Introduction
Think of finalizing your VC seed funding deal like a band signing a record contract. It’s a great achievement, a real cause for celebration and an exciting milestone on the road to stardom. But guess what? Now you have to actually go and sell millions of records!
Now that you are a start-up funded by professional investors, you, as the CEO, have a whole new class of stakeholders to manage—your VC investors.
Managing investors, their expectations, timelines, reporting, and providing updates, as well as seeking new funding from Series A focused investors, is often a fulltime job for many start-up CEOs or near to it. You will have been shocked by the amount of time it took to find, agree, and finalize your seed funding deal. Now, your VC expects you to make good on your roadmap and projections, and deliver them the company growth you promised.
Great Investor Relations
Like every other relationship in life, the key to having a great relationship with your professional investors, is communication.
Good two-way communication breeds trust and this enables your VC to become another “trusted advisor” in your network. While the relationship is of course slightly different from other advisors, there is a huge amount you can learn from your VC. They have seen it all before. They have probably been in your shoes, having grown and sold businesses from nothing. They know the future mistakes you are going to make, often before you have even begun to think about your options.
The golden rule is that a VC should never be just about the check. There is so much more they can offer you; around mentoring, networking, operational advice, strategic guidance, tips on global expansion, and introducing warm business development leads.
Once your seed funding deal has closed, start putting in place the following:
1. Monthly catch ups—Update your VC regularly on your progress. At least on a monthly basis. Your seed funding deal will probably require quarterly Management Accounts to be provided to them (from your accountant). That’s all well and good but it’s nowhere near enough communication. Aim to have a monthly catch up with your key VC contact. Always prepare a list of “asks” for that conversation, including advice on strategy, hiring, who they might know at other VCs (for your next round) or at any prospective clients you are targeting.
2. Seek operational advice—Ideally your VC partner should be an ex-entrepreneur. These are the kind of investors you should be going with anyway and it can make a huge difference to your knowledge base. They will have lived your pain and would know every inch of “The Struggle.”
It is essential that you e-mail or call your VC informally every week (or as regular as you need to), in order to seek their guidance and operational input. The more formal strategic and commercial reviews can happen each month or at your company Board meetings.
Ask them for operational advice on how to run and grow the business. Push them on this. They know your challenges coming up before you do. These discussions are not detailed commercial reviews but operational “touch bases” to pick their brains on where you are and what you are thinking of doing next. They will have valuable thoughts on how you can galvanize on potential opportunities and what pitfalls to avoid along the way.
You will need advice on candidates to hire, markets to target next, key contacts in those locations, and in which company there might be the strongest prospect. Ask them what mistakes they are worried you might make soon, and what errors they made in the past. Push them hard for suggested contacts, as well as advice and support as the business expands. Having a great partnership with your VC can transform the business and is particularly valuable to you as the CEO.
3. No nasty surprises—You owe it to your VC to keep them abreast of any significant changes to the company. Every company has bad days. It’s often not your fault. A large client changes strategy. Then you don’t get picked for a big deal. A core employee leaves due to medical reasons and you have a massive hole to fill. There are many ups and downs on the way to greatness. It is best to be upfront and transparent about these matters to your investors. They can be surprisingly understanding and often have good ideas to help steady the ship.
4. Marketing—VCs can be a significant source of marketing for the business. You are an institutional funded start-up now, so trumpet it far and wide. Have your VCs issue a separate press release when your funding closes. Have them mention you in every press interview, blog post, or panel on which they speak. Having a professional investor sing your praises as a company regularly in the media, is far more valuable and credible than marketing from the company itself.
Similarly, when you are interviewed or publish articles and marketing collateral, make sure to mention what a great investment partner they are and how exciting it is to work together. Have them share your social media posts and marketing. Tag them in your LinkedIn and Twitter posts. Constantly remind the world you are VC funded. It will make client acquisition easier.
Always remember VCs are a vain bunch. They love to be praised. They love to feel that they have unearthed a diamond company in the rough. It makes them look prophetic and visionary. If you can praise them in a way that makes them proud, they will do everything they can to move your business forward.
5. Future funding requirements—Have early stage discussions with your VC on future funding requirements. These conversations should start within a few months of the seed round closing. Will you need a smaller “bridge round” (see the following) before your Series A to resource and close out a couple of impending client deals? How much do they think you should raise for your Series A and at what Pre-Money Valuation? Who should you approach first, and can they help with the introduction? Your VC can be extremely helpful here and they will nearly always have significant contacts in their industry to help start early future funding discussions.
The Role of Bridge Funding
In the real world, the process from angel to seed to Series A is often choppy to say the least. Your carefully planned strategy can get torn to pieces if your funding round hits a legal snag or there is some other unforeseen delay. A bridge round is where you raise a small amount of money (often, but not always from your existing investor pool), to ensure you have enough operational capital to grow, while you close out your much larger Series A round.
I have closed a couple of bridging rounds over the years. They are normally quick and easy. They utilize the same seed round investment agreement (so the legal process is much reduced) and often the same pool of investors. They are rarely for more than a few hundred thousand dollars. Typically, the bridge round happens six to nine months after the seed round. This is when you are starting to bring in some decent revenue, but the costs of growing the business quickly is in danger of sucking any remaining seed funding dry.
For you as the CEO, a bridge round is a chance to revisit the company valuation. The first bridge round I did was seven months after the seed round. The company’s valuation doubled for the bridge round, based on the progress we had made. This meant less dilution for the shareholders, and crucially, enabled us to market to Series A investors that we had doubled our seed VCs investment (2x) in 7 months. Series A VCs loved that.
It was a proven track record of fast value creation for a VC’s investment portfolio. It made the Series A discussions much easier. It also injected a degree of urgency into the meetings because we had tangible evidence that the company’s valuation was climbing quickly, and they needed to make an investment decision soon.
While your focus as the CEO is to keep successfully scaling the business (and occasionally sleeping well at night), at some stage, you will soon start to think about the business reaching a “breakeven point” and finally having the incoming revenue needed to cover your costs. It is an attractive prospect after a couple of years living on the cliff edge.
Your VCs do not want to hear this. They want that famous “hockey stick” growth. Hockey stick growth means you will not reach breakeven for many years—if ever.
Many professional investors want you suckled on the milk of VC cash permanently. They do not want to hear about you being happy with reaching breakeven. This is for a number of reasons. They need a “home run” from you to make up for all their other investment losses. Also, they have far more control over you and your business if you constantly need scaling capital to keep growing. This in turn leads to faster increase in the value of their investment.
Preparing for Series A
You are always thinking about your next funding round—even before the current deal is closed.
As soon as your seed funding round is wrapped up, start thinking about your Series A. It will probably be a year away, but that time will pass quickly. How much do you think you will need? What will the valuation look like? What key milestones do you need to meet this year to get there?
Start to shortlist the VCs in your space that invest in Series A deals. Your seed VC will help you pull together a shortlist to focus on.
To start the Series A process, you need to leverage the investor relationships you have built up to date. You don’t pick up Series A funding from VCs you don’t know. At the multimillion investment level, that’s not how it works.
Series A funding is heavily relationship based. You are about to go looking for at least a couple of million dollars to start scaling the business globally. This is real money. Very few companies get to this point. It is almost certainly the largest financial transaction you will ever have been involved in, never mind actually negotiated. The deal that emerges must allow you to spend these millions as you see fit, according to the scaling strategy you have devised.
Seed investors will not necessarily look at Series A rounds and vice versa. It depends on their investment strategy and investment mandate. This means you will need to build new VC relationships with the players that look at providing scaling capital. You probably won’t have these contacts and you may be too busy running the company to build them. This is where your VCs network can be essential.
Your original VC (and even angel investors) can prove invaluable at this point. Relentlessly mine their investor network. If your seed VC agrees to come in again on your Series A (i.e., invest again at a higher valuation) that is a huge vote of confidence in you, your company, and your vision. Push them to do this. It will differentiate you from the pack of other seed funded start-ups, desperately trying to find scaling capital to grow and make raising a Series A that much easier.
Also, the conversation with VCs changes as you move closer to Series A. You are not discussing anymore how much you need to survive but instead how much funding you need to thrive. By now, you will start to have a track record of delivery as a CEO. If you are broadly executing your seed round growth strategy in accordance with your business plan and making good progress on client acquisition, then you are a much safer bet from a Series A VC perspective.
If you have closed a recent bridge round at a higher valuation, then broadcast far and wide the amazingly fast return on investment you made for your original VC.
Finally, ensure you have a two-page Investment Summary pdf ready to send immediately to interested investors. This summary is meant to whet their appetite and should be updated as and when you have new news to celebrate. It should include key wins, new client acquisitions, important hires, industry awards, press coverage, traction since your seed round, M&A approaches from interested buyers and a summary of the terms of your proposed Series A round (i.e., Pre-Money Valuation, funding being raised, expected closing date, etc.).
Great investor relations take time to cultivate and maintain. It is well worth it. The world of professional and VC investors is small, and they talk to each other constantly. A fast-growing start-up with a good reputation for open, transparent investor communication is at a significant advantage when they start looking for a Series A funding round from the market.
Chapter Summary
• Communication with your VC is key. Do it often and regularly.
• Monthly investor calls can be used for a more formal update.
• Regular operational catch ups can happen each week.
• Push your investors to help with company marketing.
• Consider a bridge funding round if its needed.
• Use your VC network to lay the foundations for your Series A funding round.
• Always have an up to date two-page Investment Summary available to send to potential investors.