Fundraising Strategies
WRITTEN BY: TED WANG
ADAPTED BY UPSIDE PARTNERSHIP
It’s important to approach fundraising with a clear plan to execute against. Ted Wang at Cowboy Ventures has written about three such strategies that can be helpful in different situations.
The Horse Race
The Horse Race is what Ted calls a traditional approach to fundraising. We have distilled it down here:
Plan: Target 6-8 VCs that you would like to close and get introductions to the names on your list at the same time.
Goal: “Keep all the prospective firms on the same pace so that the firms remain at a similar stage in their process as your process progresses. The objective is to have more than one firm making an offer at the same time so that you have the negotiating leverage brought on by having more than one option.”
Watch out for: Don’t let one firm advance in the process significantly ahead of the others you are speaking to*. “Without a second firm in the running, if an offer from one firm arises, your choice at that moment is between raising money or not (or at least starting the entire process over again) so it is vital to keep the horses moving down the track at the same pace. If you have an offer from one firm and are just in introductory meetings with the other firms, you have no real leverage.”
The Rabbit
The Rabbit is a take on the horse race that can help move investors through the process more quickly.
Plan: Target 6-8 VCs you would like to close. Leverage a pre-existing VC relationship, or a firm that has expressed interest in your company and start the fundraising process with them before the others. Ted uses the analogy of a dog track, where dogs are chasing a rabbit that has a head start on them (vs. the horse race, where the horses are all released at the same time). “In this technique, the little furry fellow is a venture capitalist whom you meet with a week or so before you begin the horse race process outlined above.”
Goal: Ted elaborates, “If you call many VCs for an introductory meeting, they are likely to offer you a meeting somewhere between two and thirty weeks from now. That conversation, however, might change if the response is ‘I’d love to meet you in 8 weeks, but I have a second partner meeting at another firm next week, so I’m concerned that things might have progressed by that time.’ All of the sudden a time slot will magically open up on the calendar in the near term and that is the true benefit of the Rabbit.”
Watch out for: You must have a solid pre-existing relationship with an investor. “Also you have to pick a VC with whom you would want to work as your Rabbit. The reason for both of these caveats is that the Rabbit must be an effective negotiating alternative.”
Heads Up
This strategy refers to the poker term for having two players left in a hand after everyone else has folded.
Plan: Approach a VC that you would like to have on board and ask if they will invest. Ted plays out the conversation below:
Say “I am going to go out and raise money. I really like you and want you to invest. If you make me a great offer, I will take it.” In the more aggressive version of this conversation, the VC will reply “tell me what you think is a good offer” to which you should reply “[I]f I am dumb enough to do that, you should not invest in my company. I’m not going to negotiate against myself.”
Goal: To create a situation where the VC negotiates against themselves, understanding that there are no other firms vying for allocation.
Watch out for: As in the scenario above, you’ll need a strong pre-existing relationship with an investor.
Read more about these strategies and Ted’s perspective on all three in his original post, found here.
Originally Published: January 8, 2014, Horses, Rabbits and Poker, Ted Wang
* Be smart about how you coordinate
__
Ted cautions, “It’s not possible to keep things entirely in sync and the last thing in the world you want to do is tell a firm that you are intentionally delaying them so that others can catch up. Use your wiles to coordinate the process as much as possible.”