Venture capitalists are a mystery to many entrepreneurs. Entrepreneurs strive to have a symbiotic relationship with VC Partners but often end up describing a love/hate relationship. I think that a large part of this is due to the fact that many entrepreneurs don’t know much about venture capital when they start their first business – I sure didn’t.
For the past six months I’ve been fortunate enough to work with City Light Capital, helping them source and evaluate potential venture investments in the efficiency and resource conservation space. In this post, I will try to summarize my learning thus far. I will attempt to embody three viewpoints in this post: That of the entrepreneur raising capital, that of the entrepreneur about to raise capital, and that of the entrepreneur who is contemplating forming a company.
Make sure your model earns $1MM in annual revenue in year 1
As an entrepreneur, you should only contemplate a business model that convincingly enables you to earn $1,000,000 in Annual Recurring Revenue (ARR) by the time that you are ready to raise institutional capital. Getting to this metric will allow your business to raise venture capital, and should be taken very seriously.
$150MM in revenue 5 years after your A
Your P&L should present a business that will make at least $150,000,000 in revenue five years after your series A fundraise. Not every business is a venture business. VCs are looking for companies that can plausibly give them a 10X return on their money. If you cannot make the case for this kind of return, you are not going to get funded.
Nobody will believe your projections
As a corollary to the previous point, your financial projections will not be believed. While it may seem counter-intuitive to base investment decisions on unbelievable projections, the point is to tell the story of the company going into the future. If your business model allows your investors to dream big, then you will be much more successful.
Practice your pitch until it hurts
The more you know exactly what points that you want to hit, the better you will be able to improvise around those points. You should also be able to get through your story in the allotted time for your pitch, regardless of distractions. It looks highly unprofessional if your flow is interrupted and you cannot make it through your deck.
Don’t be afraid to hire up
The founder who is also a good CEO for a large company is a rare thing indeed. Founders create companies out of nothing, and are not intimated by instability. A person who thrives in and is willing to set up a stable environment can bring a lot of value to your company. Seek those with more experience than you – they can lend your endeavor significant perspective.
Don’t start fundraising until you are ready to accept term sheets
VCs can look at multiple companies each day, and second chances to make an impression are rare. Don’t feel pressured to say yes to conversations when you are not ready. Saying no and proposing a later date shows both professionalism and backbone, both things that venture entrepreneurs seek in their entreprenurs.
Your business should start laser focused on one good opportunity
Startups lack resources, by definition. Standing up a business that achieves $1mm in ARR within a specific market segment is a difficult task that requires a significant amount of focus. Remember that saying no now can enable you to pursue more opportunities later.
Discover what potential funders want
Ask if your potential funders have metrics that they like the companies that they have invested in to have achieved. Getting this information upfront will allow you to point to objective criteria that influences the investment decision. As an additional note on objective negotiation, I would recommend reading Getting to Yes by Ury et al.
Evaluate the potential to add value to existing portfolio companies
Integrated systems typically function better than stand-alone parts. If your company can fill a gap in the VCs portfolio that allows both your company and theirs to grow more effectively, your value will be increased.
Expect to receive a lot of “no”s, but take feedback seriously
One of my mentors calls VC pitches “free consulting.” You’re going to be in a room with a bunch of people who are professionals at growing businesses very rapidly. They don’t all know about your business, but if they are successful, they should know about how to run a company. Pay attention to their words.
Your goal as an entrepreneur should be to build an awesome company that does great things for the world. In order to get there as a venture opportunity, you’re going to need to build a substantial business while being laser-focused on one segment, and then expand into more markets using venture capital. Don’t let it get you down that you can’t do everything at once, just focus on building your company and meeting your metrics.
You’re going to do great. Go get ‘em!
 If you would like help quantifying “great” or orienting your mission, please feel free to email me at firstname.lastname@example.org