Chumps vs. Checks: Handling The Venture Capitalist Cold Call

By Dharmesh Shah on November 8, 2010

The following is a guest post from Healy JonesHealy is the Head of Marketing for OfficeDrop, a company that offers small businesses in paper intensive industries cloud scanning software and cloud filing. Previously he was a venture capitalist with Atlas Venture and Summit Partners.

Taking a cold call from a venture capitalist

So you are busy running your startup and suddenly the phone rings and it’s a venture capitalist. What do you do?

VCs of various stages are borrowing a page in the playbook from some of the most successful buyout/growth investor groups and taking an active, outbound approach to finding new investments. In other words, you are more likely than ever to get a cold call from a VC.

This can feel pretty flattering if you are the little startup trying to take on the world. But it can also be a waste of time. Most of these cold callers do not invest in really early-stage startups – they are looking for larger companies.onstartups venture capital cold call

Growth Funds vs. Early-Stage Venture Capital Firms

I realize that the difference between a venture capital fund and a growth equity fund may not be readily apparent. Today there are seed funds, micro-VCs, traditional venture capitalists, later-stage VCs, growth funds, etc. It’s a little confusing.

Traditionally, investing in pre-revenue startups was the purview of venture capital funds. Growth investors focused on companies further along in their lifecycle – companies with substantial revenue and a history of profitable growth. Today, in addition to the whole seed funding movement, the lines between traditional venture firms and growth funds has blurred. However, most cold callers are from growth equity funds that still do not invest in pre-revenue, or even moderate (i.e. sub $10 million) revenue companies.

This is why I recommend that if you are running an early-stage startup that you do not spend a lot of time on the phone with growth fund investors. They are looking for businesses with certain levels of revenue and cash flow, and if you don’t fit the bill they will want to get off the phone too. But if you’ve just gotten some great press, you might not only find yourself deluged with cold calls from growth funds, but might also get a ring from a legitimate early-stage investor whose curiosity was piqued.

Taking the Venture Capitalist’s Cold Call

If you are actually raising capital then I suggest you approach these calls in the same way you would a sales lead: qualify the lead, move the worthless leads out of the funnel ASAP, get the info you need to appeal to the few leads that are actually a potential fit and set yourself up to make a legitimate/strong pitch to those few.

You need to quickly sort through the growth investors who are not a fit for your business. This approach is based on my former experience as a buyout investor, growth stage VC and early-stage venture capitalist, and now as an executive at a startup that has successfully raised a modest amount of venture funding. And oh yeah, I’ve made a lot of cold calls into private companies as an investor and have received them at my startup as well.

Steps for dealing with a cold call from a venture capitalist:

1) Quickly figure out if your company even fits the financial profile of the investor’s fund. Politely ask “what is the financial profile of your firm’s investments?” The good growth funds will unabashedly let you know what financial statistics they look for in an investment – say $5 million in cash flow and 15% year over year growth rate, or $10 million or more in revenue. If you are a pre-revenue startup then you are wasting your time speaking with these people. I understand that your projections might say you are going to go from zero to $50 million in revenue in the next 18 months, but trust me, you are not a fit for the growth fund today. These groups are usually very strict on investing only in companies that meet specific financial criteria (cash flow breakeven, particular revenue levels, etc) so you don’t want to spend time with them if you are a startup.

2) Ask how much money the fund invests at a time. If the group typically invests $25 million at a time, and you are only looking for a seed investment then you are not a good fit. Be wary of the investor whose fund invests in a ridiculous range of dollar values, say from $1 million to half a billion dollars – the individual you are speaking with is probably on the growth investment side of the fund. You only want to have an in-depth conversation with someone who could potentially meet your startup’s funding needs.

Note that these first two questions were all about financial issues. The goal of these questions is to weed out the growth and buyout investment funds. The majority of investors who cold call are these types of firms, and they make initial investment decisions based on financial metrics. Your pre-revenue startup is not going to get financing from one of these groups. It’s time to get off the phone. Let the cold caller know that you are so far outside of their financial criteria that a conversation does not make sense at this time. You don’t need to share any other information or spend any additional minutes on the phone! You’ve just qualified the investor off of your list and should get back to running your business. Go ahead and give them your email and let them know they can ping you that way in six months/a year to see if anything has changed. Quick note: if you are a growth stage company that meets the investment fund’s financial criteria then keep reading.

If the fund actually invests in your stage of startups, then your next goal should be to figure out how to give a solid pitch to the right person at the fund.

3) Make sure you know who you are talking to. Make sure you know which fund is calling. Learn a little bit about the fund; if it doesn’t sound like the type of fund that would invest in your startup then ask. Figure out who the person is and what their role is. Of course, you want to talk to a partner at the fund, but the person calling may be a more junior associate. A few years ago I wrote a post on talking with a junior VC; this advice may be helpful if you find yourself on the phone with one.

4) Ask what prompted the call. Was it a piece of press? Did they hear about you from someone? Or are they doing research in the industry? Which leads to the next question:

5) It is fair to ask if the fund has any investments in the same industry or any that may be considered competitive. You also want to know if the fund is actively doing diligence in the space for a different investment. I’d expect most VCs to be quite honest in this area! Thesis driven investors will often try to speak with every company and executive in that space. I know I did this in a few specific areas – I called everyone I could. But I also let the startups know I was serious about their industry and expected to find and make an investment. Most executives still were open to having a conversation. In general, I believe that this isn’t a bad move if you are actively looking for capital because:

a. A number of VCs will make more than one investment in a space.

b. If a VC is truly looking across an industry you should be able to get helpful market data out of them.

c. Good VCs will make introductions to potential partners, employees, etc for companies that they like, so getting to know a VC who is spending time in an industry could be valuable.

Be smart about this. Remember that you don’t have to give away every piece of tactical information to have a good first conversation. And do a little research on the – see if they have a good reputation, ask people in your network who know the partner and the fund, etc. This leads to my next point:

6) Now that you know who this investor is, do you want to speak with him/her at this moment? Do you want to do a little research on him/her and the fund first, or are you comfortable speaking right now? Are you ready to deliver a pitch on the phone? Do you have a presentation ready (even if you don’t share the presentation, I’d suggest you use it as a means to structure your conversation. You’ll be much more organized if you use the table of contents to talk about your company than if you talk off the cuff.) Do you actually have the time, or do you have a scrum meeting scheduled in five minutes (and make sure the VC has at least half an hour to devote to you)? If you aren’t ready then you should schedule a call in the future when you have more time. Don’t feel bad, just do it. If you are going to push off the conversation then I’d schedule it right then and there on the phone. Another option, if the VC is in your area, is to ask to meet in person. But again, try to ask for the meeting right then and there and get something on the schedule.

7) If you are ready to pitch, treat it like a pitch. Run through your fund raising presentation. Be organized and efficient. I’d suggest using your “ten minute pitch.” Even thought they called you, you are being judged so take the pitch seriously.

8) Don’t forget to ask questions. If the VC called you, they likely have some opinions on your industry. What other companies are doing well? Which customer verticals are buying? Who has cool new features? A good VC will have legitimate answers to these questions. I’m not suggesting you “test” the venture capitalist – rather you try to take advantage of the conversation and learn something.

9) Finally, end the conversation with an agreement on next steps. An in person meeting should be your goal. If you can’t get that, then get the VC to agree to follow up at a specific date. You don’t want to be in fund raising purgatory, so get their contact info so you can follow up if they don’t.

Remember, most of the investors who cold call are growth investors who really can’t help your startup. Qualify them out of your funnel ASAP. Next, figure out who you are talking to. Make sure you are ready to pitch, then give it your best shot. End with an agreement on next steps.

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The 11 Harsh Realities Of Being An Entrepreneur

By Jason Baptiste on November 1, 2010

There's always talk about the end game in the form of an acquisition, funding announcement, or eventual flame out. Hollywood has even made a movie about the founding of Facebook that glamorizes startup life instead of showing what it really is: a day in day out marathon of work with very little glamor. We rarely hear about the harsh realities that entrepreneurs face and the journey that this entails. This isn't meant to be a downbeat and negative article, but actually quite the opposite. By knowing the harsh realities that lie ahead, you can be prepared when they come about so you can solider on. Here are some of the harsh realities that come with the territory of being an entrepreneur. roughroad

Your First Iteration of an Idea Will Be Wrong

The first iteration or implementation of your idea will often be wrong. That's not because you're not smart, not doing the right things, or some other reason to come down hard on yourself. As it turns out, this is actually a good sign. No idea survives its first interactions with its customers and requires you to synthesize feedback to adapt to the customer. You could be prideful, not listen to what your customers are telling you, and keep things the way they were. In the end, that just leaves you with no customers and a product you may not even use yourself. It's okay if things change up a bit when it comes to your idea and its implementation.

Your Friends And Family Won't Understand What You Do

"You're an entrepreneur, so that means you're un-employed?" or "Oh that's nice." are some of the many reactions you will get from close friends, family members, and others over the course of starting your company. Even if you achieve milestones that are worthy of praise (customers, fundraising, new traffic levels, press,etc.) and denote success in the entrepreneurial world, people still won't understand what you do. Unless you build one of the few consumer success stories that come around every few years, things probably won't change here. The b2b space is even more difficult to explain as most people aren't your customer, especially if it's a niche workflow. This is okay and sometimes even a relief to know there is more outside in the world than just techies and entrepreneurs. Just because they don't understand it, doesn't mean you're doing something wrong or unacceptable. I doubt Larry Ellison can have most of his family understand Oracle (that database company that stores information), but things turned out pretty well for him at the end of the day.

You Will Make Less Than Normal Wages For A While

If you got into entrepreneurship first and foremost for the money, then you are in the wrong business. Sure you may one day sell your company, but that day is probably far far away. Even then, there are usually earn out clauses, vesting still in tact, and a whole lot more. Even if you raise a good chunk of cash, your money is better spent on hiring the best talent than paying yourself a higher wage. There's nothing wrong wanting to make money, but in the beginning it's going to be rough. You will make less than most of your friends, especially the ones doing the "normal" paths of things like finance. It's a litmus test in its finest form though. If you truly love what you're doing, the capacity to have a large bank account takes a back burner to completing your mission. Sure you need some basic creature comforts, but luxury items almost seem silly as you will not have the time to truly enjoy them.

Everything Takes Twice As Long...If It Even Happens

Multiply everything by two, including the things inside of your control. When things take longer, you sometimes think that you're doing it wrong or no one really cares. In reality, everyone else has multiple deals and responsibilities on the table. By factoring this into the expectations of your startup, it makes a lot easier to prepare for launching products, closing deals, and more. Also, be persistent and get the other party what they need as soon as possible. On the flipside, most deals just never work out. It may be an acquisition all the way down to a simple business development deal. There are always many moving parts and excitement that can just fade. That's okay though. If you're building your company upon one deal or a silver bullet (more on that below), then you need to re-evaluate things. Don't be depressed when a deal falls through as that is just the nature of the beast.

Titles Mean Nothing. You Will Be a Janitor

Hey there Mr. CEO, Chairman, and Co-Founder! As a co-founder of a < 10 person company with a product that doesn't have customers, titles really don't mean much. Everyone will be doing a little bit of everything, including cleaning the toilets. Don't try to mask the grind of being an entrepreneur with some superficial title. In reality, you should love and embrace the nitty gritty of those first days. Business cards are nice to hand out, but they really shouldn't say more than co-founder or something else. Maybe someone inside the company plays more of the CEO role (speaking and being the face of the company), but that doesn't really matter in the early days. You have to be humble and you have to be willing to do whatever it takes. You don't have a staff of 50 to throw the task on to either. If you don't do it, it won't get done. Sure you could also try to optimize for efficiency, but that's almost counter productive as the early days of a startup requiring doing so much, that it's hard to just cut something out.

There Is No Silver Bullet

There shouldn't be and usually never is a single deal that can make your company. Certain deals or customers can take you to another rung on the ladder, but there are still many more rungs to climb along the way. You shouldn't look at a deal as the end game to the startup, but a means to a specific milestone that is in the near future. A deal can be taken away far faster than it can be given to you. By training yourself to diversify your risk and the milestones that advance your company, you control the destiny of your company, NOT one single partner. The success of a startup is the compilation of luck infused with many little wins along the way.

Customers Will Frustrate You

Having customers is a great thing, but dealing with support is a whole other ball game. If you're in the consumer world, expect to deal with customers that don't notice the obvious even with your fancy pants UI/UX in place. You will also get an influx of feedback that is often contradictory. One customer wants it in red, another wants it in blue, and a third wants it combined to become purple. The key to dealing with customers is to respond to everyone, but have a strong rule of authority. If you succumb to customers frustrating you and do everything you say, you quickly end up in a far worse position.

You Can't Do It All Yourself

Some entrepreneurs have a superhero complex that they feel they can do everything themselves or with just one co-founder. They think that it's possible to scale the company with just two to three people. This just results in being overworked and unfocused. Know when to let go of your pride and bring in people that are often smarter than you are. By bringing in others to work with you, there's also an ability for each team member to be laser focused on what they're best at.

There Is No Such Thing As An Overnight Success

In some cases you may be able to find out that your idea just won't work or that you are one of the lucky few that get acquired early on. Other than that, be prepared to work on your startup for many many years. The press often makes it seem as if success happened overnight, but the entrepreneurs themselves spent a lot of time with the company over the course of many years. Startups aren't a 5k, but an all out iron man competition.

Building A Team Is Hard

Finding co-founders by themselves is very hard just by itself. Finding a group of individuals smarter than yourself across a broad range of skill takes up way more time than you would ever think. In the early days, you may be super excited about your company, but it's often hard to get a large group of others equally excited. They may have their own ideas they want to work on, be comfortable with a cushy salary, or generally just not interested in what you're doing. Just because you're excited does not mean others will be excited. If you're lucky enough, you will hit a certain period of growth explosion that requires you to hire rapidly and be a great judge of character on the fly. This is a dangerous period for a startup as the company is still small enough that the wrong DNA can make things take a turn for the worse, but you cannot be as granular with hiring these employees as your first 10.

There Are Forces Outside Your Control

Last, but not least, you have to understand that you cannot control everything in the universe. Markets collapse, the government intervenes, tragedy strikes, and other unforseen circumstances. You don't let this make you quit. It's like a roadblock on the way to a concert, sports game, or party you want to get to. You may have to sit in traffic or take an alternate route, but as long as you are determined to get there, you will end up at the event. In the words of the late Randy Pausch "Brick walls are there to show you how bad you want something." Once again, this isn't a deterrent to becoming an entrepreneur, but just a reality check to make sure you're prepared. Many companies die because people just give up . Hopefully this article does some small bit in helping preventing this. Life as an entrepreneur is hard, but if you really love what you're doing and have the determination, you WILL do it.

What are some of the harsh realities you have faced as an entrepreneur and what have you done to overcome them? Leave your responses in the comments.

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