Does it make sense for Swiss startups to raise venture capital (VC) money in the US? And if so, what do American investors look for?
On April 24th, Automattic CEO Toni Schneider answered these questions during swissnex San Francisco’s third webinar on US market entry geared toward Swiss startups. Following two previous sessions on legal issues, this time the spotlight was on fundraising and venture capital (VC) in the US.
Schneider is a successful Swiss-turned-American entrepreneur and investor with 20 years of Silicon Valley startup experience in his backpack. Automattic is the company behind the famous blogging platform WordPress, and he is also a Partner at the San Francisco-based VC firm TrueVentures. In his poignant and straightforward presentation, he guided participants through the realities of fundraising the Silicon Valley way.
Toni started off by dissecting the very first question that every entrepreneur has to ask himself before he embarks on the quest for venture capital.
Do I really need VC?
Against what seems to have become common wisdom, raising VC is absolutely not required for a startup’s success. Many top rated companies never raised VC, or only at a much later stage. Put another way, even if raising VC doesn’t work, that doesn’t mean that you cannot build a successful company!
Truth is, raising venture capital comes at quite a cost.
For one, it requires significant investment of time: For a period of three to six months, one or more team members will dedicate their time pretty much exclusively to fundraising—at the cost of building a product, talking to customers, managing the team, etc.
Moreover, time and again, Toni has witnessed that raising VC can give a startup a false sense of security. The fresh cash on the company’s accounts can tempt even the most parsimonious entrepreneurs to start splurging—until the cash runs out and she has to let people go. Raising funds is not a goal per se, just a means to an end. Once you have the money, you have to go and build the company. Toni’s advice is hence not to increase your spending after you have raised VC, but to remain disciplined just like in the pre-funding days.
Startups also underestimate the impact VC money can have on the balance of power within the company. Once you’ve raised VC, you’re not on your own anymore. Someone else now has a stake (and a say) in your company. And with a higher valuation, you have to perform at a higher level. This means that you limit your options. For example, you cannot sell your company at a $5m valuation when your investors are in at $10m. You might hence be forced to turn down attractive options and offers.
On the flipside, it is no secret that boostrapping—going without venture capital—takes is a slower and more arduous journey. It is particularly hard when you’re competing in a quickly developing market. Without money, you can only grow organically. And you’re missing out on bringing a potentially powerful and experienced advisor into the company.
Raising VC can also change the perception of your company if you bring in really well regarded, experienced investors. Customers and follow-up investors will know that you are now supported by real pros, and that you now have a network around you that can credibly bolster your growth.
If you opt to go with venture capital, make sure you choose your investor wisely. Test the firm by talking to portfolio companies, and see if the investor can really add value in terms of advice and connections. The chemistry has to be right, too: you want to have a really great relationship with that investor to fully reap the fruits of his support.
Pick your investor carefully—you’re entering a marriage, and it’s very difficult to get a divorce.
So, what are the sine qua nons of raising VC?
First, you need to get to the right VC Partner in the fund through a trusted recommendation.
In the Silicon Valley, there are 100 new startups created every day! Of course, the number of VCs by far doesn’t match that growth rate. Trusted relationships therefore become all the more important. Getting introductions through a portfolio company, particularly in your competitive space, is as powerful a recommendation as you can get. In other words: Get acquainted with a VC firm’s portfolio, hook up with some of their founders, get them to understand and appreciate what you do, and ask them to introduce you to their investors.
Once you’ve passed that first hurdle and you’re invited to an investor meeting, you have to be very concise. Do not bring a fifty-page long business plan. No one is going to go to that level of detail in a first meeting. Instead, distill your startup’s DNA down to the essentials (never more than ten slides!).
Who are you, and whom have you surrounded your startup with? What’s the real core of your idea, in one sentence? Talk about your financial model in terms of what you will be doing with the money you’re raising. And show how this investment fits into the big picture of major industrial or technology development. Be ready to answer this question: Why is this a huge idea?
Some questions can be expected from every investor, and you need to be ready for these and have no hesitations in answering. That means you have to get into sales mode! How much are you raising? Why? Why now? How will you spend the money? Where will you be in 12 to 18 months? What steps will you take to get there?
Investors love clarity and hate grey areas. They do not want to risk “throwing good money after bad,” as Toni Schneider says, in your next fundraising round. Investors analyze risk and decide to take it, knowing that you might fail. You have to be willing to take that risk, too, and must not keep your startup alive artificially. As Toni stresses, if investors don’t make money, it’s their problem.
There are some features that go a long way toward giving investors a sense of comfort about you and your startup: Social proof (the people around you and those who introduce you), authority or outside validation of some sort (such your customers, recent growth, someone who knows your space and endorses what you’re working on), and momentum (proof that your space is taking off to create a sense of urgency to invest, now).
What are my chances to raise VC in Silicon Valley as a Swiss startup?
Toni cautions that it is very unlikely for TrueVentures, as well as most other Silicon Valley VC firms to make investments in Switzerland. There is plenty of interesting deal flow right on their doorstep, from entrepreneurs with a local network and a track record. Looking beyond Silicon Valley is hence simply not a necessity.
The question is therefore how you can optimize your likelihood to be a target for these VC firms, how you can make it easy for them to invest in you. First, you need to be available, to be here; don’t even make the investor think about the fact that you might be traveling. Second, have a US corporation with the intellectual property in it. And make sure you present your company in a global, international way. Make it a product that could be from anywhere, benchmark yourself against any other startup in the Silicon Valley—not in Switzerland.
Finally, train and prove your ability to sell, to network, to hold an audience’s attention, to share your enthusiasm. Those are the soft skills that investors look for, the skills that will help you break through in important investors and sales meetings.
Spending some time in the US can help you train these skills, fine tune your business model, professionalize your pitch, and build a network. Get in touch with us—the swissnex teams in San Francisco and Boston are happy to discuss with you how we can help to speed up the process and maximize your learning experience!
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