By Sharene Lee and Morrad Irsane
Sharene Lee and Morrad Irsane, co-founders of Melltoo, a peer-to-peer marketplace for second-hand goods, share 7 pieces of advice they wish they had known before raising funds from Dubai-based venture capitalists
If you can avoid it, avoid it
The businesses most likely to get funded are those that do not need funding. Build monetisation right into your product and spend as little money as possible.
If you manage to stay lean, maintain a healthy cash flow, and still show growth, you will have VCs knocking at your door and not the other way round.
Unfortunately, this is not always possible, but keep this in the back of your mind each time you decide to make a new hire or invest in something. Every expense you incur shortens your runway and causes you to need funding. The more you need funding, the less likely you are to get it.
Fundraising is a long game
In this region, expect at least six months for an equity round to close and for money to be in the bank. According to start-ups who have recently raised funding, it can even take up to nine months. It is a mistake to think that you can time fundraising, so you should always be fundraising.
Fundraising is a long game and it starts by introductions and building relationships. Would you give money to someone you just met? It takes time to build trust and credibility, get started so it is not an issue when it comes time to whip out those calculators.
When you finally engage in funding talks, closing a round takes time because VCs need to get to know you and to understand your business from every angle. Help them because it is new to them.
VCs, unlike entrepreneurs, are not in a hurry to close a deal. This is not Silicon Valley where there are 100 other VCs competing for the same deal, there is no sense of urgency. Time is an effective tool for de-risking deals – it reveals the strengths and weaknesses of a business and the temperament and characters of entrepreneurs. We have been told by VCs that they will not invest in us until they have spent at least six months studying the deal.
The pitch deck only gets viewed once
You slave over your pitch deck and spend hours polishing and preening it. You send it off to investors who glance at it for 30 seconds. If something catches their attention, you will get a first meeting. The pitch deck never gets viewed again. Good meetings do not involve a pitch deck because the investor already went through it and wants details that the deck cannot (should not) provide.
What about your business can be conveyed visually in 30 seconds that will get a VC’s attention? That is what your pitch deck should be about. Do not overload your deck with details. The first 3-5 slides should sell your business and each slide should have only one message: “You need to meet us” (not literally!).
We have found that big numbers which are true really help. Investors are like Neo in the Matrix, they see the world in numbers and spreadsheets.
Instead of the pitch deck, your time is better spent building relationships with investors and other start-ups. Start-up events are a good place to start, but do not even try to pitch an investor then, there are too many things happening for them to care. Building relationships with start-ups are often more effective than trying to network with investors. The key to good networking is to pay it forward. If you can help somebody, that help will get paid back eventually.
The business lives in the financials
The vast majority of VCs in our region are financial people - they tend to come from a background of consulting and investment banking.
As start-up founders who live and breathe our businesses, we have deep insight that is not always captured in numbers. If you cannot figure out a way to represent that insight in numbers, it will go unnoticed.
Founders often use a cookie cutter set of financial statements to represent their business. They are a good start, but every business is different and VCs are looking for the key element that is a driver for your business.
As an example, for Melltoo, which is a consumer-facing business that requires mass user adoption, user acquisition is the main driver for our business. Being able to tie in all key metrics to our user acquisition strategy is extremely important in explaining our business. Of course, this took a lot of prodding and help from the VCs we were in discussion with, which is testimony that VCs can bring tremendous value to the table in these matters.
Fundraising is as strategic as building a business
Building a business is fun, fundraising is torture. Unfortunately, building a big business requires fundraising at some point so it is a skill that requires cultivating and honing. Fundraising is both physically and emotionally draining.
Even though fundraising brings you closer to your business in some ways, it is so time consuming that it does not leave you time to do much else.
Fundraising is not straightforward either. It requires strategy and execution, just as your business does. Do your research, understand the VC firm you are engaging with, learn as much as possible about the partner you are dealing with. It is your business to know and to map that into your strategy.
One of the best things to do is to reach out to other start-ups who were funded by the VC you are talking to. If you play nice, they will give you the inside scoop on the VC. There are VCs who will talk to you just to learn about your business because one of their portfolio companies is a competitor, you will only know this if you do your homework.
There are many in our ecosystem who append the word “investor” to their names. A good number of them should add the word “wannabe” as well since they have not invested in a single company. Don’t get your hopes up.
You will emerge from every VC meeting either feeling elated or depressed, there is no in-between. If you are passionate about what you do, then your start-up is almost as dear to you as your family. It is difficult if not impossible to take things objectively and not personally.
The trick here is to suck it in, process it, then discard it. Don’t take either good or bad to heart.
The reasons they don’t fund you
It is not done until money is in the bank. We have seen deals announced in the press fall through at the last minute. A lot of external circumstances can cause a deal to fail that often have nothing to do with the business.
VCs do not evaluate you only against your business competitors. They are also thinking about alternative investment opportunities. Funds are a limited resource and backing one start-up means not investing in another. In some cases, they have other portfolio companies that require follow-on funding and that divides the pool even further. In other cases, they have portfolio companies that compete with your start-up.
VCs are also thinking about the future. If they feel like you will not be able to raise follow-on funding because the investment climate is bad or there will not be enough players with the bandwidth to support the industry you are in, they will not risk investing now, even if the future remains unknown.
There are only a few major players in the region and VCs are always wary about upsetting the big guys. Few are willing to bet against the Naspers, Tiger Global, Emaar, Abraaj and sovereign funds in the region. Unlike Silicon Valley, venture capital in the region is concentrated in a few hands and is very risk-averse.
VC firms are made up of people and there are often internal dynamics that can affect a deal. General partners that don’t see eye-to-eye, limited partners who exert pressure or attempt to influence direction, timing of funds and expected returns are all some of the factors that could impact whether a deal goes through.
Often, there is nothing you can do to mitigate these circumstances. The important thing is to have a backup plan and know that it is not done until money is in the bank.
VCs are rational players, but human beings nonetheless
VCs are not your friends, they are not here to help, and they do not owe you anything. They will write you a check only if they think you will make them money. Having said that, they are still people and they are subject to the same emotional subjectivity as the rest of us.
Start by selling yourself, establish trust and credibility, and establish domain-expertise. Be sincere, the investor across the table is just like you. They have social lives and families, they have all the same fears and insecurities you do.
Be honest. There is no such thing as a perfect business and there is no point in trying to pretend that your business has no weaknesses. The more you expose the flaws of your business, the better for you. It demonstrates understanding of your business and what needs to be done to fix it.
After all, you should know more about your business than the VC and if you don’t, then they will not invest in you.
Excellent insight into the investment ecosystem in the region. Great article!
great read and insight.
sometimes the best articles are not from journalists.