Benjamin L. Hallen, assistant professor of strategy and entrepreneurship at London Business School and a contributor to Bloomberg’s Business Class, says there is a roadmap to venture-fundraising success. Hallen’s research, in collaboration with Stanford University’s Kathleen Eisenhardt, identifies four hallmarks of efficient prospecting for money. “By efficiency we mean attempts that take less than two months of formal, almost full-time fundraising, while yielding offers from desired investors,” Hallen writes.
Conventional wisdom holds that successful fundraising requires introductions to investors, a clear pitch, and the ability to signal the presence of a high-quality founding team. In tracking nine Internet-security start-ups that sought multiple venture rounds over their first five years and sampling companies across the U.S. that had raised at least one investment round, Hallen and Eisenhardt found these practices weren’t enough. Instead, they say, efficient fundraising also depends on four catalyzing strategies.
Step 1: Engage in casual dating. Meet informally, but deliberately and repeatedly, with a few investors a couple of months before formally seeking an investment. One entrepreneur strategically courted VCs for several months by seeking their advice on his start-up business model over a series of casual lunches, then disclosed he was raising a round. Within 10 days, a courted investor made an offer. Others followed. Investors become psychologically invested in ventures that follow their advice, Hallen says.
Step 2: Structure timing around proof points. Time formal investment requests around signals that indicate the accomplishment of an externally validated milestone, such as the attraction of the first paying customer. “Proof points are vital for fundraising, yet occur relatively infrequently,” Hallen points out. “Accordingly, some entrepreneurs with a recent proof point, but without an immediate need for capital, still went ahead and sought investments earlier than they otherwise might.” Timing around proof points provides a simple signal of progress that is credible and easy to understand, he adds.
Step 3: Assess the interest of potential funders. Just because a venture capitalist voices interest in a business idea doesn’t mean an investment is in store. Efficient entrepreneurs recognize that talk can be cheap; they don’t simply take a VC at face value.
Step 4: Craft alternatives. Efficient entrepreneurs establish multiple routes that can lead to fundraising success, because potential investors tend to be hesitant. As one financier told us: “There is no incentive for me to act too soon. I would rather give the company plenty of time to either prove to me that what they said three to four months ago was correct, or prove it was incorrect.”