“When you are raising money it is tempting to try to speak to everyone who will allow you to pitch, but it is very exhausting and it is very difficult to hear a ‘no,’” given how much time and energy it takes to prepare a pitch, Nadav Berger, the founder and managing partner at PeakBridge Partners told entrepreneurs at a conference hosted by the Israel Export Institute earlier this year
“By doing a little bit of due diligence and seeing who is relevant to you,” you greatly increase your odds of success and will save yourself – and potential investors – time, he said.
In particular, he recommends that entrepreneurs look at who else investors have supported, including the type and size of the companies, what their track record is and how the deals were structured. Based on this, he said, entrepreneurs can determine at a very basic level if the investor is someone they might want to partner with.
He explained that most investors will “reverse engineer” the business plans of the ventures they are considering to determine if they could have done it better any differently. Entrepreneurs should do the same of investors, he said.
“You should do the same. You should ask yourself, what stage is the fund in? Is it their last year? Are they anxious to deploy money? Is the first year or second year, in which case they may be much more picky because they have rising standards,” he said.
Learn the language
But in order to evaluate individual funds and investors effectively, Berger said, entrepreneurs need to take a step back and learn the rules of the game at large, which includes learning how to speak the language.
“The investment community has a completely new language” that is different from what entrepreneurs speak, Berger said. “What are minority rights? Preemptives? Tag-alongs and bring-alongs? First refusual? These are terms you need to get acquainted with. You have to speak the language…. If you don’t speak the language that your investors speak, you will hurt yourself.”
He explained that while most investors try to do their best by the companies they invest in, “at the end of the day, they run other people’s money and they have to be professional and use their skills, including the knowledge and language of the profession, to optimize the benefits of their LPs.”
This means they will leverage what they can, including weaknesses in entrepreneurs’ understanding of business arrangements.
“Investors are not nice people. They don’t love you,” Berger said.
“My ten cents on this is, go to a friend who is lawyer and pay him whatever it costs to spend two hours just to go over the terms and the wording so that you understand it deeply – because this might save you a lot of money or heart break,” he recommended.
Venture capital is not the only route
As entrepreneurs learn about investors and their community, they should keep in mind that they have other options if they can’t find the right fit, said Berger.
If entrepreneurs are running out of time and need more money quickly, they should think about teaming with a corporate entity before signing on with an investor who is not a perfect fit, Berger recommended.
Teaming with a corporate is much more akin to an old fashioned arrangement marriage in that while each side might not know each other intimately, entrepreneurs can get a pretty good idea of what a corporation is like before entering a partnership, he said.
“When you got to corporate funds, though, you still have to pay attention,” and should look closely at how their leadership and strategies have evolved and become more sophisticated over recent years, he said.
Look for non-dilutive funding
If corporates still aren’t a good fit, entrepreneurs should consider non-dilutive funding, such as grants or working with accelerators, Berger said.
“There are a lot of grants out there,” especially from different governments that want to bolster their economy, he said. In particular, he noted, “there is a huge amount of money and interested parties in Europe and the US.”
In the end, Berger said, raising capital is hard – but there are several paths to success if entrepreneurs take the time to discover them and weigh which path is best for them.