In 2012 my partners and I raised our sixth fund, aptly named August VI. August VI is a $550 Million fund, with $300 Million focused on early stage opportunities and $250 Million designated for what we call "Special Opportunities" (spinouts, take private transactions, later stage opportunities, etc.). As we have done since 1995, we will continue to pursue companies in the information technology space broadly (software, hardware, communications, Web, etc.). The fundraising behind us, we can now focus on finding great new companies in which to invest. But as we start the new year, I want to take a minute to reflect on the fundraising process.
VCs don't like to talk about our own fundraising. We like to pretend that the money magically appears in our bank accounts. But that's not quite true. Venture Capitalists are investors, and the vast majority of the money we invest is not our own. Where does the money come from? We go out and raise it — from foundations and endowments and fund of funds (who raise it from other investors).
Our fundraising process is not so different from that of the entrepreneurs who pitch us. We approach investors who can write big checks and we convince them that tens of millions of dollars invested today might turn into hundreds of millions of dollars tomorrow. We convince them to invest in our funds despite the long odds. We convince them to invest in our funds despite the innumerable alternatives they have. We convince them to invest in us despite the countless other investors who are promising outsized returns on a daily basis. And if we are successful in convincing these financiers to invest in our funds, we'll spend the next decade or more working hard to produce great returns.
I have always felt that the fundraising process is an important part of company building — not just as a necessary evil, but as an intrinsically valuable exercise. Having just raised my own "round of funding," I am more convinced than ever. The fundraising process acts as a catalyst in a number of valuable ways that are worth exploring:
- The fundraising process forces you to better define and defend your business strategy. While an executive summary may allow you to speak in generalities, face to face fundraising requires specificity. A defensible strategy is not something you can fake. Potential investors will dig into your assumptions in ways that you may or may not have considered. No matter what the outcome, the conversation is a valuable one.
- The fundraising process allows you to hone strategy and your pitch. Great entrepreneurs (when they have the luxury of doing so) will often pitch second tier investors first, in order to practice their delivery. The pitch will get better with time and practice, as will the strategy. And it isn't just rhetoric. You'll learn a great deal about your business defending it to a bunch of smart people.
- The fundraising process will disabuse you of your misconceptions. Entrepreneurs and VCs are invariably optimists. And, thus, they are prone to drinking their own kool-aid. Potential investors do not share your malady. They will work hard to determine if your kool-aid is in fact delicious, and if it is not, they will let you know. Now not everyone's taste buds are the same. Your kool-aid may not be delicious to everyone. But if it is delicious to no one, it is time to reassess.
- The fundraising process will provide you with valuable market intelligence. Think what you may of investors (whether they are VCs or the folks investing in VCs), they hear a lot of pitches. And all of those pitches can provide beneficial context for your own fundraising process (as well as your business in general). It is an investors job to compare your business with all other opportunities that come before them and to determine the relative value of what you are selling. If an investor has seen something better, it is invaluable for you to hear what it is and why (even if you ultimately think they're wrong).
- The fundraising process will help you determine if you have the right team. For venture capitalists this is extremely important because, in many ways, a VC fund is nothing more than the aggregation of that fund's partners. But the same holds true for startups. Investors, by and large, are betting on teams, not ideas or markets. If you don't have a credible team, potential investors will let you know.
I am grateful to have had the opportunity to pitch August Capital to some of the best Limited Partners in the country. I am certain that their feedback has made us better, more thoughtful, investors. And, in turn, we should be able to deliver even better returns for them. The same is assuredly true of every company out pitching today. Don't think of fundraising as a burden. Think of it as an opportunity. And, in return, you will get far more out of the process than just money.