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Dharmesh Shah’s 9 Quick Tips Learned While Raising $33 Million In Venture Capital

Though it would be good to relate Dharmesh Shah post on Feb 08, 2010 with his 9 Capital Raising tips to SME’s raising funds before reaching Venture Capitalists. Meaning how does this relate to businesses that haven’t yet got to the Venture Capitalist stage. Full post here.

The 9 tips were:
Insights From Raising $33 Million In Venture Capital
1. Get the first round right:
2. Avoid valuation infatuation:
3. Raise more than you need:
4. Know what “market” is:
5. Orchestration is important:
6. Beware deal fatigue:
7. Don’t Use Your Uncle Larry As Your Lawyer:
8. Partner personalities matter:
9. Switching Partners Is Hard, Do Your Homework:

Here is my interpretation of them …

1. Get the first round right:
Early investors are often friends, family or fans. These early private equity investors should be treated with the same respect as later private equity providers. You don’t want their investments watered down in later rounds because you priced them too high in the beginning. Get the first round filled up at a fair price and it will auger well for the rest of the capital raising.

2. Avoid valuation infatuation:
What Dharmesh says is right “Entrepreneurs often become obsessed with the pre-money valuation”. They often believe that 80% of the business value is in their brilliant, ideas, the mates helping them and the fact that they are the only ones that can bring it to realisation. A better approach is to take a bit less up front, meaning a more reasonable and fair figure an get more return when things do start working.

3. Raise more than you need:
Spot on Dharmesh. “Regardless of how much capital you raise, chances are, you’re going to have wished you raised a little bit more (or perhaps even a lot more). Within reason, if you have access to capital and the terms are decent, raise more than you think you need. Don’t get hung up on dilution. If you have the ability to raise a slightly larger round, and the terms are reasonable, you should probably go ahead and take the extra money”. Two of the capital raisings I have been involved with recently have closed full and then shortly after they needed more capital. Best to ain a bit higher straight up.

4. Know what “market” is:
Often SME’s are venturing in to their first capital raising experience. There are scores of people that are willing to take their money. Just a few hours research on the internet should start them down the road to being better informed. It is also important to isolate the tasks that need to be done. Ask those that approach you what exactly will they do, and break it down.
There are main stream items like:

  • Preparing your Offer Document or Information Memorandum
  • Share Capital Structuring Advice
  • Marketing the offering and holding investor meetings
  • Handling the resultant paperwork
  • Negotiating with investors

There are other items that may be needed along the way:

  • Board analysis and advice
  • General Opportunity analysis
  • Writing a Business Plan
  • Financial analysis of the projections, assumptions and valuations
  • Marketing plans for the capital raising
  • Design and collateral advice and assistance
  • I.T. advice including setting up of websites

You should be familiar with the pricing of all these items … in other words “Know what “market” is”

5. Orchestration is important:
One good thing about a capital raising platform for early stage venture funding is that it “orchestrate’s” the fund raising so that there are a number of people at various stages of the capital raising process. There are milestones to be reached, investor meetings to be attended and all this is done within a process that builds anticipation and has inbuilt scarcity. Both anticipation and scarcity are essential for a successful capital raising.

6. Beware deal fatigue:
No need to change a word here. Dharmesh’s words apply equally in both cases. “Even in good times, fund-raising is an arduous process. Be prepared for yet another round of meetings, yet another level of due diligence and yet another round of negotiations. Don’t try to sprint to the finish line and be exhausted when you get there — you may have another lap to go. And, it might be the most important lap. Much like any large negotiation, there are often relatively important deal terms that get finalized in the final stages of the deal. You need to maintain your energy so that you don’t just give-in on some of these seemingly unimportant “details”.

7. Don’t Use Your Uncle Larry As Your Lawyer:
Same here, though sometimes if family are investing there may be better “Social Proof” if Uncle Larry handles it.

8. Partner personalities matter:
Any investors that are going to have a role in your business need to be a good match for you. If the investors are “silent” then there is less need for a match. Most investors are there for the long term so it is best to be compatible unless they will have no involvement at all.

9. Switching Partners Is Hard, Do Your Homework:
If you choose to a partner with someone do your homework on them. The internet is a good place to start. Ask them what transactions they have handled before. What success they have had. Contact the businesses they have assisted to see if what they say matches with other sources.

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