Reproduced from The Irish Times
By Barry O’Sullivan, Monday, 7 July, 2014
For Irish start-ups, the challenge of raising venture capital is huge
Raising venture capital can be daunting for first-time founders. Most founders figure their way through the initial funding of the business from the four Fs: friends, family, founders and fools.
With the product built, a significant injection of capital is required to ramp up customer acquisition – the challenge now is to convince venture capitalists (VCs) to back your dream.
For Irish founders, the challenge is bigger, with the extra complexity of dealing with a mixture of Irish and US VCs, different legal environments and expectations on terms.
It’s a demanding and time-consuming job for any CEO, but there are things you can do to make the process as productive as possible.
1. Read the books
For the uninitiated, the world of venture capital can seem like a confusing swirl of new terminology. Concepts like control terms, convertible loan notes, preemption rights and reverse vesting are obtuse, but understanding them is critical to your negotiating strategy and the future of your company.
The good news is that you can get smart quickly by reading the various start-up blogs from people such as Ben Horowitz and Mark Suster, and also some of the excellent books that have been written on the topic. For Irish founders, two books are required reading: Raising Venture Capital for the Serious Entrepreneur by Dermot Berkery and Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld.
Feld is a VC at Foundry Group and Dermot Berkery is a Partner at Irish VC Delta Partners. Both books give insights into how VCs think and break down complex technical terms into easily understood concepts. More importantly, the books give very clear guidelines to founders on how to negotiate the best deal for your company.
2. Put yourself in their shoes
VCs are people too. They risk their investors’ money and are expected to show significant returns.
General Partners gets most of its compensation on the “carry” or upside in the fund, so the pressure is real and personal. In addition they have to deal with founders’ egos, demanding limited partners, the pressure of raising the next fund.
The last thing they want to have to do is explain at their Monday partner meetings, to their ultra-smart, super-competitive colleagues, why your little company isn’t gaining traction, and is running out of cash. So take the time to understand what motivates your prospective investor and tune your pitch to hit those hot buttons.
3. Talk to Irish and US venture capital firms
If your ambition is global, your investors should be too. Having local VCs means you can have regular access to local advice and networks. Irish VCs have good international networks as well and many have done deals involving US investors and have great relationships there.
As an Irish company, you are likely to have more success with Irish investors in an early round. Sean Mitchell, founder and COO of Movidius recommends concentrating on there first: “My advice would be to focus on Irish and European VCs for the early rounds (Seed and Series A) at least. It’s rare that a US VC would invest early into an Irish company, especially if no local investor was already invested.”.
Getting US investors in early however, can lay a strong foundation for future larger funding rounds says PieroTintori, founder of TerminalFour: “I absolutely benefitted from an Irish VC as my first ‘port of call’. But I believe there’s a case to be made, when considering larger initial rounds or subsequent rounds: having a US investor can help you with subsequent fundraising in the US, your exit strategy and generally raising the profile of your business.”
4. Always be raising
Even if you have just raised a round, you need to be thinking about the next one. You never want to put yourself in the weak position of negotiating terms on a round while you are quickly running out of cash.
Mitchell recommends that the founder get on the “radar screen” with target investors early.
“It’s not necessary to make a formal pitch too early, it’s possible to say to the investors, ‘I’m not looking for money at this stage but, over a coffee, it would be good to give you some insight into what’s we’re doing’. The investors will like to follow the development of the company for a while in order to see how it’s developing before getting serious about looking at an investment. But be careful not to over-promise in these early informal meetings, as they’ll be watching.”
For Irish founders, that means having a structured plan to network with potential investors on an ongoing basis.
Go to the meet-ups, the Web Summit and Irish Technology Leadership Group events.
Use your current network to get introductions to potential future investors. Don’t be shy.
VCs want to see deals and will be happy to meet you if you approach it in the right way. Even if they hate your idea, you will learn how to sharpen your pitch.
5. Lawyer up
As founders it’s our job to watch every penny so it grates to have to pay big fees for expensive legal advice. However, this is not the area to skimp.
You will need a good legal firm who has been down this road before and can stay with you for the entire journey. The good ones know when terms are “market” as opposed to unfair to founders. They know the main VC firms and have probably worked through syndication with US investors, all the way through successful exits.
The good news is that the progressive Irish legal firms will offer some flexibility on fees in the hope of a long and profitable relationship.
Think of this as an investment that will yield huge dividends for your company if you get the right advice.
6. Partner with Enterprise Ireland
Enterprise Ireland has provided the foundation for the current entrepreneurial revolution in Ireland. Frank Ryan as CEO led this up to recently, and in my opinion is the TK Whitaker of this generation of civil servants. The new CEO Julie Sinnamon looks set to take it to a new level.
Talk to Enterprise Ireland early in your journey and you will have a partnership that serves you well.
They won’t lead a round but will come in with institutional investors with terms that are fair to them and also to the founders. They will support your global expansion and connect you to investors and customers around the world.
Whatever your fundraising plan is, just get started. Read the first book, have the first coffee meeting, talk to other founders. It can be a hugely rewarding journey filled with twists and turns but it doesn’t start until you take the first step.
Barry O’Sullivan is CEO of Altocloud, a Silicon Valley-based start-up with a base in Galway