Narrowing the Investor Funnel – Advice for Founders and CEOs

By Dean Nelson & Caitlin Vorlicek

As the private capital markets continue to increase in size and complexity, founders and CEOs are faced with the most challenging (albeit favorable) fundraising environment to navigate in recent history. Many CEOs share that they receive 10, sometimes 20 (or more) emails and calls from new potential investors every week who are aggressively looking to put their dry powder to work. Ultimately, great businesses will face many attractive options when raising capital, independent of the current environment, but finding the right partner, and doing so efficiently, is still a challenge. On the first point, our colleague Will Kunin recently penned a blog post discussing the importance of founder/investor fit, highlighting that finding the right partner takes time, often taking focus off the business itself. In this blog post, we’ll dive deeper into the latter point and help try to answer the question: how should CEOs most efficiently sift through the myriad of inbound emails and calls they receive to find the right investor to minimize distraction from running the business? A few of our thoughts are listed below.

#1: Take Some Intro Calls

It’s tempting to simply delete or file away all emails from investors until you’re ready to raise capital. We get that! However, understanding firms’ strategies and building relationships are essential for finding investor/founder fit. We recommend reading emails and taking calls with pitches that resonate on a regular but manageable cadence (3-4 new investor calls per month should allow for sufficient exposure to a wide range of investors in the 12 months leading up to a capital raise). During those calls, ask the hard questions to help you understand what kind of a partner you would be working with. Some stats to ask for could include:

Signed term sheets to close ratio
Return profile of prior funds
Loss ratio
Typical range of outcomes – multiple of money invested and IRR (the annualized rate of return on that multiple)
Average and range of hold periods
Specific examples of operational expertise

Additionally, we’ve seen many exchanges where CEOs ask for a revenue threshold and decline taking a call because his or her company has not crossed that threshold. We would suggest doing the math a bit differently: don’t punt on a call because you’re not at a revenue threshold today – punt it because you do not expect to be at that threshold by the time you raise your next round of capital.

#2: Keep in Touch

A 30-minute introductory call should give you a sense of whether a firm is a good potential fit. This might come down to the answers you received, or it might be more gut feeling. We suggest maintaining a list of 3-6 firms where the fit is strong and keeping in touch with them (2-4 calls or meetings per year). This should be a living/breathing list – perhaps you meet more team members, hear something through the founder/investor grapevine, or simply have a change of heart that moves an investor on or off of your list. Maybe your list starts larger (5-10 firms) and narrows with follow-up calls.

As you attempt to get to know these firms better, be selfish:

Ask to meet in person, whether you’re in the investor’s city or they’re in yours
Ask to meet more members of the team, building relationships with those that will be most involved post-investment (could be anyone from Analyst to Partner to portfolio operations team members)
Go into each call with 1-2 operational challenges that are top of mind and ask for advice and resources. Maybe you’re looking for a CMO, rethinking your approach to pricing, optimizing sales rep compensation, or simply looking for better benchmarking / KPI reporting ideas

By asking for help, meeting more team members, and taking meetings in person, you’ll get a much better feel for what it will be like working with the investor when the inevitable challenges come post-investment.

#3: When You Raise, Keep it Narrow and On-Schedule

Once you’re ready to raise, invite your short-list to a process. Keeping that list to 3-6 firms will help minimize the distraction to your business. You’ll find that many firms will try to use speed to their advantage, giving you a sense of momentum and certainty to close. Hopefully, you’ve already asked what percent of term sheets signed get closed, so you have an actual data point instead of a “feeling” when it comes to this.

We strongly recommend setting a deadline for term sheet submission and not allowing any firm to push ahead of that deadline. Give 2-3 weeks of lead time so that your potential partners have an opportunity to thoroughly vet the deal with their investment committees – you want term sheets that are closer to fully-baked vs. half-baked. Tell any firm that tries to submit an offer ahead of your deadline that you simply won’t look at it. Though it’s tempting, there is no upside to you (and only upside for the investor) if you sign a term sheet without reviewing your complete set of options.

If a potential investor tries to game the process and gives you an exploding term sheet with a tight deadline, we think that it raises red flags. It demonstrates disrespect for you and the process you created, and it also indicates that they are worried that their offer may not be competitive, either based on fit and value add and/or valuation.

Lastly, we recommend asking for introductions to CEOs that have worked with your potential investors in the past. In addition, try to conduct some of your own off-sheet references (make sure they’ve worked with the individuals you’re talking to). Usually, off-sheet references are the most telling! Just like you, these CEOs have their own businesses to run, so we recommend doing this with only your short-list, but perhaps in Step #2 above as you’re narrowing that list.

Conclusion:

A significant advantage to the increasing size and complexity of the private capital markets is that there is undoubtedly founder/investor fit out there for almost any CEO. It’s an intimidating challenge to navigate but spreading the work out over a year, or more, can result in a high level of conviction that you’ve found the right partner and potential benefits to your company as you ask for resources and ideas along the way. At Sageview, we are always keen to demonstrate our value add ahead of becoming investors in a business – ask us for help, meet with us in person, and hold us accountable to your deadline!

We look forward to the prospect of partnering with you.