One of my loyal readers from England has posed the question:
How do VCs make an
introduction to companies for the first time? How do you make the first move? By e-mail/phone/person? How do you go about
introducing who you are and pursuade them that they may want some outside
investment? Once you have made the introduction - how can you prove that they
are genuine and that the information that they provide to you (i.e. profits,
sales etc) are correct?
If you've been watching that new television show "How To Get the Guy" which chronicles the lives of several women looking for companions, you'll probably find many similarities. In some sense, "getting together" with a company is a little dating dance unto itself.
As my reader surmises, there are indeed several methods to this madness. Every firm does it differently. Every opportunity is unique and circumstances vary.
Before you go looking for a company, you need some basic parameters such as sector, stage, and geography. Some other things to consider are whether you want to co-invest, only take lead investment roles, or only make control investments. I mention these early parameters because what you want will influence where you go and what you do to get it. If you are looking for a companion or something potentially serious, you don't go out to the nightclubs and bar scenes. Usually, your best chances are meeting someone who already knows the person. We all know how often "blind dates" work out in disaster!
So if you are looking for early stage deals, you need to be in the Valley or nearby universities or other areas where entrepreneurs are sniffing around for money. If you are looking at later stage deals, then you need to get chummy with other financiers who are looking to syndicate to mitigate risk.
All of this relies on the assumption that money is looking for companies and companies are looking for money. If you go to conferences, you'll see lots of companies showing their stuff and the VCs hovering around the ones they are interested in.
Now the real question that I am avoiding seems to be how to approach the stranger company. I guess the reason that I am avoiding this is that if you are a VC or a financier, you never want to "cold call" a company. If you are worth your salt then you will find someone who knows someone that will make an introduction. If this company has any prospects then they must have sniffed around for customers, must have developed their idea or product from some professor or spin out of another company. It is rare to find a handful of people in a startup who are isolated like an island with no contact from others.
In the I-banking industry, there are bankers who do cold call companies they hear about to express interest in potentially underwriting their IPO. In the buyout business, there are associates who cold call companies looking for a transaction.
If you absolutely do not have any way of getting an inside track to a company, then the truth is that it probably doesn't matter whether you email, telephone, or IM the company. They will either be receptive or not receptive. If they are not receptive and you are really hot for the company, then work to develop the relationship. If you haven't realized it, getting a company involves a subtle undertone of selling by a VC. So even the VC needs to be a great salesperson.
Once you have initiated contact with a stranger company, you need to sit down with the entrepreneur and explore their vision of the company. This is important because the entrepreneur must have the vision. A VC cannot invest in a company who does not have this vision, unless it plans to replace the leadership with others who do. The VC can't be the only one with the vision. If this is the scenario, then the VC might as well be the entrepreneur.
After you have initiated discussions, you need to do some real due diligence and you will need the company or entrepreneur to provide you with audited company financials and tax returns if available. Whether you trust this data is really up to you, the more you pound the pavement and call customers to verify and find out whether their product has potential, the better off you will be.
As you can imagine, being a suitor to a company is a lot easier if you have an inside track. Not only is there less competition for the deal, but the source can be a little more trusted.
If I've still avoided the real meat of your questions, please let me know.
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