Occasionally, in my role as a consultant, I am approached by companies that have a plan in place for their fundraising that doesn’t involve the CEO or a member of the founding team running point on the fundraising process. From one perspective, I can understand that: VC fundraising does, from the outside, look a lot like sales, and if you have a good salesperson, why not let them do what they do best?
The issue is that while salespeople are great at sales, the VC fundraising process is very different than landing a customer. You’re trying to find an alignment between the company and a long-term partner who will have a significant amount of input into the future of your startup. And if there are discrepancies between the sales process and the deeper due diligence into the company (and there will be, because the sales team has a different long-term perspective on what success looks like), that can make the whole deal fall apart.
The majority of early-stage VC deals fall apart in due diligence
There are several really good reasons why, at the earliest stages of fundraising, the founding team should be running the fundraising process. In this article, I break it down and explain why it’s an awful idea to let anyone but the CEO do the fundraising.
A CEO has only three jobs
In most small startups, the CEO has a thousand roles to play on any given day. When a company matures, however, the CEO’s responsibilities typically start reducing more and more until they only do three things:
- Set the vision, mission, values, culture and direction of the company.
- Hire the best possible people to execute the above set of goals.
- Ensure that the company doesn’t run out of money.
As you’ll have spotted, those three jobs are closely related: Setting the direction is where it all begins. From there, you need to ensure that the right human resources are available to reach those goals. To do that, you need enough money to get those people and ensure they’re adequately well resourced to deliver on those goals.
When a VC is evaluating a potential investment, they will spend a lot of time with the founding team to ensure that they have the right “founder/market fit” — assuming the opportunity is big and interesting enough, are they really the right people to go and solve this set of problems? If the answer is negative, they won’t invest.
Sending someone else to do the CEO’s job means one of two things: Either the wrong person is in the CEO’s chair (that does happen and can be adjusted) or the CEO doesn’t fully appreciate what their job is in the context of resource management.
Who has skin in the game?
Most of the time when you are raising money as a founder, you probably have a significant amount of equity in the company. That is important because the founder has the most comprehensive incentive alignment with its long-term success. That means that they are the ones who ought to be deeply involved in the fundraising process.
Note that this doesn’t mean that, as a founder, you can’t get assistance. If you have a chief of staff or someone who assists with scheduling, by all means, drag them into the nitty-gritty of making sure the meetings go on the calendar. The actual pitching, meetings, negotiations and overall fundraising strategy, however, really shouldn’t be outsourced.
In any case, the person who has both lots of equity in the company and the decision-making power to raise money is likely to be the CEO or the whole founding team. It’s really odd if anyone outside that group is heavily involved in the fundraising process.
Evaluating the team
One of the biggest considerations for a fundraising process is for the VCs to get a deep look into the team that’s going to be building the company. Over the lifetime of a startup, there will be oodles of team members who join, stay for a while and leave again. That’s natural and fine — but the VCs will be looking for consistency across the long-term vision for the company, along with the power to make the right decisions.
From the very first email to the writing of the check to the many years of board meetings, the senior management of a startup (and in particular the CEO) will continue to be evaluated every step of the way. It doesn’t make sense to miss an opportunity to make a good impression and show off what a great CEO you are. If you have doubts about whether you are a great CEO, that’s OK, too. Everyone has weaknesses and shortcomings.
But if you truly believe you are the wrong person to run the company, then find another CEO who can. If you are just experiencing a little bit of impostor syndrome, then that’s cool — it happens to even the best CEOs from time to time. Get some feedback, make a plan for how to make up for your shortcomings (whether that means training yourself, hiring smart people to plug those gaps or designing processes that mitigate the things you’re less good at) and go from there.
Who owns the vision for the company?
Typically, even on a larger founding team, there is one person who “owns” the overall vision for a startup. This is the person who has strong views on the target audience, the product, the market and many other aspects of the business. I’ve never met a founding team where, if asked, the whole team didn’t agree on who is the original “visionary” for the company.
Now, that person may not be the CEO. In many startups, especially at the later stages of company building, the visionary realizes that they aren’t good at, or don’t enjoy, the job of CEO. If they are a great salesperson, perhaps they become head of sales. If they are a talented technologist, perhaps they take on the chief product or chief technology officer mantle. In any case, if the original visionary is still involved in the company and they have a significant voice in where the company is going from a product/strategic/technical point of view, it’s highly likely that they ought to be part of the fundraising process.
All the eggs go in one basket
There is no hedging your bets when fundraising: The whole senior leadership team needs to be behind the fundraise. It isn’t really a job that can be shared among multiple people, however: It is extremely frustrating, confusing and often a huge red flag if there are multiple people out there fundraising for the same company.
As a founding team, it’s important that everyone agrees on why you are raising money, how much you are raising and what the goals are for the money you are raising. That may take a few big conversations, but once that is squared away, there’s no reason to take more than one approach to the fundraising process. It either works or it doesn’t. If it works, great. If it doesn’t, evaluate why it didn’t, make a new plan and try again.
Whatever you do, don’t pay someone to fundraise for you
When we are in boom times, economically speaking, an ecosystem of people wanting to help you fundraise emerges. As we mentioned before, there’s nothing wrong with getting a bit of help. And, of course, quality help needs to be compensated.
Having said that, you absolutely do not want to give up equity, or a percentage of a fundraising round, to get an external person to “make introductions” or “help you with the fundraise.” As a VC, whenever someone comes along trying to fundraise on behalf of a startup, it’s almost always an automatic no. It shows that the funding team is not sophisticated enough to know how this works, and there rarely is space (or patience) for middlemen in the process.
Are there exceptions?
There are two exceptions worth noting to the “CEO has to do the fundraising” rule. One of them is grant writing; if your company is looking for grants or non-dilutive funding, it’s often a good idea to include a grant writer who is an expert at knowing what to say and how to say it. The other exception is if you’re going out to do an IPO roadshow. Yes, the CEO still has to be deeply involved in the process for both of these types of funding, but grant writers and bankers have a role to play in these very specialized, very specific types of fundraising rounds.
Comment