Emergence CEOs Share The Secrets to Raising Growth Capital

May 1, 2018 Joseph Floyd

Series B is known as both the hardest round to raise by entrepreneurs and the hardest to evaluate by investors. The data proves this out as approximately 50% of Series A funded companies raise a Series B. Why is it so hard? Teams have product market fit figured out, but there is still a ton of risk in scaling early success into a machine. I’ve been at Emergence for 6 years and in that time, every single one of our Seed or Series A portfolio companies that wanted to raise their subsequent Series A or B has successfully done so from an outside investor at a higher price (over 2x higher price on average). That’s right: 100% success rate for over 20 investments. So I went to the source of truth and asked five of our CEOs who have raised growth rounds in the last year to share what worked for them and also asked the Emergence team to generalize their wisdom into the following 5 tips.

1. Don’t fundraise until you are fundraising. As an entrepreneur, you have to focus on the most important factors that can advance your business. If you aren’t in fundraising mode, then don’t waste your time talking to every investor that cold emails you. Don’t ghost investors, but just politely decline and offer to keep them apprised of developments via email and re-engage when the timing is right for you. Good fundraisers maintain a pipeline of 5–10 investors with a quarterly email that builds trust that you can hit milestones. Quarterly touch points also enable a CEO to solicit feedback and help which gives a CEO the opportunity to assess VCs on their fit as a future partner.

“The secret to fundraising is to make customers happy. We built a great product and a successful team with the help of Emergence Capital. We were not actively fundraising when Sequoia approached us as we had plenty of cash in the bank so we were in control of our destiny. When you focus on your customers, then the new investors will come.”
- Eric Yuan, CEO of Zoom ($146MM raised)

2. Timing is everything. Finding the right partner takes time and requires a full process. You should start preparing for a fundraise cycle at least 9 months in advance by preparing your investor list and having initial investor meetings to understand their process, gauge interest and solicit feedback. You should earnestly go to market with your pitch deck and diligence materials at least 6 months before zero cash date. If you try to cut your timing too close, you will give yourself (and your investors) a lot of heartburn and you’ll be at the mercy of investors as your cash balance ticks down. Venture debt can extend your runway (and can be factored 50% into your runway timing). Also, it’s hard to fundraise in August or between Thanksgiving and New Years so you have to factor that into your math.

“Before you start your fundraising process, you need to understand how each firm will ultimately make their decision — who are the key decision makers and what is the process and timing for the decision. Some firms can make a decision with one Partner and others require two full partner meetings. If you have pre-fundraising meetings with potential investors, then you can qualify your list down to the top 5–10 and guide the process so everyone can make a decision within your timeline.”
- Jett McCandless, CEO of project44 ($46MM raised)

3. Practice and preparation are critical to a smooth fundraising process. Fundraising is practically a full time job for the CEO. You should practice and iterate on your pitch until you have it down cold. You should research the partner you are pitching and tailor your story to their specific criteria (which you hopefully learned during initial meetings). You should prepare and practice answers for every possible pitch or diligence question you can predict. The key to keeping interested investors engaged is to have prepared materials for every diligence request.

“Entrepreneurs need to be prepared for any question in a pitch and any diligence request after the pitch. I brainstormed questions with Emergence ahead of time and together we made sure we had answers to every question and a data room ready for diligence. Having everything prepared ahead of time really kept SalesLoft in the driver’s seat in our process, and it helped us weed out firms that weren’t interested because we could see the firms that were diving into our data room.”
- Kyle Porter, CEO of SalesLoft ($76MM raised)

4. Choose the individual you want as a long term partner, not just the term sheet with the best terms. The common refrain in Silicon Valley is that choosing an investor is analogous to getting married. You want a partner who will support you through good times and bad. Selecting the term sheet with the best terms at the expense of working with your preferred partner is a sure fire way to end in divorce. Make sure you really know and trust the individual person (not just the firm) that you are choosing as your partner. After you have a term sheet, you should absolutely talk to the entrepreneurs that person has backed.

“You choose an investor, not a fund and definitely not a term sheet. For us, this meant making a careful list of the people we wanted as partners and then running a tight process. We were authentic with who we are — strengths and weaknesses — and we wanted to find a partner who was aligned with our story. If you run a tight process where you keep your meetings close together and have everyone finish their process around the same time, then you will have the option to choose your preferred investor and get the terms you think are fair. We were lucky to do this for both our Series A with Emergence and our Series B.”
- Kieran Snyder, CEO of Textio ($30MM raised)

5. Build trust during your fundraising process with transparency and follow through. Don’t stretch the truth — not on your metrics, market size or anywhere else. VCs are great at finding flaws and half truths and you simply cannot regain credibility and trust once it is lost. Specifically, don’t pretend pilots or proof of concept deals are signed customers, don’t show CAC, LTV or any other metric on a pro-forma basis unless you denote your formula on the slide and definitely don’t say you are an AI company when you aren’t. If you build trust, regardless of the outcome, you will have allies out there who believe in you and that will pay dividends in the future.

“Our Series B came together only a few months after our Series A so it wasn’t the typical process. We had a number of investors from the Series A process that loved our story. Partnering with Emergence was an easy decision given their reputation and track record in the Enterprise space. After closing the round, Mya hit the milestones we laid out in the Series A process and we kept the investors we liked updated on our progress. One of them preemptively led the Series B and we were able to close very quickly. For me as a first time CEO, the key was proving our credibility by hitting goals and following through on what we said we were going to do.”
- Eyal Grayevsky, CEO of Mya Systems ($32MM raised)

Emergence CEOs Share The Secrets to Raising Growth Capital was originally published in Emergence Playbook on Medium, where people are continuing the conversation by highlighting and responding to this story.

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