In the current private equity landscape, which is grimmer than any I have seen in 40 years, I rack my brain repeatedly on behalf of clients (actual and potential) as to how to enhance the chances of raising money, particularly in the Series A round.
The usual nostrums offer direct work ... a tight business model, a focused planned, attentiveness to what the market really wants, revenues, scalable model, ... etc., etc. The woods are full of advice of that genre, but in today's market, it usually doesn't help.
What then? What can get the AAA companies recognized?
The first idea is to listen to the VCs. What do they want and/or need? Treat them like customers. Hold a real (or synthetic) focus group and ask: what do you really want to see? Let's conjure with their problem, not yours.
First, most of them have been beaten up pretty badly. They have dry powder but they need a winner, a deal which drips with possibilities. Otherwise, if they issue a capital call, they could trigger a bunch of 'drop dead' responses from their LPs. High anxiety time, in other words, translating into little margin for error. One more stumble and the proponent of your deal could be on the street. Any new deal must either threaten to be a "portfolio maker," a 100 to 1 return, or be amply protected on the downside, entailing the existence of a safe harbor in the case of trouble.
Secondly, they are stressed and tired. Most of their time and energy is still being spent in attending to troubled companies in their portfolio and dealing with angry limited partners. Reviewing new deals is both time consuming and expensive; recall again the reluctance to issue capital calls for any purpose ... new or follow on investments and/or partnership expenses. In the latter case, any new opportunity requires due diligence including frequently the employment of a consultant.
What, then, does the entrepreneur do? Here is the suggestion I am making to clients, based on some recent experience.
First, before approaching a VC manager, why not do her work for her? By that I mean, first ascertain a reliable independent consulting firm in your space and hire it to do due diligence of the sort the VCs are accustomed to purchase. This may cost the entrepreneur high five figures, depending on the circumstances, but it can be money well spent. If the report is favorable (e.g. the technology is a world beater), so much for the better. If flaws are exposed, better early in the process than late; the entrepreneur has an opportunity to respond, to make changes and enhancements to eliminate the questionable areas. The consultants report is worthless, of course, unless it is paid for regardless of the outcome, and exposed in its entirety to potential investors.
This step is counterintuitive, of course. Potential investors should (and will) do their own due diligence. But remember that your objective is to make it easy and attractive for the VCs to invest in difficult times. Find the consultants they tend to use (not hard to do... just ask them) and pay a flat fee on a "Hell or High Water" basis. Staple the report to the business plan and go out into the market.
As an added benefit, include a request that the consultant perform a 'quick and dirty' source-protected survey of the potential for an advantageous trade sale if the business model works. Nothing will make a VC more comfortable than an informed opinion that there is an escape hatch if the IPO market continues to languish. In addition, the report can also be useful in attracting a first class placement agent to take on the assignment.