When my management team presented our 2020 plan to our board in late March, we were asked how much capital we needed to ensure our DevOps business survives COVID-19. At the time, we had no idea what was next but we had three choices: raise, hold, or run.
Twelve months earlier I had been diagnosed with Stage 3 colon cancer and, in surviving it, realized that while I control nothing, I could influence anything. I decided running wasn’t a choice and set out to preserve the business. We assessed how much capital would carry us for 24 months and set out to fundraise.
In the past two years, I had a successful exit, almost died, and was at the helm of a company growing 100% plus in the midst of a pandemic. I had done raises in 1994, 2001, 2008, and 2016, but this time I had no fear of failure and there’s nothing like practicing radical candor when you realize you don’t control the clock.
Everyone doesn’t have a great team, a great product, and great customers. My advice is don’t raise capital in a pandemic if you don’t have these three elements, because it’s easy to smell blood in the water during a crisis. Today’s investors are looking for excuses to lower valuations and force companies into terms they would run from 12 months ago. The last thing you want to do during the pandemic is take a deal you regret down the road and permanently handicap your company. The pandemic is a desperate time for many companies. Plan your fundraising with extreme care. Here are my top tips:
Limit your targets
We were extremely targeted and put together a list of 30 funds that had reached out to the business over the past 12 months. The pandemic may seem like a time to spray and pray (some startups go after hundreds of funds), but I don’t recommend it, now or in the future. Over the course of two weeks, we did four pitches a day. We were doing so many calls that we had to stick to the clock and politely move on to the next one. The reality was that more than 90% of the people we spoke to were not going to be in the deal, by our choice or theirs. During COVID-19, expect the percentage to be roughly the same, or even slimmer.
Understand investor motivations
When an investor said, “we are open for business,” it was code that they were under deep portfolio stress and we shouldn’t waste our time. On one call, the investor was sick with the coronavirus so, naturally, we let him rest (which also showed a true testament to the investor’s workhorse nature). We also met with investors who were honest and told us their portfolio was a hot mess and this was not a time they could entertain new business. I knew we were dealing with great investors when they were candid–I believe we could do business with them in a future round. COVID-19 was a strain for many firms and the thought of wiring $10M in funds to folks they just met online seemed like a fiduciary stretch that some investors weren’t comfortable executing.
A sniff test is critical right now. Are the investors you’re pitching typically involved in seed rounds, or focus on A or B or C rounds? Are they aggressively using the pandemic to drive great values in new companies, seeking growth in existing investments, or another agenda? VCs are viewing the pandemic differently and you should know which deck of cards you want to be dealing with.
Add entertainment value
Put fun back in fundraising, especially as we were pitching investors at such a solemn time in our world. Often, I would mention to the audience, even if we don’t work together this is going to be the most entertaining meeting you have today. I would usually make a joke about surviving cancer and working at Copado because I love it. It’s amazing how many jokes you can make about your own rectal cancer. I think this humor exuded confidence and a bit of honest vulnerability needed right now. Remember, VCs are people too and they’re also feeling this pandemic, professionally and personally.
Stay on course
We ran through the 30 first calls and quickly knocked 50% of the investors off the list based on our read of the call, investor fit with our current backers, and timeline. I pitched and my CFO listened for signals of intent. I learned to bring my wife when I went to see the doctor for my cancer. I was focused on surviving but she actually listened to what the doctor said. Sharing notes with a listener, my CFO, helped us validate where we would spend our time. We set out to get commitments within three weeks from the outset of our process and close a transaction in 60 days. We knew that rapid qualification would help us understand our options and execute our business in the midst of a pandemic. Our process was to hold the initial call, send the NDA, and provide access to our data room. We tracked if investors were logging into the data room and if they didn’t within an hour of access, we expected they weren’t engaged in our deal.
The second round of calls was where the rubber hit the road. They had access to our data, knew our timeline and this call was about committing or knocking them off the list. This process qualified people and we asked if they could move at our speed or politely not waste each other’s cycles. I believe investors were relieved when we asked them to pull out of the process if they didn’t feel they could get around it and move on our timeline. Investors’ time is their most valuable asset and we let them know we respected that this deal wasn’t for everyone. They took this pretty well after I made a self-deprecating joke about poop and cancer and not having a lot of time to dawdle. We might have a future round they could join and burning bridges helps no one.
Know what you want and why you want it
Know how much capital you need and why will this allow you to execute a plan that would warrant investment. Professional investors want to deploy no less than $5 mm, so if you don’t think you can use $5 mm, raise money from Angels or friends. If you can’t lay out a reasonable plan for how you can grow the money, raising VC is not for you right now.
Build a data room
If you can’t populate financials, track revenue retention and speak to Customer Acquisition Cost (CAC), stop. It’s time to reevaluate. Make sure you know your numbers and that they are defendable. Wishful thinking without a strong financial plan will waste everyone’s time. Many startups don’t have a CFO or financial leadership and many do not get a deal if their numbers are off. This is more important now than before because VCs during the pandemic are much less risky and have a conservative outlook. Any company that does not come in and have great financials will not be successful in COVID-19 funding outreach.
I have executed this process in three businesses over the last 20 years and been involved in raising $250 million from investors. I have failed and succeeded raising capital. If I had to do it all over, I would have hoped to execute the first time the way we did this last round. We don’t get to control time but we can influence everything else by being honest with ourselves and taking the time to be prepared.
Ted Elliott is a serial entrepreneur and Chief Executive Officer of Copado, a DevOps solution for Salesforce, and serves on the company’s Board of Directors. As CEO, Elliott is overseeing the company’s rapidly growing global sales, alliances, corporate development, marketing, and business operations.