Chumps vs. Checks: Handling The Venture Capitalist Cold Call

The following is a guest post from Healy Jones.  Healy is the Head of Marketing for OfficeDrop, a company that offers small businesses in paper intensive industries cloud scanning software and cloud filing. Previously he was a venture capitalist with Atlas Venture and Summit Partners.

Taking a cold call from a venture capitalist

So you are busy running your startup and suddenly the phone rings and it’s a venture capitalist. What do you do?

VCs of various stages are borrowing a page in the playbook from some of the most successful buyout/growth investor groups and taking an active, outbound approach to finding new investments. In other words, you are more likely than ever to get a cold call from a VC.

This can feel pretty flattering if you are the little startup trying to take on the world. But it can also be a waste of time. Most of these cold callers do not invest in really early-stage startups – they are looking for larger companies.

Growth Funds vs. Early-Stage Venture Capital Firms

I realize that the difference between a venture capital fund and a growth equity fund may not be readily apparent. Today there are seed funds, micro-VCs, traditional venture capitalists, later-stage VCs, growth funds, etc. It’s a little confusing.

Traditionally, investing in pre-revenue startups was the purview of venture capital funds. Growth investors focused on companies further along in their lifecycle – companies with substantial revenue and a history of profitable growth. Today, in addition to the whole seed funding movement, the lines between traditional venture firms and growth funds has blurred. However, most cold callers are from growth equity funds that still do not invest in pre-revenue, or even moderate (i.e. sub $10 million) revenue companies.

This is why I recommend that if you are running an early-stage startup that you do not spend a lot of time on the phone with growth fund investors. They are looking for businesses with certain levels of revenue and cash flow, and if you don’t fit the bill they will want to get off the phone too. But if you’ve just gotten some great press, you might not only find yourself deluged with cold calls from growth funds, but might also get a ring from a legitimate early-stage investor whose curiosity was piqued.

Taking the Venture Capitalist’s Cold Call

If you are actually raising capital then I suggest you approach these calls in the same way you would a sales lead: qualify the lead, move the worthless leads out of the funnel ASAP, get the info you need to appeal to the few leads that are actually a potential fit and set yourself up to make a legitimate/strong pitch to those few.

You need to quickly sort through the growth investors who are not a fit for your business. This approach is based on my former experience as a buyout investor, growth stage VC and early-stage venture capitalist, and now as an executive at a startup that has successfully raised a modest amount of venture funding. And oh yeah, I’ve made a lot of cold calls into private companies as an investor and have received them at my startup as well.

Steps for dealing with a cold call from a venture capitalist:

1) Quickly figure out if your company even fits the financial profile of the investor’s fund. Politely ask “what is the financial profile of your firm’s investments?” The good growth funds will unabashedly let you know what financial statistics they look for in an investment – say $5 million in cash flow and 15% year over year growth rate, or $10 million or more in revenue. If you are a pre-revenue startup then you are wasting your time speaking with these people. I understand that your projections might say you are going to go from zero to $50 million in revenue in the next 18 months, but trust me, you are not a fit for the growth fund today. These groups are usually very strict on investing only in companies that meet specific financial criteria (cash flow breakeven, particular revenue levels, etc) so you don’t want to spend time with them if you are a startup.

2) Ask how much money the fund invests at a time. If the group typically invests $25 million at a time, and you are only looking for a seed investment then you are not a good fit. Be wary of the investor whose fund invests in a ridiculous range of dollar values, say from $1 million to half a billion dollars – the individual you are speaking with is probably on the growth investment side of the fund. You only want to have an in-depth conversation with someone who could potentially meet your startup’s funding needs.

Note that these first two questions were all about financial issues. The goal of these questions is to weed out the growth and buyout investment funds. The majority of investors who cold call are these types of firms, and they make initial investment decisions based on financial metrics. Your pre-revenue startup is not going to get financing from one of these groups. It’s time to get off the phone. Let the cold caller know that you are so far outside of their financial criteria that a conversation does not make sense at this time. You don’t need to share any other information or spend any additional minutes on the phone! You’ve just qualified the investor off of your list and should get back to running your business. Go ahead and give them your email and let them know they can ping you that way in six months/a year to see if anything has changed. Quick note: if you are a growth stage company that meets the investment fund’s financial criteria then keep reading.

If the fund actually invests in your stage of startups, then your next goal should be to figure out how to give a solid pitch to the right person at the fund.

3) Make sure you know who you are talking to. Make sure you know which fund is calling. Learn a little bit about the fund; if it doesn’t sound like the type of fund that would invest in your startup then ask. Figure out who the person is and what their role is. Of course, you want to talk to a partner at the fund, but the person calling may be a more junior associate. A few years ago I wrote a post on talking with a junior VC; this advice may be helpful if you find yourself on the phone with one.

4) Ask what prompted the call. Was it a piece of press? Did they hear about you from someone? Or are they doing research in the industry? Which leads to the next question:

5) It is fair to ask if the fund has any investments in the same industry or any that may be considered competitive. You also want to know if the fund is actively doing diligence in the space for a different investment. I’d expect most VCs to be quite honest in this area! Thesis driven investors will often try to speak with every company and executive in that space. I know I did this in a few specific areas – I called everyone I could. But I also let the startups know I was serious about their industry and expected to find and make an investment. Most executives still were open to having a conversation. In general, I believe that this isn’t a bad move if you are actively looking for capital because:

a. A number of VCs will make more than one investment in a space.

b. If a VC is truly looking across an industry you should be able to get helpful market data out of them.

c. Good VCs will make introductions to potential partners, employees, etc for companies that they like, so getting to know a VC who is spending time in an industry could be valuable.

Be smart about this. Remember that you don’t have to give away every piece of tactical information to have a good first conversation. And do a little research on the thefunded.com – see if they have a good reputation, ask people in your network who know the partner and the fund, etc. This leads to my next point:

6) Now that you know who this investor is, do you want to speak with him/her at this moment? Do you want to do a little research on him/her and the fund first, or are you comfortable speaking right now? Are you ready to deliver a pitch on the phone? Do you have a presentation ready (even if you don’t share the presentation, I’d suggest you use it as a means to structure your conversation. You’ll be much more organized if you use the table of contents to talk about your company than if you talk off the cuff.) Do you actually have the time, or do you have a scrum meeting scheduled in five minutes (and make sure the VC has at least half an hour to devote to you)? If you aren’t ready then you should schedule a call in the future when you have more time. Don’t feel bad, just do it. If you are going to push off the conversation then I’d schedule it right then and there on the phone. Another option, if the VC is in your area, is to ask to meet in person. But again, try to ask for the meeting right then and there and get something on the schedule.

7) If you are ready to pitch, treat it like a pitch. Run through your fund raising presentation. Be organized and efficient. I’d suggest using your “ten minute pitch.” Even thought they called you, you are being judged so take the pitch seriously.

8) Don’t forget to ask questions. If the VC called you, they likely have some opinions on your industry. What other companies are doing well? Which customer verticals are buying? Who has cool new features? A good VC will have legitimate answers to these questions. I’m not suggesting you “test” the venture capitalist – rather you try to take advantage of the conversation and learn something.

9) Finally, end the conversation with an agreement on next steps. An in person meeting should be your goal. If you can’t get that, then get the VC to agree to follow up at a specific date. You don’t want to be in fund raising purgatory, so get their contact info so you can follow up if they don’t.

Remember, most of the investors who cold call are growth investors who really can’t help your startup. Qualify them out of your funnel ASAP. Next, figure out who you are talking to. Make sure you are ready to pitch, then give it your best shot. End with an agreement on next steps.

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Oh, and by the way, you should follow me on twitter: @dharmesh.