While an entrepreneur can start off by identifying private investors and brainstorming with relatives, friends and business associates who would be willing to support the venture. If the intention is to scale up the effort, focus should be on how to maximize the close rate with fundraising prospects. It makes more sense to increase the closing rate from 25% to 75%, rather than expanding the prospecting list to 40 or 50 individuals, thus needing fewer prospects to complete the round of funding.
1. Pick a closing date, then don't enforce it: When raising large sums of money from VC Firms and/or institutional investors, the closing dates are critical. The interest income in most cases is almost the same amount as the total legal fees on VC rounds, so the cost of a closing delay is substantial. In practice, the investors will ignore the closing date and give the money at their own convenience.
Word of Advice: the standard closing date clause should read "The closing date is [some date in the near future] or another date that is mutually agreeable to both parties." This will keep the documentation valid for several weeks after the closing date in case the investor takes extra time to give the funds.
2. Provide investment options: Flexibility is critical when dealing with non-institutional investors. Take-it-or-leave-it terms seldom work because the motivation for each investor will vary. If the funding is raised in the form of debt, it is prudent to offer different options for participation in the round with the variables being amounts/thresholds, time horizons, and repayment schedules. On the other hand, if the fund is raised against equity dilution, the preferable instrument is convertible debt than preferred stock.
3. Anticipating follow-up meetings: It is best to end each meeting with a definite plan for the next meeting. Even if the whole idea and the story can be told over one meeting, it is better to spread it to two or three meetings since that might be how long it takes for the investor to get comfortable with the entrepreneur. It is also a good idea to schedule reference calls with previous investors, partners, and/or board members to demonstrate the people involved with the venture and who can vouch for the business.
4. Stop selling: The habit of selling and the sales culture of fundraising can seep into the interactions with investors even after the investment decision is made and the formalities are being worked on.
5. Getting the Check: When raising money, often the entrepreneur gets tied up and entangled in the process of answering the questions posed by the investors, negotiations, paperwork, making sure the relationship with the investor can be continued even after. During the course of all these interactions, it is easy to forget that the primary focus and purpose of the process is to get the money.
Word of Advice: It is a wonder that the funding is received earlier than anticipated if it is asked for earlier. One way to ask for the check is to ask your investor whether he plans to make a wire transfer or send a personal check so you can decide if he needs to receive your bank wire transfer details. It might be presumptive to ask this question too early, but it tends to move the dialogue along very quickly. What must be remembered are -- "If it is not documented, it is not said" and "The deal is not closed until the money is in the bank".
