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How To Raise Money From A VC: Insider Tips

I’m sitting in on a packed breakout session at the SxSW conference with Charlie O’Donnell of First Round Capital.

If you’re interested in creating technology-driven businesses, you should know about Charlie.

I like Charlie because he’s worked both sides of the fence (founder/CEO of businesses and venture capitalist); and he’s extremely well-networked .

His current employer First Round helps entrepreneurs with their early financing (before the big venture capitalists get involved).

Note: If you want to know more about the different stages of raising money, check out The 5 Major Stages of Startup Funding article I wrote.

Think of them as a “feeder fund” to the larger investors. If you can sell First Round on investing in you, you’re about 100X as likely to get larger funding from more venture capitalists.

Here are some tips he shared with entrepreneurs:

Ask For Advice (not money)

He says: “If you ask for advice (from venture capitalists), you get money…if you ask for money, you get advice.”

Vet Your Product/Product Management is Key

Most startups have a biz person and a techie…but it’s the translation in the middle that’s key (someone to focus on what the milestones are, priorities, etc. for the product).

Simple things like getting wireframes of your products nailed down before you start coding can be a huge time saver.

“The best ideas are the ones that nobody thought would work.”

Everyone is good at coming up with feature ideas…it’s a lot tougher to pick the ones to prioritize on.

So, be very clear about who is in charge of product management.

Things Take Longer And Cost More Than You Think

Building a company will take three times as long and cost twice as much; or take twice as long as cost three times as much.

Have 2-Week Plans (not 6-month plans)

Focus on Small/Short Milestones

This is tougher but will make you more efficient. Again, this is where someone with product management is key.

Hiring Is Harder Than You Think

On-boarding is harder and takes longer than you think. A programmer, for example, takes awhile to get to know your systems.

Venture capitalists, O’Donnell adds, don’t always help: “VCs look only at top-level employees…and never ask details about lower level hires.”

Embrace Failure

Find people who have failed in your space because they’ve learned the most — don’t just talk to people at a successful company like Twitter.

You Might Consider Selling Customers First, VCs Later

It’s way easier to ask a venture capitalist for money than it is to ask a customer…but you should focus on getting sales from customer to increase your leverage with VCs.

For example, Square Space in New York focused on generating sales (as opposed to raising money from VCs) and is now in a position of greater control with raising money from VCs.

Launching Products/Businesses

PR is really hard to do…there are not that many people who do it well.

You may get a bunch of public relations on the launch day, but it will be much tougher to get PR a few months later (unless you have a new milestone) — again, having greater frequency of milestones is a theme here.

Building a Startup Is All About “Unfair Advantages”

A key leverage point with VCs is your “unfair advantages.”

Examples of unfair advantages:

  1. You worked at the #1 competitor and you know the inner-workings of that company like noone else.
  2. You have visibility in the community and folks will want to work with you.

For example, Gary Vaynerchuk can jump on his Wine Library video blog right now and get a developer hired immediately — that is a good “unfair advantage” he has over his competition.

3 Must-Haves To Attract A VC

  • Solid Team
  • Market The VC Wants to Play In
  • A Strong Product

Caution: Don’t Idealize Strategic Investments

Don’t assume that when a strategic investor puts money in you that you’ll get everything from that company that makes sense.

He points to his startup Indeed raising $1 Million from the New York Times and assuming that the newspaper would promote Indeed on its highly-trafficked Jobs Web pages (which it wouldn’t do).

Start The Wind-Down Process Early

When you’ve raised venture capital and your business isn’t working out, leave yourself enough time to sell your assets.

That’s because the “wind-down” period of a business goes very fast and selling your remaining assets takes time and energy.