It’s not every day you get to chat with someone who has the trifecta of venture capital in their back pocket. From helping startups prepare for and close rounds of funding to investing in startups, and helping structure new venture funds, Noah Pittard has seen it all when it comes to startups and fundraising.
As a Partner at Cooley, LLC, a law firm where Noah has helped hundreds of startups navigate legal complexities for more than 15 years, and now as a Co-founder at Service Provider Capital, a new venture fund targeting startups raising their Series A, Noah takes a holistic view when advising startups on how and why to raise capital. Noah brought that perspective to Galvanize Denver members during his November Study Hall where he highlighted two important topics that most startups should keep in mind as they move forward.
This one seems like a no-brainer for any founder looking to raise some capital, but Pittard mentioned that most VCs are less than impressed with how startups manage the data required for due diligence exercises. Pittard also wrote about organization in a blog post, if you’d like to read more.
Even if raising a round is something you won’t pursue for a while, go ahead and start pretending you get a due diligence request every month. Setup a data site (Dropbox is more than fine), and as a daily or weekly discipline, make sure each piece of information an investor needs is neatly organized. That information can be anything from revenue projections to alterations in your cap table. Just make sure it’s up to date and readily accessible.
“That’s the first impression you make on a VC,” says Pittard, “If your documents are really well organized, they’ll lower their guard and lower the intensity when it comes to actually doing their due diligence on your company.”
Convertible Debt – Something Both Sides of the Table Should Love
Every time a new startup hits the scene with a big round of seed funding (Clinkle comes to mind) the whole startup community gets abuzz with excitement. These funding mechanisms are known as priced rounds where investors are able to purchase equity in the company at a set price based on a predetermined valuation of the company.
Convertible debt financing is one of those options. For early stage startups looking to raise ~$750k or less, Pittard mentions this as being an easier route for founders to raise the necessary capital to get their business to the next stage of growth. Savvy investors are generally comfortable with convertible debt rounds since it’s just as easy to write a similar sized check without the due diligence and negotiations over board seats and equity.
“It’s a placeholder,” says Pittard, “it allows you to kick the can down the road before setting a valuation.”
So how do those investors get repaid? The companies set milestones where that debt gets repaid to the investors. It could be a revenue milestone, it could be reaching a threshold of a number of users, or anything else agreed upon based on the company’s specifics. As an extra “thank you” to those investors who got in early and helped take a startup idea off the ground, founders will usually provide a discount on purchasing shares whenever the next round of funding is closed.
There’s no right way to build a company, and by proxy, there’s no right way to raise capital. A final word to the wise from Pittard is that if you know that there’s a possibility you’ll be fundraising in the future, it’s important to cultivate some Angel/VC relationships early on. If you’re en route to hitting some big milestones as an early stage company, those investors will want to see your growth as time goes on and will make asking for capital much easier when the time comes.