The Top 3 Lessons I've Learned Raising Venture Capital_David DeWolf_1200x675

The Top 3 Lessons I’ve Learned Raising Venture Capital

1024 576 David DeWolf

On March 9th, 2020, just as the global pandemic began to surge and public markets became unstable, 3Pillar closed a strategic investment. This investment was the culmination of a long and arduous process that lasted more than nine months. The investment of time and focus, while undoubtedly distracting, allowed us to return capital to our original investors and gain access to the capital we needed to fund our growth plans. The funding was a net-win for all stakeholders and was designed to carry us for at least the next 4-5 years.

Less than 12 months later, I found myself in the midst of discussions with our board about recapitalizing the business yet again. While CIP Capital had been a great partner, we had quickly outgrown their ability to fund our future growth. The investments we had made, the team’s crisp execution, and the acceleration of digital disruption had all collided to accelerate our growth well beyond what we had originally anticipated. Ultimately, following yet another long and difficult process, we closed new financing with H.I.G. Capital, the largest middle-market family of private equity funds in the world.

I have now raised well over half a billion dollars across a total of five financing rounds, and through that process, I have learned quite a few lessons.

Prepare Your Team

Raising institutional capital requires intense effort. The process will consume a significant amount of time and will inevitably take even the most seasoned leadership team on an emotional rollercoaster. Make sure that your business, your team, and you are prepared and at the top of your game before you pursue fresh capital.

Having learned from past experience, in preparation for one of my fundraising processes, I took the time to make sure I was operating at peak performance. I got caught up on my sleep, increased my exercise regime, and improved my eating habits. I also prepared spiritually and emotionally. I made sure I was on track with my prayer routine and took a vacation immediately before launching into fundraising. This helped me endure and stay healthy through a wild ride.

Another time I had nearly the opposite experience. For reasons outside of my control, our fundraising process began without preparation. I began the process worn down, tired, and behind on work already. Moreover, my team was stretched thin. They were overworked and understaffed. We had to move forward anyway to take advantage of the opportunity, and in my zeal to protect the team from exhaustion, I took on as much of the process as I could by myself. A few months in, my wife threatened to have me hospitalized for exhaustion, and I was forced to go back and ask my team for help. We made it successfully to the end. But we dragged one another across the finish line exhausted rather than exhilarated.

Lesson learned. Prepare yourself, your team, and your organization for the toll that fundraising will take on the business. Despite your best intentions, there’s nearly no way to limit the drain the process will have.

Clarify Your Objective

A business’s financial strategy should support the overarching vision and strategy of the business. It should be aligned with the firm’s ideology. In the heat of the fundraising process, it is easy to get narrowly focused on financial terms – the valuation, structure, and amount of money being raised – and to lose sight of the big picture and what you are trying to accomplish. Nothing will undermine an investment or sabotage a business more than misalignment. It’s critical to define clear objectives before you get started with your financing efforts.

I learned this lesson during our first major financing event. A mentor of mine encouraged me to write down what success would look like. I contemplated the type of partner I was looking for, the outcomes that I thought were fair for our various constituents, and the dynamics that would lead to ultimate success. Much to my surprise, when I pulled this document out when it was time to choose a partner, I found that, in the midst of battle, I had lost sight of several of my priorities. The written document helped me get back on track.

I used this lesson to my advantage in a subsequent funding round. When our board began discussing a potential financial event, I took the time to define success. I pulled out 3Pillar’s core ideology – our purpose, our values, and our stakeholder philosophy – and used these fundamental documents to work with the board to define success. Through this process, we all agreed, up front, what success would look like for the business. As a result, we were able to be good stewards, select a path that was beneficial for all stakeholders, and manage towards an ideal outcome.

Manage The Process

The capital markets are filled with service providers that are focused on nothing more than effecting a transaction. If you’re not careful, the investors, bankers, lawyers, and accountants will drive the process for the sake of the transaction itself and not for the sake of the business. Remember, as the CEO, you are responsible for actively managing the process and making sure that the financing effort serves the business.

Managing the fundraising process is hard. For the professionals you work with, capital transactions are their area of expertise. It can be intimidating to manage experts who know more than you. Here are a few tips I’ve learned along the way.

  • Choose your providers carefully. When you hire your fundraising team, make sure to choose providers who are aligned to your values and understand what you’re trying to build. Developing this foundational alignment is essential to both being able to trust and listen to the advice of your team and having candid conversations throughout the fundraising process.
  • Test intentions continually. Be vigilant and keep an open mind about what you believe to be true. In one fundraising process, I found quick alignment with an investor who shared a desire to preempt our process by openly collaborating with each other to find a quick win-win. While this sounded like an approach my ideal partner would take, I found that the more I put my cards on the table, the less he did. Luckily, one of my advisors challenged my assumption that this individual genuinely wanted to preempt our process and helped me avoid a partnership that was doomed to fail before it began. Keep your eyes wide open. I’ve learned from experience that investors, bankers, and others involved in fundraising can have ulterior incentives that aren’t always aligned to long-term partnership.
  • Assert yourself purposefully. Trust your gut. Regardless of your experience in fundraising, you didn’t become a CEO running a business worthy of investment without having a good sense for whether things are on track or not. In more than one of my fundraising processes, I had a sense that negotiations were not going well and, when the bankers disagreed, I stepped back in deference to their expertise. In both situations, my fears were realized weeks later. If I had been more assertive, I would have saved all of us significant time and helped drive a better outcome.

In Conclusion

Raising, and as importantly continually having access to, capital is a core part of the CEO’s job. Unfortunately, in a world obsessed with the latest paper unicorn that has raised hundreds of millions of dollars on a multi-billion dollar valuation, too many entrepreneurs – and frankly, observers – see raising capital as what defines their success. Nothing could be further from the truth. Raising capital is nothing more than one way to finance your strategy. If you’re going to be successful, it’s important that you keep this in perspective, prepare your team, clarify your objective, and manage the process.