Many new companies rely on venture capital (VC) in order to grow. To get a better feel about successful VC fundraising, I talked with Valery Komissarova, Principal at Grishin Robotics. Grishin Robotics is a $100 million venture-capital fund that focuses on smart hardware, robotics and the Internet of Things (IoT).
Wong: What are the three top issues that most developers forget to consider when coming to a VC?
Komissarova: First, venture capital is an asset class with fairly specific requirements in terms of the kinds of deals we are looking for. Hence, to ensure a good match, entrepreneurs should be keenly aware of the motivations, mechanics, and mathematics of the decision-making processes of venture-capital firms, as well as various parties inside of them. Specifically, VC firms’ managers are looking for so-called “outsized” returns on their investments—and 2X to 3X on the original investment simply doesn’t cut it. Does your business, realistically, have the potential to generate those kinds of returns?
Although countless factors are involved—and the level of uncertainty in this business is notoriously high—the size of the market is one of the utmost things to consider, as well as your exit scenarios (in an ideal world, an IPO; the more likely reality, though, is acquisition by a bigger company).
Valery Komissarova, Principal, Grishin Robotics
VC investors make a distinction between VC-backable companies and lifestyle businesses. The latter may be a great outcome for you as an entrepreneur in terms of income and such, but highly unlikely to generate meaningful returns for us. There’s nothing inherently bad about it, but it does highlight the fact that VC fundraising is not a default route to grow your business. Rather, it must be a result of careful consideration to avoid misalignment of interests later down the road.
Second, get very specific regarding what VCs are looking for, not just on a high level. How are deals usually structured? Get comfortable with key terms (e.g., liquidation preference or pre-money valuation), for instance, read books by Brad Feld. What is the style and format of the pitches VCs are used to? How should your investment deck look? Is it okay to write a cold email to a prospective investor, or does someone need to find an introduction first?
Do as much homework as possible before you have your first meeting with a VC. That’s the only way to ensure that you will be taken seriously by investors. The process will be maximally effective for both sides, and you will be able to protect your interests as well as those of your company throughout (let’s face it, not all VCs are created equal, and you need to be able to spot unusual behavior).
Last but not the least, you need to essentially forget that you’re building a hardware or robotics product or business—nobody cares, not your customers nor your investors. I know from personal experience. Robotics is so exciting, and as a geek at heart, I know how easy it is to get lost in the beauty of a particular technical solution and lose sight of the big picture. The particular kind of technology you’re using, be it robotics or something else, is infinitely less important than the need to have a deep understanding of the problem you’re solving with it, market you’re going after, customers’ needs, and so on.
Wong: When is the right time to start looking for VC funding?
Komissarova: As in any business negotiation, the strongest position is one where you’re ready to walk away at any time. Therefore, the worst possible moment to start looking for capital is when you’re running out of cash—it’s way too late already. In a time- and cash-constrained situation, it will be much more difficult to do proper due diligence on your investors (yes, they do their due diligence on you, too—it’s an absolutely mutual process!), to negotiate good terms etc.
Therefore, plan in advance and start developing relationships with potential investors way before you think you will actually need money. And when you’re thinking about the amount of capital you need to raise in any given round, for that same reason (as well as many others), plan your runway very carefully to minimize the risk. Otherwise, you will find yourself in a tough position later down the road. Have a margin of safety, because whatever can go wrong usually goes wrong.
Wong: What’s the blueprint of the successful VC fundraising strategy, especially when it comes to hardware and robotics companies?
Komissarova: We already covered a lot of the ground earlier in our conversation, while talking about the necessary preparation and common mistakes entrepreneurs tend to make when approaching VC investors. One other critical aspect that’s often overlooked by entrepreneurs, especially if it’s their first time when it comes to VC fundraising and they don’t have that much experience, is the importance of managing your fundraising’s moment—especially in Silicon Valley.
Let’s face it, all investors talk to each other (especially when it comes to hardware and robotics startups, which still constitutes a fairly narrow, albeit growing, subset of investors). And as much as everybody touts independent thinking and a systematic decision-making process, the signaling issue is a big one for an entrepreneur.
At a certain point, if the process isn’t managed strategically and proactively, you reach a critical mass of “no” answers from investors, and the deal essentially goes “stale.” Any further investors will be quite wary of the deal if they’re already aware of 15-20 people who passed on it before. For better or worse, VC investors are as much cautious as they are innovative. It’s the nature of the business, and the art of it is in a careful balance, too. Be aware of this dynamic.
Wong: What are the areas VCs are interested in today when it comes to hardware and robotics? Any specific types of companies?
Komissarova: Different investors have different propensities and interests when it comes to specific markets and business-models. That’s why it’s critical to do research before outreach begins, to understand best targets. And not just specific firms, but specific partners inside of them: What excites them? What kinds of deals do they usually do? Do they have any particular expertise or background knowledge that can be relevant and beneficial to your business’ growth if they wind up on your board of directors?
I would say that first wave of consumer hardware and robotics startups, be it drones, wearables, or smart-home automation, is largely aware. There were some successes and plenty of failures.
A lot of the companies suffered from the problem I described earlier: After getting over-excited about the newfound ability to connect so many different things to the cloud and collect certain data (thanks to sensors and computing power, which have never been cheaper), many entrepreneurs lost sight of the bigger picture. Why? What is the problem being solved? A handful of people on Kickstarter or Indiegogo would buy almost anything in some small quantities, but that means next to nothing in terms of the product’s potential to grow into a big, successful business.
Consequently, VCs today have much higher requirements when it comes to consumer hardware and robotics startups. This goes for manufacturing experience of team members, market sizing, and commercial traction, as well as the potential for extra software recurring revenue streams that ideally would help significantly increase customer lifetime value (LTV) beyond just one-off product sales.
Along those lines, China has become an even more formidable force than it was only five or six years ago. No longer is it just a giant outsourced manufacturing facility for, say, U.S.-based companies. Just think of DJI or Xiaomi, which just about destroyed many American consumer wearables or drones startups. To be clear, there are still plenty of interesting, meaningful challenges and problems to be solved for consumers through clever application of robotics and automation—it’s just that the bar is so much higher today.
Industrial or B2B markets offer tremendous opportunities. Think of all biggest industries in the world, from food to oil & gas to finance to retail (not to mention automobile market)—all of them will be completely transformed by the advent of IoT and robotics and automation in the next five to 10 years. However, startups providing B2B solutions for those markets have their own unique set of challenges that VC investors are quite cognizant of. They often seem to lack team members with any deep knowledge and experience of working in a target market, long sales cycles, unattractive/limited exit scenarios, and so on. Again, entrepreneurs should tackle all of those issues long before they contact a venture capitalist.