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Jul 3, 2014
What To Expect After Demo Day
By Mat Goldstein and Tim Jones*
It's an old adage that an investor-company relationship is "like a marriage ... but more important." Demo Days and networking events can spark mutual connections, but once that connection is made, how long does the typical 'dating' process last between investor and startup before a commitment is made?
Charlie O'Donnell, partner at Brooklyn Bridge Ventures, analyzed his last 21 investments to model this question. For his average investment, 821 days elapsed between his initial communication with the company and the deal's actual closing. In other words, startups can expect to be acquainted with a venture capitalist for almost two and a half years before a cheque arrives.
Further, O'Donnell's average investment closed 162 days after it was pitched. So even a successful pitch doesn't necessarily result in immediate cash flow - a five to six-month wait until closing is not uncommon.
Since rounds of investment require multiple confident investors to be lined up concurrently, this time lag between pitch session and cash flow is unsurprising. Ironically, even the fastest-growing startups require patience. Indeed, the organizers of one networking trip to New York City warned investment-ready startups "not to expect cheques," instead advising that relationship-building, in and of itself, should be the primary focus.
O'Donnell's findings support the theory that investors want to "invest in lines, not dots" - that repeated exposure to a startup's principals and ideas is necessary to build confidence in future success. Only 13% of O'Donnell's investments were made to companies with whom he was completely unfamiliar before making a pitch. The vast majority of them came from relationships that developed organically over time.
What can startups do to increase the chances of a healthy marriage with investors? Venture capitalist Mark Suster offers six effective practices for startups to manage their relationships with investors. Check out StartupSource.ca's Top Tips for Raising Capital for suggestions on what investors are looking for. Our website also contains a calendar of events where you might reconnect with people you have met or pitched to previously.
Ultimately, getting to demo day is not an end in itself - it's an important step, but only one part of a long-term strategy.
* Tim Jones was a summer student at Aird & Berlis LLP.