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Even if there’s no short-term desire to raise venture capital, it’s still important to develop relationships with venture capitalists if you eventually plan to raise institutional money. The best relationships with potential investors start well in advance of a financial desire. Much like any sales process, it’s best to come up with a plan and iterate as necessary.

Here are a few thoughts about an on-going dialogue with VCs:

• First, figure out how to start the relationship (this is often the hardest part — see Getting Access to the Old Boys’ Club)
• At the end of the first meeting, ask permission to keep them abreast of the progress of your startup
• Decide on an update rhythm (e.g. every 60 days or every quarter) and reach out like clockwork on that schedule
• Create a potential investor update template and send the update as part of the rhythm (see the Monthly Advisor Update Email as an example)
• Ask to catch up in-person or over the phone at least twice a year, or more frequently as appropriate
• Remember to pay it forward and seek out ways to provide value to the investor (see VC Access Via Helping a Portfolio Company)

Entrepreneurs would do well to have an on-going dialogue with VCs so that when they do want to raise money, a relationship and track record is already in place.

What else? What are some other thoughts on the best ways to build relationships with investors?

Recently I was talking to an entrepreneur that was starting to make some early progress in his startup. With several dozen paying customers, it was clear that product-market fit was in place (see 5 Ways to Identify Product-Market Fit). The next step, a repeatable customer acquisition process, was still a ways out, but deals were coming in at a steady pace, albeit in low volume. Then, he said something that stuck with me:

I now know this business is going to work, and I’m settling in for at least five more years.

Steve Blank defines a startup as a “temporary organization searching for a repeatable and scalable business model.” For this entrepreneur, achieving early traction and gaining visibility into a repeatable sales model gave him the confidence to know the business is going work. Oh, and it’s taken over two years to get to this point. Only now, he knows it’s time to settle in for the long haul.

What else? How do you know when you’re on to something special that’s going to take many more years to materialize?

Entrepreneurs love talking about fundraising announcements from other startups. Fundraising, while it’s much too celebrated, is the most dramatic and firm number that’s readily associated with many startups. Whenever a fundraising announcement comes out, it’s fun to speculate on things like pre-money valuation, participating preferred vs non-participating preferred, stock option pool size, and other stipulations.

From an entrepreneur’s perspective, too much effort is focused on raising a specific dollar amount and not enough on dilution. After building a financial model, and plugging in imaginary numbers, it’s easy to get fixated on a specific amount as the must-have number. Only, with that number in mind, investors have more leverage in negotiating the pre-money valuation and other terms as the conversation is centered around the amount of money the entrepreneur wants to raise.

Instead, when raising money, it’s best to give a range (e.g. we want to raise $2-$3 million for our Series A) and make the conversation more focused on valuation and key terms and less about a specific amount. When we tried to raise money for Pardot in 2009, we received one verbal offer to invest $1 million at a $2 million pre-money valuation and a separate verbal offer to invest $5 million at a $7 million pre-money valuation. Both offers came from venture capitalists, and both were at the same time for the same business (we had slightly over $1 million in annual recurring revenue at the time). In one case we could sell 33% of the business for $1 million and the other case we could sell 40% of the business for $5 million. We passed on both offers.

When doing the dilution dance with investors, focus on the key terms and less on the actual dollar amount raised.

What else? What are some more thoughts on entrepreneurs focused on raising a specific dollar amount instead of more important terms like valuation and control provisions?

Today marks the two year anniversary of Pardot being acquired by ExactTarget (see ExactTarget and Pardot Join Forces followed by Thoughts on Salesforce.com Acquiring ExactTarget/Pardot). It’s still surreal looking back on the Pardot experience and reminiscing about everything we accomplished.

Of course, I enjoy working on a number of different initiatives and It’s been a busy two years since the sale. Here are a few accomplishments over the past 24 months:

• Bought 3423 Piedmont Rd and named it the Atlanta Tech Village
• Finished almost all the renovations on the Atlanta Tech Village (all office space has been renovated and there are only a few patio, basement, and garage items left)
• Started Kevy and have already signed 100+ paying customers
• Made six major startup investments that were greater than $200,000
• Made four small startup investments that less than $50,000
• Joined three non-profit boards
• Endowed a startup grant at Duke in honor of my professor

The journey continues to unfold in fascinating and interesting ways. Life’s changed since the sale of the Pardot but the core tenants of family, community development, and working with startups hasn’t changed. Life is good.

What else? What are some other observations since the sale of Pardot?

This is a topic that continues to fascinate me, so here it goes again: startup dreams are worth more than limited reality when it comes to fundraising. Entrepreneurs pitching an unproven idea with no product or customers can often raise money at a higher valuation than if they have a working product with a few paying customers.

The potential of the unknown. What might the business become? How big can this thing really be in a few years? Without a product these are all fantastic questions. Being blissfully ignorant about the true potential makes for a dreamy discussion when it comes to valuation: there’s no data so the valuation can be as high as the entrepreneur can convince the investor.

Once a product has been built and a handful of customers are using it, there’s data. All kinds of data. How frequently is the product used? How much did it cost to acquire the customers? How much do the customers pay? How long does it look like they’ll use the product? With data, it’s easy to build a financial model and make estimates around growth, financing needs, etc. Then, valuations are more definable (even if some part of the financial models are imaginary).

Entrepreneurs would do well to remember that dreams are worth more than limited reality when it comes to fundraising and valuations.

What else? What are some other thoughts on the disconnect in valuations for a startup with an idea vs one with a product and a handful of customers?