The venture capital industry is
alive (and doing well). Despite my ongoing efforts to convince
early-stage entrepreneurs (particularly those building software companies) to
forego venture capital for as long as possible, it continues to be a popular pursuit.
Guess I’m not yet as convincing as I need to be.
So, assuming that I have not talked
you out of deferring the quest for the early-stage VC round, I’d like to
share a few insights that I think will help. You may know most of this
already, but chances are there is one item on this list you may not have
Pithy Insights On Venture
1. Remember that VCs have a
diversified portfolio of investments and can spread their risk. You
can't. Don’t try to compensate by pursuing a bunch of different
ideas simultaneously with the hopes of diversifying your risk. It doesn’t
work that way.
2. VCs negotiate term sheets
and financing deals for a living. You don't. Accept this imbalance
early and find great advisors and counsel. VC negotiation, even in
early-stage deals is highly nuanced and reasonably complex.
3. Partners at VC firms have
one big constraint, and it's usually not capital, it's time. The time it
takes to find new deals, explore them and continue to oversee their existing
portfolio companies. Understand where the partner is in terms of their
deal flow. If they have already closed a couple of deals this year, it
will impact your chances of getting funding from that partner. This is
not a reflection on you or your idea, but is often purely a function of timing.
4. Remember that you are being
measured on a relative scale. It's not good enough that you have a great
idea and team, it has to be *better* than the other opportunities a VC is
considering. If you’re talking to a top-tier, successful firm, they’re
seeing a lot of great ideas and
teams. Most partners in venture firms will do only a few new investments
a year, regardless of how many “great idea and great team”
opportunities they see.
5. You raise money from a VC
firm, but you work with a specific partner. Know your partner. This
is the individual that will either bring immense value to your startup or make
your life miserable (or both). Next to your choice of co-founders, this
will likely be one of the most significant people decisions you will make.
Don’t take it lightly.
6.. Transparency is
crucial. Don't try to hide facts about the startup you know are
important. They will come out eventually, and later is rarely better for
you. From a VC’s perspective, the act of hiding unpleasant facts is
in many cases a worse signal than the fact itself. It goes to the
integrity and behavior of the founders.
7. Time is usually working
against you. You're better off getting a deal done quickly (as long as
it's reasonable) than dragging things out for the best possible deal. If
you're looking to raise money, focus on the critical factors and get a deal done. You are generally
better off getting a fair deal done quickly and efficiently vs. seeking the “optimal”
8. Between the time initial terms
are agreed to and when money shows up in your bank, a lot of things can go
wrong. Plan accordingly. No deal is “done” until the
money is in the bank.
9. Never underestimate the
intelligence of a general partner at a successful VC firm. It is a highly
competitive industry and though impacted by a “who you know”
phenomenon, they don’t suffer fools for very long. Chances are very
high that a partner at a VC firm is highly intelligent. They have to
be. It’s a tough business. If you think the VC you are
talking to is stupid, you’re talking to the wrong person or the wrong
firm (or both).
Bonus Insight (and my
favorite one): Remember that VCs are looking to optimize their “risk/reward”
ratio. As such, it is often to their advantage to get a “costless
option” on an investment opportunity. Said differently, let’s
assume they sort of like you and your company. The deal terms they need to
give you today (i.e. the “price”) may not be that different than
the deal-terms they’d have to give you 4-6 months from now. During
that time, the risk in your opportunity gets disproportionately lower compared
to the “higher price” they’d have to pay later. The
only reason for them to do the deal now
is if there is competition for your deal and they may miss out on the
opportunity (i.e., a “costless option” is not available). If,
on the other hand, there is no competition, they’re often better off
waiting. If they’ve maintained a good relationship with you in the
early days, chances are you’re going to go back to them in a few months
anyway (once the business is further along). Effectively, what they have
is an “option to invest later” which didn’t really cost them
anything. At that point, they will have much better insight into you and
your idea (and how you deal with the inevitable fact that the business you
thought you were building is likely not what you end up building anyways).
All of this is a long-winded way of saying: “The word maybe is
one of the most powerful tools in the VC tool-chest”.
If any of you have experience in the
VC industry, please share your personal favorite insights. I don’t
think we as entrepreneurs share enough of this amongst ourselves (most of the
information out there comes from VCs themselves or lawyers and advisors).
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