Tell HN: Dealing with VCs, my experience
40 comments
This post begs the question that going the VC rout is right for "you," which is rarely the case.
Most founders and startups are better off bootstrapping and positioning for an early exit than chasing VCs. If you don't know what an early exit is, why it's a good option to have, and why VC's will usually block it, see Basil Peter's blog, http://www.angelblog.net/ (he's compiled much of the info on his blog into a PDF called “Early Exits," which you can find there, too).
I'm digressing, but the point is, VCs are wrong for 99% of startups, and that's a good thing. You do not want them unless you don't need them, in which case they will be chasing you and pitching you, which is the way it should be. Bootstrap or get an angel investor.
Signed, Former Venture Investor, now startup founder
Most founders and startups are better off bootstrapping and positioning for an early exit than chasing VCs. If you don't know what an early exit is, why it's a good option to have, and why VC's will usually block it, see Basil Peter's blog, http://www.angelblog.net/ (he's compiled much of the info on his blog into a PDF called “Early Exits," which you can find there, too).
I'm digressing, but the point is, VCs are wrong for 99% of startups, and that's a good thing. You do not want them unless you don't need them, in which case they will be chasing you and pitching you, which is the way it should be. Bootstrap or get an angel investor.
Signed, Former Venture Investor, now startup founder
That's actually a really good point.
But even with angel investors plenty of these points still apply.
But even with angel investors plenty of these points still apply.
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NDA's just aren't going to happen. And you're going to expose yourself as a noob if you ask for one. No VC (at least here in the US) will sign one. If you really have something that special, get your IP in order first. Provisionals at least. Then, you have some measure of protection. In any case, engage a real IP lawyer. No someone who plays on on HN ... That said, 10 other people have had your idea and might have already pitched these very same VCs. You need to be the best of the 10.
You do want them to confirm that they do not have a conflict of interest. if they are not willing to do that, you're probably dealing with one of the many bottom feeders in the biz. See my comment below/about about how checking for conflicts of interest.
Like they'd ever tell you.
One VC, after investing in a company I was at, deliberately fed us the pitches of competing companies that were pitching them. Thanks, VC!
Another VC, in a second partner meeting, stocked the room with the m-team of a direct competitor. After the meeting, the competitor talked about "buying" us. Thanks, VC!
Note: in neither case were this minor VCs. You would recognize them.
One VC, after investing in a company I was at, deliberately fed us the pitches of competing companies that were pitching them. Thanks, VC!
Another VC, in a second partner meeting, stocked the room with the m-team of a direct competitor. After the meeting, the competitor talked about "buying" us. Thanks, VC!
Note: in neither case were this minor VCs. You would recognize them.
So, by your logic, because you might be lied to, you should not even ask. Smart.
Regardless of the truth of an answer received, when we ask questions, we gain information. If you ask a question and are lied to, you have gained valuable information about the person, among other things.
It's all about information and you get that information by interacting with your counterparty. Even if they sit there and don't make a peep while you talk, you should be gaining valuable information (unless you're a unobservant). If they open their mouths, you gain even more. If they put something in writing, you have it in writing.
The most valuable information often comes from what people DON'T say or when they lie. Don't have time to discuss further today, but people figure that out on their own over time. Maybe.
In our "Do you have any conflicts of interests example?" If you ask and you are lied to, you have what you need. They are locked in. They have made a representation, in writing. You have relied upon it, and you have told them that you are relying upon it (before you peel back more layers of the onion). It has legal and ethical consequences for them.
Regarding your examples, sounds like you might have had unethical people inside your company and got what you deserved. Birds of a feather flock together. Also sounds like you guys were as trusting as schoolchildren and got fleeced. You did not ask the right questions, such as about conflicts. You did not require the right, or any, conditions precedent. Smart.
Regardless of the truth of an answer received, when we ask questions, we gain information. If you ask a question and are lied to, you have gained valuable information about the person, among other things.
It's all about information and you get that information by interacting with your counterparty. Even if they sit there and don't make a peep while you talk, you should be gaining valuable information (unless you're a unobservant). If they open their mouths, you gain even more. If they put something in writing, you have it in writing.
The most valuable information often comes from what people DON'T say or when they lie. Don't have time to discuss further today, but people figure that out on their own over time. Maybe.
In our "Do you have any conflicts of interests example?" If you ask and you are lied to, you have what you need. They are locked in. They have made a representation, in writing. You have relied upon it, and you have told them that you are relying upon it (before you peel back more layers of the onion). It has legal and ethical consequences for them.
Regarding your examples, sounds like you might have had unethical people inside your company and got what you deserved. Birds of a feather flock together. Also sounds like you guys were as trusting as schoolchildren and got fleeced. You did not ask the right questions, such as about conflicts. You did not require the right, or any, conditions precedent. Smart.
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> One VC, after investing in a company I was at, deliberately fed us the pitches of competing companies that were pitching them. Thanks, VC!
Well, but would you ever want to deal with that VC again ?
Thanks but no thanks, VC. We already know you can't be trusted. I'm actually surprised that you would accept such information, I find it highly unethical.
Well, but would you ever want to deal with that VC again ?
Thanks but no thanks, VC. We already know you can't be trusted. I'm actually surprised that you would accept such information, I find it highly unethical.
I'm not going to get any more specific about the circumstances, but my conscience is clear and I agree about the ethics.
As for "that VC" --- if these ones were so sketchy, why would I assume the lesser-known ones were better? Maybe they are. I've met some VC's I really liked personally. David Aronoff at Flybridge was fun to talk to, for instance.
I'm sorry for tarring everyone with such a broad brush, but I'll note that Graham made the exact same point in "A Unified Theory of VC Suckage".
As for "that VC" --- if these ones were so sketchy, why would I assume the lesser-known ones were better? Maybe they are. I've met some VC's I really liked personally. David Aronoff at Flybridge was fun to talk to, for instance.
I'm sorry for tarring everyone with such a broad brush, but I'll note that Graham made the exact same point in "A Unified Theory of VC Suckage".
Excellent points. I have very little to add but a few minor bits:
- Don't worry about NDAs with VCs. At least on this side of the pond, no VC is going to sign them. Don't leave your full deck behind in digital form. Leave them a summary deck on paper if you absolutely must. (just assume the deck will get passed outside the firm).
- Do make sure the VC doesn't have a conflicting investment - if so, assume everything you talk about will be going into the ears of your competitors.
- Avoid spotters/associates. Get referred in to a partner by another entrepreneur they've worked with before (work your linkedin or xing). Don't take a 1st meeting with an associate (feel free to chat with them on the phone briefly). If a firm wants to see you, then they can find a partner to talk to you. Associates can only say 'no' and generally have limited deal experience and just may not understand your market (of course there are exceptional individuals and firms where this doesn't apply).
- Timing is everything. When you're ready to go out - have a list of VCs you want to speak with and try to get all your meetings lined up for the same two to three weeks. VCs all talk to each other. Once they hear another firm passed on your deal, it's harder to get the next one to bite. Make it a parallel competition. Don't overexpose your company.
- Do research on the firm and the partner that you're pitching. http://www.thefunded.com is free for founders. Get an account and use it for research. (I'm not affiliated with thefunded, just a fan).
- Don't worry about NDAs with VCs. At least on this side of the pond, no VC is going to sign them. Don't leave your full deck behind in digital form. Leave them a summary deck on paper if you absolutely must. (just assume the deck will get passed outside the firm).
- Do make sure the VC doesn't have a conflicting investment - if so, assume everything you talk about will be going into the ears of your competitors.
- Avoid spotters/associates. Get referred in to a partner by another entrepreneur they've worked with before (work your linkedin or xing). Don't take a 1st meeting with an associate (feel free to chat with them on the phone briefly). If a firm wants to see you, then they can find a partner to talk to you. Associates can only say 'no' and generally have limited deal experience and just may not understand your market (of course there are exceptional individuals and firms where this doesn't apply).
- Timing is everything. When you're ready to go out - have a list of VCs you want to speak with and try to get all your meetings lined up for the same two to three weeks. VCs all talk to each other. Once they hear another firm passed on your deal, it's harder to get the next one to bite. Make it a parallel competition. Don't overexpose your company.
- Do research on the firm and the partner that you're pitching. http://www.thefunded.com is free for founders. Get an account and use it for research. (I'm not affiliated with thefunded, just a fan).
RE: "make sure the VC doesn't have a conflicting investment": This is very important.
My recommendation is to proceed like this:
1) Tell then a little about your project (not being cagey, just progressive disclosure) and ask if they have any conflicts, such as existing investments or close relationships ti similar companies.
2) If there are no conflicts, then memorialize this via email (maybe you had this whole conversation via email already, so you're done).
3) Save that email, it is evidence of you disclosing enough about your product/service/whatever for them to determine if they have a conflict or not and them representing that there is no conflict.
4) Proceed and peel back some more layers of the onion. Explore together and ask them as many questions as they ask you. Do not fall into the "I'm pitching them" role. You are "pitching" each other, if you insist on using that word. You should be doing due diligence on them.
My recommendation is to proceed like this:
1) Tell then a little about your project (not being cagey, just progressive disclosure) and ask if they have any conflicts, such as existing investments or close relationships ti similar companies.
2) If there are no conflicts, then memorialize this via email (maybe you had this whole conversation via email already, so you're done).
3) Save that email, it is evidence of you disclosing enough about your product/service/whatever for them to determine if they have a conflict or not and them representing that there is no conflict.
4) Proceed and peel back some more layers of the onion. Explore together and ask them as many questions as they ask you. Do not fall into the "I'm pitching them" role. You are "pitching" each other, if you insist on using that word. You should be doing due diligence on them.
> Associates can only say 'no' and generally have limited deal experience and just may not understand your market
Interesting!
That's in direct conflict with my (limited, European) experience. Usually you don't get to speak to a partner until you've passed muster with one of the associates, they act as gatekeepers to make sure the partners spend their time on those things that they feel are worth it.
I agree with all your other points, the NDAs are not a common thing in start-ups, but at a later stage they are definitely important.
Interesting!
That's in direct conflict with my (limited, European) experience. Usually you don't get to speak to a partner until you've passed muster with one of the associates, they act as gatekeepers to make sure the partners spend their time on those things that they feel are worth it.
I agree with all your other points, the NDAs are not a common thing in start-ups, but at a later stage they are definitely important.
When we did the tour in '05, we were in the door with partners at every firm we pitched, and we're not especially connected. The way to get VC meetings is to have friends who have been funded; you call them up, and they call up their VCs, and it goes from there.
If your friends like/respect you, this isn't a big favor.
If your friends like/respect you, this isn't a big favor.
Hey, by the way, the fact that this industry is so clubby, and that having the right friends rockets you to the front of the line? Something else I don't like about VC-funded startups.
Yes, I know that if you're rocking it, you don't need the friends. But then, if you're rocking it, you don't need a lot of advice on how to engage VC's --- in fact, you don't need the VC's.
Yes, I know that if you're rocking it, you don't need the friends. But then, if you're rocking it, you don't need a lot of advice on how to engage VC's --- in fact, you don't need the VC's.
If you're walking in the front-door / blind emailing then you'll end up with an associate. Same on both sides of the pond.
The trick is to get referred in via a stronger link (a referral from a successful entrepreneur they've worked with in the past is usually a quick way to get to a partner. Perhaps even an intro from a fellow that does due diligence for them ;).
The trick is to get referred in via a stronger link (a referral from a successful entrepreneur they've worked with in the past is usually a quick way to get to a partner. Perhaps even an intro from a fellow that does due diligence for them ;).
This is missing an extremely important piece of VC advice, which is that VC's very rarely say "no". They say "not now", and they use different words to say it: "let's take another meeting a couple weeks from now", "we're really interested", "we'd be interested in syndicating with someone else", "yes", etc.
You will lose a lot of time from important things at your startup if you can't either have the cajones to pin them down (of course, you're probably going to get a "no") or run your business in a way that works with or without funding.
From cofounding a company that got an A round, having a decent role at a very successful VC-funded company, and going out again for funding in '05, my gut is that by the time they've sent someone out to talk to you about database architecture, you're getting buying signals.
You will lose a lot of time from important things at your startup if you can't either have the cajones to pin them down (of course, you're probably going to get a "no") or run your business in a way that works with or without funding.
From cofounding a company that got an A round, having a decent role at a very successful VC-funded company, and going out again for funding in '05, my gut is that by the time they've sent someone out to talk to you about database architecture, you're getting buying signals.
That must be a cultural thing then. In europe the 'no' is loud and clear, when it's no.
What does happen is that VCs are careful not to burn their bridges, they'll not feel comfortable enough to invest but they can't rule out that you'll pull some rabbit from an otherwise empty hat in the future and then they don't want to have the door completely closed.
This is indeed quite common. But when it's 'no', it really is 'no'.
Another typical VC disease is to want to be the second investor in your company, but never the first.
What does happen is that VCs are careful not to burn their bridges, they'll not feel comfortable enough to invest but they can't rule out that you'll pull some rabbit from an otherwise empty hat in the future and then they don't want to have the door completely closed.
This is indeed quite common. But when it's 'no', it really is 'no'.
Another typical VC disease is to want to be the second investor in your company, but never the first.
"No" probably does mean "no", but you're lucky if you hear "no", because VCs have so many ways to avoid using the word "no".
"Maybe" is so much more expensive than "no".
I'm pretty sure Paul Graham wrote about this in "How To Fund A Startup", but I don't have time to read and he doesn't like being misquoted.
"Maybe" is so much more expensive than "no".
I'm pretty sure Paul Graham wrote about this in "How To Fund A Startup", but I don't have time to read and he doesn't like being misquoted.
This is a great post, but why not stick it on a blog (posterous?) or something less ephemeral than what's essentially the comments section of a news aggregator?
I see HN a bit different than you do I think. To me HN is already a pretty good resource for information like this, I think I have more threads here bookmarked than from any other site I frequent.
It's a veritable gold mine for information.
Another thing you get when you post stuff on some blog somewhere that is really written exclusively for HN is that the comments will split between the two pages.
Like this it's all in one place. It's not like I need the pageviews.
It's a veritable gold mine for information.
Another thing you get when you post stuff on some blog somewhere that is really written exclusively for HN is that the comments will split between the two pages.
Like this it's all in one place. It's not like I need the pageviews.
As a reader, I'd say you come across more credible by posting here, since I know that you're not linkbaiting for ad revenue.
The low-contrast faint text on tan makes it annoying to read. Would be nice to see higher contrast, and perhaps narrower column, for long posts like this.
I think most of us end up using this:
http://lab.arc90.com/experiments/readability/
http://lab.arc90.com/experiments/readability/
It is a bit straining. If you're on mac cmd+opt+ctrl+8 helps a little.
good tip! I wonder why cmd-opt-ctrl doesn't have any other numerical bindings... it seems like there's an opportunity to create a usability convention, but instead, this function is sitting by itself on an island named "8".
I guess the upside of having it on a blog is you can edit it later, add links, real formatting, etc.
I think that blogs is something HN could implement, I mean it could take advantage of something like posterous for it. Just to give people who don't really want to run a blog but want to write the occasional long form post on HN.
What a great informative post! Thanks and thanks to Mahmud as well.
- There are 'middle-men' in the VC world that sell their services to unsuspecting young companies in order to get them capital - so they say. The trick is that once they have your signature on a piece of paper that gives them exclusivity they no longer have to do anything. If you find your own capital they will claim their pound of flesh.
I recently came across someone with biz plan (essentially one-person with a vague plan in his head and some details on a PPT) who has come here in Dubai in search of funding and exploring clients. I tagged along with this founder to a meeting with one such person - (I've never been involved even remotely with any VC/angels/startups - so I'm not really sure if I'm reading your description of middleman correctly) - and I was quite frankly there only to learn how these kind of deals/discussions take place. I was essentially a passive listener while the two of them discussed over coffee.
I was surprised by how it went. He asked for a 7% stake via some kind of a nominee account in exchange of getting a funding of around $1M + some upfront commission % off the actual funds he could get, and 25% stake for the investors. More importantly he said something about this nominee account means he is not listed as a stakeholder in any of company's legalities (I got the impression that he'd not be held for any future liabilities, lawsuits etc) yet he'd share in the profits....that part was confusing to me.
By all background checks, this guy seems like a well-connected investment consultant who has worked on bigger deals and he indicated this nominee stake thing in a off-hand way and said it was an industry norm. And all he would be doing was take this business plan and pitch it to investors in his network.
And get this: there is no real way to even evaluate or even remotely guesstimate the worth of this business, because as I said right now it's just a plan in someone's head, a shoddy website and cheapjack PPT with nothing really fleshed out.
What's the deal with this nominee stake thing? Certainly he needs to be compensated for his efforts but 7% sounded a bit too much. But what do I know.
Can someone tell me, if this is how just deals take place? If so would you call this angel investment or VC? And apart from the funding size, is there any real legal difference between angel investors and VCs?
- There are 'middle-men' in the VC world that sell their services to unsuspecting young companies in order to get them capital - so they say. The trick is that once they have your signature on a piece of paper that gives them exclusivity they no longer have to do anything. If you find your own capital they will claim their pound of flesh.
I recently came across someone with biz plan (essentially one-person with a vague plan in his head and some details on a PPT) who has come here in Dubai in search of funding and exploring clients. I tagged along with this founder to a meeting with one such person - (I've never been involved even remotely with any VC/angels/startups - so I'm not really sure if I'm reading your description of middleman correctly) - and I was quite frankly there only to learn how these kind of deals/discussions take place. I was essentially a passive listener while the two of them discussed over coffee.
I was surprised by how it went. He asked for a 7% stake via some kind of a nominee account in exchange of getting a funding of around $1M + some upfront commission % off the actual funds he could get, and 25% stake for the investors. More importantly he said something about this nominee account means he is not listed as a stakeholder in any of company's legalities (I got the impression that he'd not be held for any future liabilities, lawsuits etc) yet he'd share in the profits....that part was confusing to me.
By all background checks, this guy seems like a well-connected investment consultant who has worked on bigger deals and he indicated this nominee stake thing in a off-hand way and said it was an industry norm. And all he would be doing was take this business plan and pitch it to investors in his network.
And get this: there is no real way to even evaluate or even remotely guesstimate the worth of this business, because as I said right now it's just a plan in someone's head, a shoddy website and cheapjack PPT with nothing really fleshed out.
What's the deal with this nominee stake thing? Certainly he needs to be compensated for his efforts but 7% sounded a bit too much. But what do I know.
Can someone tell me, if this is how just deals take place? If so would you call this angel investment or VC? And apart from the funding size, is there any real legal difference between angel investors and VCs?
Great stuff jacque, I'm really digging your posts here. May I inquire when you went through this process and for what company?
+1
Cheers, Steve
+1
Cheers, Steve
The most recent stuff is related to 'infocaster', before that 'camarades', but that's already quite a while ago.
My NDA with the VCs I've worked for is such that I can not give you the names of the companies that I did tdd for without asking them and I don't see how it really would matter which companies they are, but the deals were on the order of tens of millions of euros, so a little larger than your average seed investment.
The principles are much the same at that level but the procedures are far more formal and in depth than at the lower levels of investment. Due diligence for a larger company can take several weeks, at the start-up level there is usually not a whole lot in terms of financial and legal, later those are actually the bigger portion of the time.
There usually is quite a bit of time pressure.
When taken as a percentage of the value of the deal due diligence can cost quite a bit in early stage investments, so it can be a partner or the CFO/CTO of a company 'friendly' to the VC (or one they've already invested in) that will have a thorough look.
Later, as the amounts go up and there is a lot more money available to have this work done by outsiders, also because it usually is too much work to do as a favour.
The VC world is a very tightly interwoven one, lots of partners have a stake in more than one company, some may even have an angel fund of their own. So when you pitch to a VC and you don't get a deal there is still a small chance that one of the VCs partners will do an investment out of their own pocket, outside of the main fund.
And sometimes that's the way to get an investment for a 'stage mismatch', where a VC is interested in you but your current situation does not match their preferred profile. They can then do a smaller investment through one of the partners, it gives them the inside view for relatively little money and it is a way to hedge their bets. By the time you're ready for a larger round they'll have their foot in the door and will be preferred candidate.
My NDA with the VCs I've worked for is such that I can not give you the names of the companies that I did tdd for without asking them and I don't see how it really would matter which companies they are, but the deals were on the order of tens of millions of euros, so a little larger than your average seed investment.
The principles are much the same at that level but the procedures are far more formal and in depth than at the lower levels of investment. Due diligence for a larger company can take several weeks, at the start-up level there is usually not a whole lot in terms of financial and legal, later those are actually the bigger portion of the time.
There usually is quite a bit of time pressure.
When taken as a percentage of the value of the deal due diligence can cost quite a bit in early stage investments, so it can be a partner or the CFO/CTO of a company 'friendly' to the VC (or one they've already invested in) that will have a thorough look.
Later, as the amounts go up and there is a lot more money available to have this work done by outsiders, also because it usually is too much work to do as a favour.
The VC world is a very tightly interwoven one, lots of partners have a stake in more than one company, some may even have an angel fund of their own. So when you pitch to a VC and you don't get a deal there is still a small chance that one of the VCs partners will do an investment out of their own pocket, outside of the main fund.
And sometimes that's the way to get an investment for a 'stage mismatch', where a VC is interested in you but your current situation does not match their preferred profile. They can then do a smaller investment through one of the partners, it gives them the inside view for relatively little money and it is a way to hedge their bets. By the time you're ready for a larger round they'll have their foot in the door and will be preferred candidate.
> deals were on the order of tens of millions of euros
Early stage folks tend to be more lightweight than the processes you mentioned. Less technical due diligence (because there's less to investigate, obviously, etc)
> some may even have an angel fund of their own
Increasingly, this is not allowed.
Early stage folks tend to be more lightweight than the processes you mentioned. Less technical due diligence (because there's less to investigate, obviously, etc)
> some may even have an angel fund of their own
Increasingly, this is not allowed.
> Early stage folks tend to be more lightweight than the processes you mentioned.
It depends on how far you got under your own power and how big the deal is. Anything that comes from a fund will have the whole show regardless, they have to because otherwise if a company imploded after the deal was done they could be held liable.
And some small time investors are quite savvy, and have their own small army of people to call on. "Angel" deals are different, there it is all much more personal.
But even an Angel deal > 250K will have quite a bit of dd, unless there is a longstanding relationship between all parties.
It depends on how far you got under your own power and how big the deal is. Anything that comes from a fund will have the whole show regardless, they have to because otherwise if a company imploded after the deal was done they could be held liable.
And some small time investors are quite savvy, and have their own small army of people to call on. "Angel" deals are different, there it is all much more personal.
But even an Angel deal > 250K will have quite a bit of dd, unless there is a longstanding relationship between all parties.
As a young guy who tries to learn everything he can on the business of VCs and that whole world this post was awesome!
-know the terminology. If you don't know an NDA from a MOU then you will have to spend some time on that.
Does anyone have any tips on where I can spend some time studying up on that? NDA is pretty much the only term I know.
-know the terminology. If you don't know an NDA from a MOU then you will have to spend some time on that.
Does anyone have any tips on where I can spend some time studying up on that? NDA is pretty much the only term I know.
MOU/LOI - memo of understanding / letter of intent. More concrete and binding than a conversation. Less so than a contract.
The only words you need to know are "term sheet". You will get a term sheet before you get any other form of commitment. You don't care about the other details, because when you get a term sheet, you can tell other VCs that you got it, and now you have competition.
I don't think you need to know the jargon to do the VC thing, other than you should know the lifecycle of a deal, which is something that's kind of missing from this post.
You need to know what should be happening before the term sheet and after the term sheet --- pitching, market due diligence, the partner meeting, term sheet, all the rest of the due diligence, 9 months of waiting with 86.7% chance of flaking, the room at the law office with the papers you have to sign, steak dinner.
The VCs know you're not an MBA, even if you try to sound like one.
The only words you need to know are "term sheet". You will get a term sheet before you get any other form of commitment. You don't care about the other details, because when you get a term sheet, you can tell other VCs that you got it, and now you have competition.
I don't think you need to know the jargon to do the VC thing, other than you should know the lifecycle of a deal, which is something that's kind of missing from this post.
You need to know what should be happening before the term sheet and after the term sheet --- pitching, market due diligence, the partner meeting, term sheet, all the rest of the due diligence, 9 months of waiting with 86.7% chance of flaking, the room at the law office with the papers you have to sign, steak dinner.
The VCs know you're not an MBA, even if you try to sound like one.
A good way is to read the articles on upcoming m&a deals, once you fully grok those there isn't much that will surprise you in a basic deal. Especially the financial side of things has a whole bunch of acronyms that can be hard to remember if you don't use them daily.
Required reading: askthevc.com
the middle column, scroll down a bit for the categories list. A goldmine.
Jason and Brad have done a huge service to the community with this site.
the middle column, scroll down a bit for the categories list. A goldmine.
Jason and Brad have done a huge service to the community with this site.
Awesome post, Thanks lot..
+1
pk
+1
pk
My background in this is that I did several pitches to VCs and have worked for several VCs in the last couple of years, mostly on the technical side but you get to see a good part of the process as perceived by the companies pitching. I also helped one company get seed capital, because I thought they showed great promise.
So, the following is from personal experience, which is limited but it may be useful.
Some VC's are more forgiving than others when it comes to following proper form, but even if they're forgiving they'll appreciate it if you know your stuff before you apply. Their agendas are almost always quite full and the amount of time they have to spend on you is limited, so you should use it wisely to maximize your chances of success.
== before you start pitching ==
- First off, let's dispel a popular mistaken belief, getting an investment is not 'success'. It's a step towards a possible success, and it may give you a better chance, but it basically comes down to another party estimating that you have a chance of success and that they want a piece of that success in return for an investment.
- You have to know your stuff. This of course, sounds completely obvious but it really is surprising how many people will pitch to a VC (in itself something of an opportunity) and completely blow it by not having done basic homework. A fairly recent example, someone wrote a businessplan around a certain type of person and was pitching for capital. Halfway through the presentation one of the partners of the company being pitched interrupted and asked 'And how many of these people do you know ?'. A sensible question. The answer '0', more or less ended the interview, even though it went on for a while beyond that point, for politeness' sake.
Not knowing your target market, not having done any basic research in to the demographic that you intend to sell your product to is lethal.
As is not knowing your competive arena. If you come up with a brilliant plan that looks like some successful competitor is already executing and you don't know they exist that's probably the end of the ride for you. You really need to spend solid time on mapping out the competition. Know their weak points, know your strong points.
In short, know your stuff, expect to be challenged.
- Make sure you inform your partners about all your moves and get them on board before approaching a new party. To find out that someone isn't on board after you approach a VC is a real problem.
If there is any problem between the founders get it ironed out before you start making pitches, and make sure problems are resolved to all parties satisfaction.
- It isn't a must to be incorporated before approaching VCs, but it can be a problem if you picked the wrong form.
- if there are pending lawsuits it is usually a good idea to get those resolved before pitching as well. This can royally screw up your timing, a window of opportunity can easily close while you attend to this.
- you have to know what it is that you want that investment for, no matter how sure you are that you'll be able to spend it wisely, you need to pretty much lay out how you intend to use the money an investment will bring. This is where a businessplan comes in. These are no longer the 90's, so please no columns with more than 9 0's in it. Keep it realistic and make sure that it contains realistic estimates for the costs of the various components of your business. Factor in market rates for salaries, office space and so on. Get a feel for what it costs a business of a similar size to operate.
- scouting for capital takes time. Sometimes LOTS of time. Make sure you have that time, and make sure that your business does not suffer from this. Farm out as much of the work to your co-founders as you can, spread that load. It will give them more insight in the process and it will get them more involved.
== approaching target VCs ==
- when approaching a VC try to find out the names of their 'spotters', and pitch the spotters first. That way, you essentially get two chances, the spotters might be able to tell you how to shape up your presentation in areas where it is perceived as weak.
- VCs are busy. Most of them are very busy, you have exactly one shot at making a first impression. One good way to get their attention is to send a single sheet executive summary to one of the junior partners if there are multiple partners, otherwise to a senior partner. If they're interested they'll hand it off to one of their underlings who will contact you, or they might contact you directly. Don't harrass them, but do mail two weeks or so later if you haven't had a response to inquire what they thought of it.
== a word of warning ==
- There are 'middle-men' in the VC world that sell their services to unsuspecting young companies in order to get them capital - so they say. The trick is that once they have your signature on a piece of paper that gives them exclusivity they no longer have to do anything. If you find your own capital they will claim their pound of flesh.
Selling 'access' is meaningless. For the price of a google search you can find more VCs than you could possibly hope to pitch, if your stuff is good and you can present it well you will most likely succeed in finding funding, even if you do not have an inside track. Work your network, get on that phone. It's a lot cheaper than giving some loser equity for doing nothing.
If you can't find anybody to refer you then maybe your product isn't that good, or maybe your team has a red flag. Ask why if you won't get a reference.
== you've been spotted ==
- If a VC approaches you because one of their spotters has alerted them to your existence then don't panic. They are simply interested, you've materialized on their radar and they would probably like to establish some kind of contact to be kept in the loop. Give them a bit of backstory about your company, don't gush out anything that you would not want a competitor to know.
If at some point you feel that the time for approaching investors is ripe then inform them. Until then simply keep them up to date of major public developments, if you get to know them a bit better you can ask for advice on business issues.
- make sure the VC that is asking you for information has not invested in a competitor! A bit of googling goes a long way before you start giving out confidential data. This is obviously not the normal case, but it does occasionally happen.
== pitching ==
- get an NDA signed by everybody that you are going to give confidential information if you think that there is something non-obvious about what you are going to present. Most people are over protective in this respect, but every now and then there is a bit of data that is really crucial. Think about if you even need to reveal it at this stage.
- Don't assume anything. You are pitching to people that are probably whip smart, but they don't have your background in your field. They will know business, but they may not know a thing about what it is that you are doing. So when you use words that are 'obvious' to the incrowd keep in mind that you are not talking to the incrowd. Get out of your techie mindset (unless the VC you're pitching to is extremely technical) and present your company as though building up from the ground.
- if you're the CEO of your fledgeling company keep in mind that you are speaking for everyone, not just for yourself, and make sure that you do not let any conflict of interest arise between you and the other founders (you really should have at least one co-founder). One of you should speak for all of you, but that one person should have the unconditional backing of the others.
- You pay your way (and they pay theirs). A VC is not under any obligation to refund you air-fare, hotel costs, legal, presentational or any other costs associated with the pitch. Conversely, you are not obliged to pay for any of their costs, such as legal and technical due dilligence, transportation and so on.
If you're short on cash and you want to pitch to a VC that is in an out of the way location for you, then the reality is that you may not be able to afford to pitch to them.
A recent weirdness is VCs charging an 'entrance fee', this is something to stay very far away from, anybody that wants an entrance fee is making money OF you, not WITH you and that is why they shouldn't be able to call themselves Venture Capitalists. Maybe Vulture Capitalists is a better term for such characters.
- know the terminology. If you don't know an NDA from a MOU then you will have to spend some time on that. Having your eyes glaze over halfway an interview or agreeing to something because you do not know what it means and you don't want to admit your ignorance is simply stupid. It does not mean that you have to know everything, it simply means that it is a lot easier to have a conversation with people if everybody is aware of the meaning of all the terms. It saves time, and makes you come across more professional, and hence will increase your chances of success (both to find capital as well as in succeeding with your venture).
- Other than NDA's nobody expects anything to be signed when it is delivered. So, do not sign stuff that you haven't had the time to go over, with your partners and your lawyer.
- When pitching time comes around: Sleep! Again, dead obvious, for sure. But the best way to get around being nervous is to be well rested. If you have to pitch several parties then try to schedule a break between them. I know that when I was done with a pitch I would literally be exhausted, unable to drive back to the office. It takes every bit of concentration and energy from you in a few hours time.
- never go alone. Bring someone along that you can trust and that will give you a no-holds barred evaluation of how you performed.
- if it doesn't work out, don't despair. No angry letters to a VC that rejected you, instead, thank them for the opportunity and ask them if it is ok to keep them informed of your further development.
Ask them why they rejected you, in as much detail as possible.
Not as a way to get the door to open again, but simply because that is the best you can take away from this pitch, a lesson on what went wrong or why you did not make the grade.
Try again, and do it better next time.
== due dilligence ==
- Due Dilligence usually consists of several parallel jobs. There are legal, technical and financial stages.
Legal is to make sure that you own what you're selling, that all the proper procedures and contracts are in place and that there are no hidden liabilities. Usually this will also look at intellectual property issues and patents if applicable.
Technical is to make sure that what you've built is solid and that it will not open up the investor to a potential liability because of technical weaknesses.
Financial is to make sure that your books are in order and up to date and that there are no skeletons in the closet.
Due Dilligence is a VERY invasive process, depending on the quality of the people that the VC hires. My own specialty, technical due dilligence usually takes the form of a several hour long grilling of the CTO of a company with anybody they wish to call on, subsequently they get a long list of follow up questions via email. I will want to see your code, meet your developers, look at your documentation, inspect your physical security if you store private information and so on.
The questions range from simple ones to very complicated ones and I've seen at least one CTO flee the room to fix a SPOF that became apparent only during the interview. (what do you mean you run a single database server and you've never tried to restore a backup ? What if that drive crashes and it turns out that none of your backups are restorable ?)
== getting to a deal ==
- You have to get your own legal representation. Remember, in this phase of the process you are on opposite sides of the table, and if you are lax and let the VCs handle your legal bill you are effectively using a lawyer who is not working in your interest.
This will cost you dearly.
Pay your own lawyer, and pay him out-of-pocket, not out of a deal that hasn't been done yet, the situation should be the same if you walk away from it or if you take it. That's important because otherwise you might have to do a bad deal just to pay the legal fees.
- Nothing is binding until it is signed. Even a LOI isn't as strong as a real contract, and money in the bank. That goes both ways, but it is considered very bad form to back out once a LOI is signed. Still, a letter of intent is not a contract and VCs have been known to bow out in spite of signing and if anything major happens to your company between the LOI and a real deal you will probably be able to back out. But forget about pitching that VC ever again.
- Stay in constant touch with your co-founders during the whole process, if possible have them there when you're pitching and discussing the deal. People kept in the dark are usually not going to be happy with a fait-accompli that is not in their best interests. By bringing them in on the negotiations you stand a much better chance of not messing up your internal affairs.
- Feel free to request a better deal! Remember, the VCs will negotiate what's best for them. You have to be in control of your side, you have to know what it is that you want and how much you are willing to give up for it. There is no 'bad' deal that was not done, the only deals people regret are the ones that they did do, for too little money or too large a stake in the company.
This phase can take quite a while, don't feel rushed.
- be careful, there doesn't seem to be much difference from a funding perspective between a convertible loan and giving out equity, but in practice the difference is huge, especially if there are survival clauses and the company goes bust.
== the data room ==
- when preparing a larger deal there will usually be a data room set up, a centralized spot at your lawyers, or their lawyers office where all the documentation that both parties provide gets integrated in to a seamless whole
- you have the fiduciary obligation to inform the other party of anything material that you think may influence the deal. If someone has threatened to sue you recently then state it, make it part of the record. If you don't and the suit does happen you are going to be in big trouble.
- the VC has the obligation to do their research as thorough as they can, time permitting.
== doing the deal ==
- Once all the details are ironed out, there will be a concept investment contract. Usually this will involve changes to the articles of incorporation or the shareholder agreements of the company that is being invested in.
Unless you are a legal eagle I'd suggest you spend a lot of quality time ( ;) ) with your lawyer during this phase.
- have all your co-founders go over the contract, if they're unsure about the language get them to bring their lawyers at their expense. Make sure everybody knows exactly what will happen.
Best of luck!
thanks to Mahmud for the critique.