Beware of Gym Salesman VC

Posted on Jul 29, 2009 | 4 comments


gym salesmanThe post is part of a series called “Pitching a VC” – the outlines is here.

You’ve been trying to raise VC for months.  You’ve obviously talked with several funds to hedge your bets.  You finally get your first term sheet.  Time to celebrate!

But wait.  What?  They’re giving me 48 hours to sign the term sheet or it expires?  WTF?  What about all the other VC’s I’m talking with?  I can’t get them to close in 48 hours.  But I have a bird in the hand.  Will they really pull the term sheet if I don’t sign?

OK.  First, every term sheet has an expiration date in it.  That’s normal and no reason for alarm.  A VC isn’t going to give you an unlimited offer to stay on the table as you shop the terms around town.  But there is a difference between a term sheet with an expiration date and a VC that puts pressure on you to sign and alludes to pulling if you don’t close by the date.

The various excuses they will give you are:

  • I can’t leave an offer “hanging out there”
  • I don’t want you to shop my deal
  • If I’ve made you an offer and you don’t KNOW you want to work with me maybe there’s a problem here
  • Whatever …

Please read this disclaimer here before following any of my advice.   You need to make your own mind up regarding an offer and I accept no liability for your basing your decision on my point of view.

So here’s my view: it’s total bullshit.  Any VC that would try to turn the screws on you to try and pressure a decision is not the kind of VC you want to work with.  If they use these tactics when they “love you” imagine the tactics when you’re not performing as well as you would have liked.

It’s one thing if this term sheet is the only game in town.  You might NEED to take it.  But I like to say that “VC is more permanent than marriage.  At least in a marriage if you’re unhappy you can get divorced.”  Not so, VC.  So why should you be pressured to make a quick decision.  It’s unlikely that you’ve even had time to do due diligence calls on this VC – you wouldn’t be so presumptuous as to do this pre term sheet.

The only reason some VCs use these tactics is the same reason a gym salesman only offers you a discount if you sign up today.  Once you’re out of the gym they’re afraid someone else will get a hold of you and you won’t sign with them.  And you know damn well that when you come back to the gym tomorrow and ask for the deal that was only valid yesterday they’ll still give it to you.

One more reminder to read my disclaimer ;-) , but I highly doubt that any VC who submits a term sheet to you would really pull it because you politely ask for a reasonable extension to their deadline.  They’ve done all the work.  They’ve had the big debates at the partners’ meeting.  You partner sponsor is excited.  And lose it because you need 2 weeks rather than 1?  Really?

Don’t mistake eagerness for pressure.  I can understand a VC who tries to close you the way you would try to close a customer deal.  It’s OK for them to push for closure but if you politely request more time they should really be understanding.  And if there are threats, implied consequences for taking time to think about it or do due diligence then I’d give that VC a really hard think.  Caveat Emptor.

Next post I’ll talk about how to handle this awkward period of time when your first term sheet is in and you’re waiting for a few more potential ones.

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  • http://www.audiomicro.com Ryan Born

    Following some of Mark’s offline advice here….a great way to buy a little more time before the term sheet “expires” (and also to perform a task that is crucial to the entrepreneur) is to politely say you have no problem signing the term sheet but you would like to chat with 3 of their portfolio company CEO’s to get references on them. This will buy you a week easy, as the portfolio company CEO’s will take that long to schedule / chat with you. You’ll get your self a little time while performing crucial due diligence of your own.

  • marksuster

    Doh! You stole my next post ;-)

  • http://walkercorporatelaw.com scott walker

    As a corporate lawyer with 15+ years’ experience doing deals, I echo Ryan’s comment: entrepreneurs MUST diligence the guys on the other side of the table in order to make an informed judgment. Indeed, the failure to do so is probably the biggest mistake that entrepreneurs make (in every dealmaking context).

    Scott Edward Walker
    Walker Corporate Law Group, PLLC

  • http://allantyoung.com Allan

    Nice post – great analogy.

    Of course, entrepreneurs tend to use the capital (probably too liberally) whereas folks on a new year’s resolution end up never using the gym.

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