In the past I’ve written on the topic of “Raising Venture Capital” but today I’m starting a new series called “Understanding VC’s.” My goal is writing this series of to make it easier for you as a startup needing to raise money to understand how venture capital firms work so you can be more efficient and more effective in your process.
In today’s post I want to talk about the concept of a VC flightpath. This is my description of a VC process, not one I’ve heard from other VCs so don’t expect it to be accepted nomenclature. But I use this all of the time as a metaphor when talking with entrepreneurs in person and I’ve found it to be a useful way of explaining to entrepreneurs what is going in in the VC’s life.
When you visit a VC to tell them about your wonderful idea it’s easy to imagine that this person is not evaluating any other deals at the moment. I have no idea why, but that’s always how it always felt to me when I was an entrepreneur raising money. Of course I knew that they sat on other boards that kept them busy but somehow it seemed like I had all of their attention to myself during the fund raising process – especially the ones who seemed to like me and spend time with me. Even when you’re getting the VC love this reality I imagined couldn’t be further from the truth.
Imagine your VC as an airport. Imagine he or she sits on the boards of 5 companies. Those companies are the planes that are already on the tarmac and many of them are loading / unloading other passengers. They’re obviously garnering a fair amount of attention from the airport staff. You can easily know which planes are on the ground as they’ll almost always be listed on the VCs website.
What’s less clear is which airplanes are in the sky and waiting to land. The VC might have an airplane on final descent (e.g. a term sheet has been signed, the legal documents are being drafted and the deal will close some time in the near future). If a VC has an airplane that is currently landing then you can be pretty sure that they’ll have a lot of their attention making sure this plane lands safely and this may make it more difficult for you to get a landing slot in the short term. Assume that your VC has more than one runway but each partner only controls one runway so if you’re talking to the partner who’s in the airport tower guiding in the descending plane it’s not likely yours is going to get cleared for landing.
And while there are likely at least two runways at your VC firm’s airport they probably have 4-7 partners vying for those landing spots and terminals so even if your partner is trying to get approval to land your plane there are other partners who have their planes, too. And they might just get a priority landing slot before yours.
So you might have had your first meeting with a VC and he got super excited. But you’re traveling from JFK to SFO and you’ve only just been granted permission for take off. If most VCs will only have one airplane landing at any one time they probably have many others that are circling their airport hoping for clearance to land and many more en route.
Let’s talk first about the “holding pattern.” In my analogy these are deals where the VC has invested a lot of time and is deciding whether or not to proceed with a landing. There is a lot of congestion in the circling pattern. Usually there are 3-4 deals with strong consideration. Since the average VC partner (excluding higher volume, earlier-stage VCs) only does 2-3 deals per year it is clear they can’t land every deal. So much of their time is spent in trying to decide which deals in their circling pattern to divert to other airports. They’d like to leave them circling for as long as possible but eventually the pilots press them to land or divert.
The reason I like this metaphor is because I believe it helps the entrepreneurs to know that the VC’s mind is congested with dealflow of airplanes that they’re contemplating letting land yet such limited runway and terminal capacity that most deals won’t land. When you’ve had 3 meetings, a partners meeting and some reference calls you’re not likely the only company in the circling pattern. You need to be aware of that and find a way to get land or get diverted. As you know, circling patterns suck. In a future post I’ll discuss the “divert or land” procedure.
I have on many occasions had a few companies in a holding patterns as I did a lot of research on the company and as I shared that with my partners to try and build support for a landing. But on occasion one of my other partners might be trying to land a 747 one week that consumes most of our attention at that week’s partners’ meeting. I can always fight for time on the docket to discuss whether my plane should land but sometimes I find it better to wait a week or two until there’s a little less airport congestion. It’s both out of courtesy to my partners and also out of a need for me to actually get involved with helping to land their big jet coming in. If one of my companies circling is running low on fuel I might have to make a quick decision and even seek approval during a congested time but if the airplane has enough fuel I’ll usually ask it to circle one more week.
I’m a pretty transparent guy so I usually call the CEO and tell them the situation that another plane is landing. But don’t expect every partner in a VC firm to necessarily divulge that information. In a future post I’m going to talk about how I recommend best finding out this information.
But it’s not just airplanes in the holding pattern that you have to contend with. You have many other plans that are en route from all over the country in various stages of flight. A typical VC might take between 4-10 new meetings per week. Some take more, many take less. But your airplane that is heading from JFK to SFO and is currently above Denver might get preempted by a regional jet coming from Sacramento to San Francisco and even though you took off first he might still land before you. In fact, it is not uncommon for a totally unscheduled airplane to come in for an emergency landing and consume all of the VCs resources while you’re asked to slow down your speed considerably. You might call that the FourSquare Express.
UPDATE: To make extra clear given Jason Lemkin’s comments below – it is certainly true that the A+ deals get fast tracking for an emergency landing so paraphrasing a famous statement, “Look at your hands. If you’re holding a term sheet the VC is interested. If not, they’re not yet interested” or put differently, “if you’ve been waived on for a quick emergency landing they’re super interested and if not they’re not yet convinced.” That is certainly true and A+ deals will know they are A+ deals and will get fast tracked no matter what. That doesn’t mean that deals that have to fly cross-country for 5 hours don’t also get to land – it just means that either: a) you had no prior relationship with the VC so they’re getting to know you, b) you’re company is not yet “hot” and therefore people aren’t fighting over it c) your data has not trending up massively yet or you would be landing quickly or d) the partner is working on another deal and hasn’t yet gotten his head around the fact that you are a high priority deal.
OK, I know I may have gotten a little bit carried away with the airport analogy but here’s the truth: If you’re talking with any venture capital partner worth their salt they will have lots of other deals competing for their attention. If they are showing you interest and taking more meetings then they are likely genuinely interested and may even hope to get to completion with you. But remember that you are competing not only with your partner’s other airplanes looking to land but also with the other partners in the fund who want to land their planes.
As one prominent partner in a well known Silicon Valley VC fund recently told me, “I hate Tuesday mornings. It’s when I have to call a bunch of excited entrepreneurs and tell them we’ve decided not to proceed” (read: divert them to another airport). “Sometimes they want answers on what we thought was wrong with their business and I try to explain, ‘we DID like your business. It’s just that we have other businesses we’re talking with that we feel have higher potential.’ ” In other words, VC’s have a very limited number of landing slots and have to decide which of circling plans are allowed to land. Invariably interesting businesses get diverted.