This is part of a series that I’ve been working on called Understanding Venture Capital.

In one of the posts I spoke about how the size and vintage of funds might affect you when you’re raising money.   This led Roy Rodenstein (whose company Going.com was sold to AOL) and others to discuss, what happens when VC’s need to invest across multiple funds.  Specifically Roy commented

“your company may go long enough that its vintage fund gets cramped and you may get painted into a corner for followons. Even more complicated, VCs often invest from multiple funds or sub-funds into a single deal. So as an entrepreneur it’s hard to navigate those waters over time. As usual the rule is, if you’re doing well, they’ll find the money for your next round.”

Everything that Roy mentions is true.  And VC’s don’t like to invest across multiple funds.  I thought I’d do a quick post on why VC’s don’t like to cross funds so entrepreneurs can better understand the situation and how to talk with their investors about it.

As a reminder, VC funds are comprised of money from LP’s (Limited Partners) that include university endowments, pension funds, high-net-worth individuals, insurance companies and large corporations.  In a single fund of $100 million you might have 30 difference LPs.  So if a fund was raised in 2006 and the next fund was raised in 2010 it’s possible that they have two funds that “cross over” at the same time.

It’s technically possible that the VC still has a couple of new investments left from their old fund or even more likely it’s possible that they invested in your company from the end of Fund 1 and subsequently raised Fund 2.  In a perfect world they “reserved” enough money from Fund 1 in order to continue to invest in your company from just one fund.  But it’s possible that they have to “cross over.”

Why does the cross-over matter? As it turns out some of the LPs in Fund 1 might not have “re-upped” (e.g. invested again) in Fund 2.  It’s also possible that some new investors joined Fund 2 that weren’t in Fund 1.  So there isn’t a 100% correlation of investors across funds.

So if Fund 1 invested in your first round and Fund 2 invested in your second round, you can imagine the following scenarios:

- An investor who is only in Fund 2 wonders why the VC invested again in your company.  Is their money being used to “protect” the investment that was made from Fund 1?

- Conversely, let’s say there is an investor in Fund 1 who didn’t “re-up” for Fund 2.  He might be thinking, “whoa, you’ve got this killer portfolio company where my money was used to invest in this startup and now my money isn’t being used to follow on the previous round so I’m owning less of the company than I should.”

- Now, let’s get more ominous.  Let’s say that the first round of investment in a startup was done at a $50 million pre-money valuation from Fund 1 but the company has severely underperformed.  A totally new VC is willing to invest in the company but at a $15 million pre-money valuation.  A condition of their investment is that the initial VC continue investing alongside them.  And let’s say that VC now needs to invest from Fund 2.  In this case the second fund might actually be used to “crush” the money from the first fund.

Given all of the conflicts you can see why investors would want to avoid crossing over funds.

How do they deal with these types of situations? First, VC’s have “advisory committees” that consist of a sub-segment of their LPs.  These groups meet regularly to discuss fund issues such as “how to value the portfolio companies” and to get input on issues like “whether the VC is investing outside of its normal scope.”  If it’s a simple cross-over issue the VC might bring the issue to a special advisory committee meeting.

For issues that are more complicated (such as the last scenario above) VC’s have something called a “conflict committee” that is designed specifically for issues that might be perceived as conflicts of interests.  You can see clearly how this could be the case in scenario three.  The conflict committee will help the VC decide what to do.

But here’s the thing.  Most VCs like to raise their next fund from existing investors.  It’s less risk and makes fund raising much easier since the LPs already know your firm.  So VCs avoid these types of scenarios any time possible.

So how should you deal with this issue? Just make sure to know how big your VC’s fund is, what vintage it is, how many investments they have left in their fund, how much they’re “reserving” for follow on investment in your company and when they’ll be raising a new fund.  You can’t just blurt out these questions because they’re sensitive topics.  But when a fund offers you a term sheet and is interested in investing you can politely and cautiously approach some or all of these topics.

And if the VC is “at the end of their fund” and about to close a new one I would strongly recommend you talk to them about the “reserves” they have for your company and how they would deal with the issue of investing across funds if it were ever required.  Hopefully it won’t be.

Note: I don’t have experience in dealing with these issues in 100′s of funds so it’s possible that other VCs have slightly different points-of-view.  If anybody has any more information or thinks about these issues differently please feel free to add in the comments section.

This is part of my ongoing series on Understanding Venture Capital.

I recently wrote a blog post on understanding how the size and age of a venture capital fund might affect you when you’re raising money.  Because it is a “series” I plan to get into some of the deeper complexities of funds such as “cross over funds” and “why VC’s hate to price their own deals” at a later stage. The last post was a high-level primer.  I know many super experienced entrepreneurs who don’t understand the basics of how fund size and age can affect them so I thought it was worth establishing a baseline.

Chris Dixon provided some commentary on Twitter that he believes my last post missed “the most important point about fund size.”  He’s specifically referring to his point of view that entrepreneurs shouldn’t take seed money from “big VC’s” (he defines them as > $100 million).  It actually wasn’t the point of my post – my point was just to get people thinking about the issues of size and age in the first place.

But I understand Chris’s sentiment and in certain situations I agree.  But while he’s directionally right that there are risks, he’s wrong to rule out all VC’s who do seed investing.  Yes, I’m a VC who does seed investing so I have a bias.  But Chris is a seed investor who competes for deals with VCs so the bias runs both ways.  I bet if we discussed the issue live we’d probably end up agreeing more than disagreeing.

Let me elaborate:

1. The problem with VC Seed Funding – Chris is right to raise the issue with entrepreneurs because there have been instances where large VC funds have set up seed programs where the investments have been used as “options.”  There are many problems with this.  First, if the VC does 15-20 of these under one partner then it is certain he can’t spend any time with these investments.  And they don’t.  I believe these VC funds have suffered some amount of reputation fall out.  In a world of The Funded, VentureHacks and entrepreneur blogs this kind of information spreads like wildfire.

Second, more damning is the “signaling problem.”  This means that if a VC invests in your seed round and does not participate in a future round the next round investor will think to himself, “well, if Big VC Co. invested in the seed round they have more inside knowledge than I do.  If they’re not willing to fund the next round then something must be wrong with this company.”  This is true and does happen.

Third, he notes that even if they do invest they’re likely to do so at a lower price because you can’t truly get an independent valuation.  He says that if somebody new looks at the deal they’re likely to call the seed investor and collude on a price that is artificially low.  I’m sure this happens, too.  But I’m also sure it doesn’t happen all of the time.  As always it comes down to competition.  If you have several new investors looking at your company you’re likely to get  higher price.

2. Why are VC’s really doing seed deals? There are several reasons why VCs are doing seed investments.  One of them is simply that more entrepreneurs don’t require as much money to get through their first milestones.  When I was first starting companies in the late nineties it took $3 million just to get version one of our product out the door.  We had to buy expensive Sun servers, Oracle databases, Unix licenses and build complex software.  Bandwidth and hosting charges were expensive.  These days solid entrepreneurs can get their companies through the first 12-18 months for $500-$750k.  So if a VC wants to work with really talented early-stage entrepreneurs there are times where they have to be willing to seed fund them in order to be in the deal.

This was the exact case on my first two seed deals (and as a $200 million fund I fall into Chris’s “big” status – although I certainly don’t feel that way ).  My very first seed deal was a company that told me flat out that they didn’t want to raise more than $500k.  We offered them more : $750k-1 million.  They said that they didn’t want the extra money or dilution.  We took the $500k.  We used the Y Combinator open source term sheet.  We signed the term sheet within 48 hours and had funded in under 2 weeks.

How did it go so quickly?  I knew the team for 2 years and had tracked their company through to pre-launch.  We funded it just before they took the wrappers off of the company.  They were grateful for the extra money as their launch was overwhelmingly successful and they had to rapidly hire staff to support customer demand.

It’s true that some VCs view seed deals as options.  I do not. I’m not the only VC who feels this way.  The deal I described has gotten just as much attention from me as the A round investments I’ve done because I haven’t done 15-20 seed deals – I’ve done three.  The seed nature to me are just the size, price and risk factors – not a pure “option” to see what happens.

3. Signaling problems always exist - What Chris doesn’t make clear is that signaling problems exist with nearly EVERY investor.  If you raise angel money that’s another story.  But if you raise from any fund and unless the fund has a 100% consistent policy that they will absolutely never do a follow on investment then a signaling problem exists.

Let me give you an example.  A very well known early stage fund used to have a rule that they didn’t do “follow on” investments.  Life seemed easy as they told all investors that their model was to lead the first round and not to follow on.  The problem is that all investors speak with each other.  And I learned through the grapevine that they had done a very small number of follow-ons for their most promising investments.  They didn’t announce that – it just happened.  So once I knew this my obvious question on the deals that I looked at was, “ok, are you investing?”  You can’t avoid it – signals always exist unless a fund is 100% absolute in its rules.

Or … you raised your $500k from angels and now are ready for a VC “A” round.  You’re trying to raise $3 million at a $6-7 million pre-money (e.g. “A” investors will own 30-33% of your company).  Well, if you raise that VC money you’ll have the signaling problem if they fall out of love with your company in the future because you’re not performing well.  The reality of raising venture capital is that you’ll always have some signaling risk- frankly, there’s almost no way around it.  It’s an occupational hazard.  Your best antidote to the signaling effect, I’m afraid, is to perform reasonably well.

Let me give you another example.  Let’s say you’re an EIR (entrepreneur in residence) at a VC firm.  You were there for 9 months and then you left and created a company 15 months after you left.  If that VC doesn’t invest people will ask why.  That’s signaling.  You’ll have your reasons and some VCs will get beyond that.  But it’s a signal nonetheless.

Different scenario:  You’re on your second company.  A prominent VC funded your first company but isn’t currently investing in this company.  Think that’s not a signal?  Think again.

Or you’ve never done a startup but your last boss from Google, Facebook or Yahoo! is now a VC.  Many are.  They didn’t invest in your company?  Signal, signal, signal.

OK, so your boss didn’t become a VC.  You were a VP at a startup company that sold for $100-200 million making the founder very wealthy.  You’re startup raised angel money and is now looking for VC.  That founder wasn’t one of your angels.  Think that the VCs looking at your deal won’t wonder why?  Think they won’t call him?  Signal.

It’s very hard to completely get around the signaling problem.  It always exists.  I agree with Chris that it is more prominent when a big VC invests in the seed round of your current company and doesn’t follow the investment.  But if you raise money from a small seed fund and they don’t want to follow (and you’re not able to immediately raise new money) you’re equally screwed.

3. The problem isn’t whether or not to take seed money from a big VC, it’s which VC you are working with – I’ve written about good VC seed investors before in this post about taking seed funding from VCs (if you’re very interested in the topic it’s worth a read even though it’s similar to this post).  Fred Wilson of USV invests in seed deals including in Foursquare where they split a $1.35 million investment with O’Reilly Alphatech Ventures (OATV).  I think Fred qualify as both an active investor and one in which you’d be delighted to have on your team.  He’s also an investor who isn’t shy about following on at deals in which a new VC does not come into the next round.  And he works at a “big” VC.

Brad Feld at Foundry Group also invests in seed deals (this is a great post worth reading on Brad’s views of seed deals).  In fact, 7 out of Foundry’s first 16 investments were seed deals.  Foundry is both stage agnostic and syndication agnostic.  They don’t mind being the lead investor on deals that they seeded.  How many entrepreneurs wouldn’t kill to have Brad and/or Foundry in general involved with their company.

First Round Capital meets Chris’s definition of a “big fund” and they do seed and A round investments.  They also do follow ons so Chris’s point about signaling exists with FRC as it does with most investors.  I’ve never met a FRC CEO has has anything but positive things to say about the fund and their involvement with portfolio companies.  Sometimes they’re “over the top” effusive about FRC!  FRC is the most innovative VC out there now.  They’ve found a way to get leverage for their high volume of investments by running CEO Summits and special industry events beyond what many VCs provide with their lower volume of investments.

Same with True Ventures.  Their entrepreneurs are evangelical about how great it is to be part of True’s portfolio.  Big fund.  Great reputation.  Seeds deals.  Would you not take money from them?  I would.  In fact, I nearly did at my second company but we were bought by Salesforce before we raised our round.  True was my top pick to work with in Silicon Valley.  They seemed to have a different way of working than most VCs, which I found appealing.  And I know that True has done some very small seed deals as well as some larger A round deals.  They seem to be managing fine with both models.

And then there is my firm, GRP Partners.  I’ve made 3 seed investments out 5 total investments over the past year.  Two of the three were at the founders’ request.  In one of the three instances the company is now raising more money.  I proactively offered the CEO to fund the company without any other investors having to come into the deal to lead it.  I gave him what I consider a very fair price.  I then told him, verbatim, “I feel this is a fair price.  You’re more than welcome to shop around on Sand Hill Road for as long as you want.  I’ll take the whole round, half of the round or my prorata.  If you shop it be aware of a few things: 1) your information will be widespread in Silicon Valley including amongst your competitors (this is just a reality) and 2) it’s likely to take 6-8 weeks to get through the process if you’re doing well.  If you accept my terms you’re done.  Cash in bank in 30 days.  Your choice.”

It wasn’t an easy decision for the team.  It was sincere in my offer.  They elected to sign my term sheet.  Chris might say that they could have gotten a higher price had they shopped it.  He might be right – we’ll never know.  But the highest price possible is not always the best outcome for the company.  I gave them a “high” price by Chris’s definition in his post on not taking seed money from VC, but I didn’t give them a “Foursquare Price.”  But importantly, there was no signaling effect.  By offering to take half the round or my prorata I fully enabled the company to do whatever they needed to do.

Entrepreneurs – please take note.  I know you’ve all read Chris’s post because so many of you have told me so.  He makes many great points so if you haven’t read it you should.  But the reality is that in life it’s far more important to look at the whole picture.  Make sure you know the reputation of the people you’ll be working with.  I’ve covered that topic in this post on how to reference check your VC.   If they blog make sure to read what they think because they make much of it known in writing.  I’ve made my entrepreneur thesis clear.

It’s not black-and-white.  It’s more important to pick wisely with whom you work at an early stage.  Whom you work with is more important in my opinion than it is whether they’re a seed fund or a VC fund.

4. The plus side of good VC’s doing your seed round - I just want to hit one last topic that is worth noting.  There is one point that Chris leaves out of his post.  There can actually be a positive side of a “good VC” doing your seed round.  I like to talk about seed investments with entrepreneurs in these terms:

a – if your company sucks wind don’t think that you’re guaranteed to get a follow on from me or from anyone else.  if you completely miss the target you’re dead no matter whom you raise the money from.  So a good VC fund or seed fund or angels in this case is all neutral.  You’re forked either way.

b – if your business is “killing it” (e.g. doing really well) then it also won’t matter.  Do you think companies like FourSquare or Gowalla would ever struggle to raise follow on rounds if their early stage VC’s don’t follow?  Or for that matter can you imagine their VC’s not following?  If you’re doing well you’ll have demand

c – so for me the most telling case is when you’re doing “ok” but you haven’t hit major proof points yet.  This is actually what happens the majority of the time at startups so if it’s you, you’re in the norm.

In the “c” case (50%+ of outcomes) let me point out the following.  It’s far easier to get an extra $500k out of a $200 million VC fund to get to your next milestone than it is to squeeze $500k out of 5 angels if they’re not sure you’re performing well.  They often judge your performance on whether VCs show interest.  How’s that for a dilemma?

And more to the point – if you hit a major economic down cycle (like September 2008) you’ll have tough times with all investors.  But it will be much easier to get a small bridge from a VC than one from angels.  Why?  Because angels will have their money in real estate, the stock market, etc. and a VC’s fund has one purpose – startups.

And the final argument I hear is, “I’ll just do angel money now so I can shop my next round to a big VC at a high price.”  Um … that’s fine in scenario “b” above.  In scenario “c” – good luck.  I’d much rather have the fund on the inside and on my team with the ability to bridge me than on the outside.

I am a fan of raising angel money and often tell entrepreneurs to do so.  What I like most is that if your company has an opportunity for an early exit most angels would be delighted.  I’ve written about the fact that I feel most businesses should never raise VC.

But if you plan to try and build a big company then involving good VC’s early can be a benefit.  I think you’ll be just fine taking their money in your seed round and if it’s a small round I don’t believe most good VCs would block an early exit.

And for reference, most “good VC’s” will work with seed funds and angels in seed deals.  In my first deal we took angel money in the seed round (from 2 angels) and an early-stage co-investor in the A round.  In my second seed deal I did the whole round for expediency.  In my third seed deal we co-invested with a seed fund and then syndicated the rest to strategic angels.

And if I ever got the chance to work with Chris Dixon’s fund I’d be delighted.  I like the way he thinks.

This is part of my series on Understanding Venture Capital.  I’m writing this series because if you better understand how VC firms work you can better target which firms make sense for you to speak with.

It is not uncommon to see a VC talk about “total assets under management” as in “We have $1.5 billion under management.”  I don’t really understand why VCs do this since it’s mostly a meaningless number.   I’m writing this post to explain to entrepreneurs what you should be thinking about in terms of the VC’s you approach and the size and stage of their funds.

What is total assets under management? - VC’s often talk about this term as in the total amount of funds EVER raised by that VC.  Example: if a VC is on their fourth $200 million fund that they just raised in 2009 then you might hear them talk about $800 million under management.  This is ONLY relevant in so much as it will tell you that they’ve been able to raise a lot of money historically.  But without knowing whether they had a $700 million fund and now have a $100 million fund or whether they’re a first time fund of $800 million it’s pretty meaningless.  It’s also meaningless if they had four $200 million funds and the last one they closed was in 2000.

What is a VC fund? – I’ll do a detailed post at a later date but to make sure that everybody has a baseline understand for the more important details of this post I’ll touch on this topic here.  VC’s don’t invest 100% of their own money.  They raise money from institutions who want to have some allocation of their investment dollars in a category known as “alternatives,” which is supposed to mean higher risk, higher returns.  Unfortunately over the period of 2000-2010 the VC industry hasn’t performed well and therefore the number of funds going forward is likely to reduce greatly.  VC’s raise this money from university endowments, public & private pension funds, insurance companies, banks who invest from their balance sheet or that of their wealthy clients, “family offices” which means money from very wealthy people, etc.  And funds also have investments from the partners of the firm.  Most funds are 10 years in length and the initial investment period is normally 3-5 years.  So VCs often raise money every 3-5 years if they can.  Some wait 5-7 years but usually this is because it’s proving more difficult to raise a new fund due to market conditions or the lack of returns in their current fund.

What IS relevant about the size of a VC’s fund? – The most relevant thing for you to know about size is the dollars of the CURRENT fund.  For example, my firm, GRP Partners, has a $200 million fund that was closed in March 2009 and we have 4 investment partners.  Our prior fund was $360+ million and the fund before that was around $200 million.  The size of those prior funds doesn’t really matter to you.  What you really want to know is that our current fund is $200 million and you want to know when it was raised (covered in next section).  If a fund has a $25 million fund then you know they aren’t going to be writing $5 million checks!  A fund size of $25 – $100 million is normally an “early stage” fund that is likely to do seed investments and/or smaller A round investments.  A fund size of $100 million – $200 million is likely to either be an A round investor or “stage agnostic”.  An A round investor implies they are the “first institutional money in the deal.”  GRP Partners is stage agnostic.  We’ll invest $500k in a seed stage deal, $2 million in an A round or $8-10 million in a B round investment or later.

If you see a fund of $600 million you can bet that it’s harder for them to do $1 million investments so it won’t be uncommon for you to hear them talking of “putting more capital to work” which is code for “I can’t really get out of bed unless I’m putting at least $2-3 million into your company.”  It’s not always the case.  But it’s worth your knowing that the larger the fund size the more pressure the fund will have to shy away from investments that are too small.  You can always talk to your VC about the “stage” (seed, A, B, C) of deals they like to do and their “typical first investment size.”  All quotes in this post are VC lingo.

Understanding the fund vintage – “Vintage” of a fund refers to when the fund was raised.  A 1997 vintage is likely to perform much better than a 2000 vintage because the former got to ride the dot com bonanza and likely saw some quick IPOs and crazy trade sales while the latter is more likely filled with many companies that never reached the promise land (or are still trying).  Why does vintage matter to you? If the VC your talking to raised its last fund in 2002 then they likely don’t have much fire power for new investments.  I wouldn’t say the have NO firepower but it’s not likely a lot left.  If you imagine that they did most of their initial investments between 2002-2007 then it’s been 3 years of mostly doing follow-on investments in those old deals.  Also, since most funds are 10-year funds there will be pressure in 2012 for this fund to start exiting its investments and return money to its shareholders.  Most funds get annual extensions.  I’m not an expert in this fields but ironically I’m finding the most “10-year funds” are really more like 13 year funds.  But let’s just say I wouldn’t want to take an A round investment from a firm who is in year 8 of their fund without really understanding this.  If they’re likely to raise a new fund then you might be OK but at least have the conversation with them.  And know that raising new VC funds right now is incredibly hard.

How much of a fund is actually invested in new deals? – If a VC has a $150 million fund (let’s call the VC-A) to  they might only invest $75 million in new deals. Maybe even less.  Let’s say a fund invests $1 million in an A round deal in a company called NewCo.  That fund “reserves” money for NewCo’s “follow on” investments.  In an early stage deal that fund might reserve 2x their initial investment or if it’s a larger round or later stage they might reserve 1x.  In the 2x example that means that VC-A has really blocked out $3 million from their fund ($1 million invested, $2 million reserved for NewCo.)  They might never invest that $2 million and over time they might adjust that reserve (up or down).  The main take-away for you is that a $150 million fund is not $150 million of new investments.  You want to know how much money is “not reserved.”

Knowing the “number of deals left in the fund” – VC’s typically talk among themselves about “the number of deals left in their fund” as in a $200 million fund with a vintage of 2006 saying, “we have about 4 new deals left in our fund.”  In that number they have to include the amount of the new investment they plan to make plus the amount they would reserve for those new investments.  VC’s don’t publicly state this number so don’t expect to find it on their website and don’t blurt out the question in your first meeting with them.  But know that for funds that aren’t closed within the past 3-4 years … the VC will know this number.

Will your VC be able to raise another fund? – That’s a tough question that as of 2010 is a hard to know for certain.  The industry is in turmoil, for sure. Paul Kedrosky wrote a seminal paper for the Kauffman Foundation saying that the VC industry needs to shrink by 50%. Fred Wilson also wrote a sophisticated analysis of why he believes the market must normalize to smaller amount of money going into VC firms.  Fred echoes my view that fewer firms is good for the industry and good for the companies we fund.  Irrational prices and over investment in your competitors hurts your ability to build healthy businesses.  I saw it myself in 1999-2002 when it was hard to charge for my product because all of my competitors raised large rounds of capital and were giving away their products free fueled by large VC rounds.

If a VC fund you’re talking to raised a fund in 2005 or early and hasn’t yet raised a new fund they certainly will be thinking about it and trying to figure out how and when to raise a fund.  What will matter are: whether the people who invest in VC funds (LPs or Limited Partners) increase their activity and the performance of that actual fund.  What the LPs will be looking for are VCs with enough “exits” to prove that they can make returns.  So look at the latest portfolio of your VC (not prior funds) and see whether they’ve had exits and how many of their non-exited companies are likely to exit in the near future.

I wouldn’t rule any decent firms out.  I know many great funds that haven’t yet raised their new fund but may still get there.  A lot will depend on how exits go in 2010/2011.  GRP’s last fund was in 2000.  When GRP talked to LPs about a new fund in 2005 the feedback was “get some more exits in your fund and then come back.”  That’s what many VCs are hearing in 2010.  I’m happy to say that in 2006-2008 we has some good exits including BillMeLater, DealerTrack, UGO Networks and PrePay Technologies to name a few.  We also took one of our large portfolio companies, Ulta, public.  Our 2000 fund is now performing significantly above industry averages and therefore we were able to raise a new fund in tumultuous times.

How and when can you ask all of these delicate questions – You can’t blurt out all of these questions in your first meeting.  But you can do some focused Internet-based research before approaching the firms.  You can ask around to startup lawyers and other entrepreneurs who know these things.  And if your friendly with somebody at a VC firm they usually know the high-level details about the other firms.  The right time to start asking about these sensitive questions is when the VC starts showing interest in your company.  Ask delicately and respectfully.  But make sure you answer all of the important questions about when their last fund was raised, how big the fund size was, how many investments are left and when they will likely raise their next fund (assuming this fund wasn’t closed in 2007 or beyond).

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.

This is part of my ongoing series with Startup Advice (although this also applies tightly with Raising Venture Capital)

You all know this intuitively.  But on a scale of ABC (always be closing) there is a wide degree of urgency that entrepreneurs show.  As as I’ve said before, I believe that getting things done is one of the major things that differentiates successful entrepreneurs from just reasonable ones.  This is a reminder for all entrepreneurs to remember to be careful about “deal drift.”

I think the perfect saying to have as a reminder is “time is the enemy of all deals,” or as my wife is all too tired of hearing me say, “Don’t pop the champagne until the ink is dry on the contract and the money is in the bank.”

So, where does this all come from and how can you apply it in practice?

Let me start with a story.  When I was raising money for my first company we had closed a seed round in 1999 and were working on our A round.  We had many term sheets (it was 1999 and we had a pulse) and we were deciding which one to take.  We were trying to optimize around a few criteria: price, size of round, number of syndicate partners and, of course, terms.

We ended up agreeing a term sheet for $16.5 million at a $15 million pre-money valuation.  Yes, this was stupid.  But we weren’t optimizing for dilution – we were building a $1 billion+ company and we wanted the runway to succeed.  We had people hearing through the grapevine that we were about to raise money and new investors started calling us to get in on the deal.

My co-founder and other management team members wanted us to hold off and see whether we could get the deal done at a higher price.  I was resolute.  “Guys, I accept that we could probably shop this around for a higher price but we could also end up with nothing.  Let’s take the deal on the table and go build a huge business.”  They accepted my argument.   It was December 1999.  We signed a term sheet.

We moved into the legal process and final due diligence in January and February of 2000.  Goldman Sachs was going to be one of the investors in my firm.  Morgan Stanley found out about us and organized a secret Sunday meeting where they flew in a bunch of bankers to convince us to let them in on the round.  We thought it was a good idea so we brought it up to Goldman.  Morgan Stanley had proposed a higher valuation to let them in.  Goldman said NFW.  Not just on the valuation creep but also on Morgan Stanley being involved.  We were faced with a situation – slow down deal closure to convince all parties to work together or plow ahead.  We plowed.  Morgan Stanley then funded one of our competitors.  That’s a different story.

Our final closure was the first week of March 2000.  We closed with 5 investors including Goldman.  If you remember your history the market crashed the next week.  Many companies that were in the process of raising money did not.  It quickly became impossible to raise venture capital.  Most people who hadn’t already closed their deals were dead.

I lived through this again September 2001.  I don’t even need to mention the date for you to know what happened.  By mid September the entire market was constipated.  Any deal – ANY DEAL – that was pre 9/11 was suddenly in question.  Many deals – VC or otherwise – didn’t ever close.

History repeated itself in September 2008 with that market crash.

So having lived through this I became a very superstitious and paranoid deal guy.  When Salesforce.com decided to buy my company in December 2006 I dropped everything and focused religiously on closure.  I was obsessed with the closure date.  I did everything in my power to get this to be the earliest date possible.  For me it was a binary outcome.  If anything changed (stock market crash, real estate crash, somebody trying to buy Salesforce.com, whatever) I could end up with goose eggs.

This isn’t a story about Black Swan events.  It isn’t even a story about raising venture capital or M&A.  It is a story about the nature of deals themselves.  Any deal.  VC, sales, biz dev, M&A or otherwise.  Time is the enemy of ALL deals.  Unless, of course, you’re the buyer and playing for a lower price.

Things change.  Your deal sponsor could lose their job or change jobs.  Just ask my good friend Stuart Lander.  He was working on a big deal at his company Public Spend when his client, a Miami public official, was arrested for fraud.  True story.  People who were excited about your deal can suddenly become enamored with the next shiny object to come along.  New competitors can introduce stuff into deal dynamics.  Whatever.  I’ve seen it all.

What can you do about it?

1. Don’t over shop – If the deal you’re involved with involves raising venture capital or selling your company you naturally want some competition.  This helps you get your deal done in the first place and it helps you get better terms.

I’m not suggesting to single source.  I’m not being cynical as a VC and trying to get you to accept my offer on lower terms.  I always tell people to take their time deciding and to be wary of Gym Salesman VCs.  But be aware that adding weeks adds risks.  It’s always a trade off.  If you have a deal that you’re comfortable enough with think hard about going for closure.  Think hard about binary outcomes.  Had I delayed my fund raising in 99/00 by even 3-4 weeks I’m convinced I would not have raised any money at all.

I’ve seen this directly myself as a VC.  I’ve offered to fund an early stage company where I promised cash in bank in less than 30 days.  They accepted and we had cash-in-bank in sub 2 weeks.  They were off to the races building their company rather than raising cash.  Within 6 months they raising another round at an up round.

Conversely I offered the same deal to another entrepreneur who decided to shop around longer.  I told him my term sheet wasn’t “exploding” (meaning you put pressure to sign immediately or you’re out) but that it didn’t have an indefinite end date.  6 weeks’ later he didn’t have any other term sheets.  I offered a second time to fund and even increased price a little bit.  Second time he also kept shopping.  It’s been a while and he still doesn’t have a term sheet.  It’s a great company and a great team so I’m pretty sure they’ll get funded.  But if it “drifts” too much longer I worry.  You never know.  Anything can happen.

Especially in VC.  There is a fatigue factor.  If deals drift people start whisper campaigns.  It is a tight-knit industry.  Like it or not everybody knows each other.  “Hey, did you guys see ABC company?  Yeah, we passed, too.  I heard they were struggling to get a term sheet.  What’s going on?  They were raising since last August.  Strange that they haven’t gotten a close yet.”  Don’t shoot the messenger.  I’m just telling you the kind of stuff I hear all the time.  It simply is.  Better that you know.

2. Don’t grind every detail – The first cousin of the over-shopper is the over-grinder.  It happens on all deals.  I’m not saying to throw in the towel and don’t negotiate important points.  But think about what you really care about in deals.  Try your best to stand your ground on as many points as you care about.  If it’s a biz deal you might care about IP protection, revenue share, investment commitments to joint marketing – whatever.

But I sometimes see people get bogged down in PR releases, cancelation clauses, minimum guarantees, whatever.  I’m not saying that these points are unimportant.  On each deal they might be more or less important.  Decide what’s important to you.  Grind on that.

Avoid over grinding.  You know that every turn of the legal documents can add weeks.  Some senior legal guy needs to approve the changes and then run it by his lawyer to be drafted.  Some senior business unit head needs to approve your changes.  Each grind introduces more uncertainty both in terms of elapsed time and other unknown variables.  On the VC front, I advise other VCs I know to also be careful about over grinding.  You don’t want to enter important new relationships with bad feelings.  It’s not worth it.  Grind wisely.

3. Don’t be complacent – What really winds me up is when entrepreneurs are complacent.  I see people who just have a blind belief that the deal will eventually just get done.  They’re not bothered when the lawyers didn’t get the documents out when they promised.

Opposing lawyers used to hate working with me.  If they promised they’d ship documents and they weren’t released I’d be straight on the phone with them.  If they missed 2 deadlines (they always miss the deadlines – sometimes their fault, sometimes the clients) then I was straight on the phone with my negotiation partner to ask him/her to push the lawyer.  I always made them commit in an email to the day they would ship documents and then I’d hold them too it.  I’d send them their email and point out the docs were late.

Lawyers are like any humans.  The squeaky wheel gets oiled.

Don’t be complacent.  Push hard to document turns.  Push hard to set up the technical reviews, the due diligence meetings, the reference calls – whatever.  If they want reference calls be ballsy.  Help schedule the actual calls for them.  I’ve done it.  I’m sure you all have your tricks – feel free to add in the comments.

If they promise the next meeting in 3 weeks see if you can make it in 2.  Or 1.  But Mark, you met us and told us to come back in 3 months?  Can we push you?  Sometimes.  Read the tea leaves.  Sometimes I’m not yet convinced about the deal and you need elapsed time to have proof points.  I’m not talking about being pushy for the sake of being pushy.  But when you genuinely have “buying signals” then be ambitious about your meeting dates.  Offer to fly at the drop of a hat if need be.  Offer to meet at 7am or 7pm to make schedules work.

Just don’t be complacent.  Time is the enemy of all deals.

4. Get people in person – One technique that isn’t aggressive and always works is to get all the parties in one room.  You need your key negotiating partner and both sets of lawyers.  You can streamline what would have taken 2 weeks in document turns and accomplish more in a single day.  Plan well for your negotiation so you know what you’ll give in on.  Be willing to take breaks to let your partner call his senior people for consent.  But get everybody to commit to sitting in the room until the terms are pounded out and creative solutions are reached for areas where you are at odds on terms.

And, I can never link to this clip enough.  ABC: Always Be Closing.  There is no better movie scene than this.

I’m writing this post as part of my series with Advice on Raising Venture Capital but will file it under Sales Tips as well since it applies equally to both scenarios.

Congratulations.  You’ve found a VC partner or principal who has invited you to the Monday partners’ meeting.  Or on a sales campaign you’ve finally gotten your project sponsor to take you to the “executive committee” where decisions are made and budgets are agreed.

So you arrive at the meeting in the comfort that somebody has championed you to this point.  Every 1:1 meeting you’ve had to date has been collegiate and productive.  What could go wrong?  A lot, actually.  Here are some tips to keep in mind for the big day.

1. Information Asymmetry - The biggest problem that presenters face in large (5+ people) is information asymmetry.  You come into a meeting where your sponsor (the person who invited you to present to the partners) knows a lot about you and the rest of the room may have varying degrees of knowledge.

This is true whether your at a sales meeting or at a VC firm.  Sometimes a company presents at a partners’ meeting that has been well vetted and thoroughly discussed prior to the meeting so all partners know a great deal about the presenting company.  Other times the partner wants to test whether there is support before sinking in tons of due diligence time.

Either way, don’t assume that the entire room is up to speed on your company.  Also, you might be presenting your telecom company to a 6-person team where 3 people are telecom experts and the other 3 have only superficial knowledge.  These kinds of meetings present challenges as some people want to go deep and others are at 50,000 feet.

Make sure you discuss this expectation with your sponsor before the meeting.  Understand how knowledgeable the room will be around your industry and your product and importantly – agree a plan with your sponsor on how to play the meeting.  Getting his / her buy-in to your approach is important as they can help you steward the meeting in the right direction.

I would normally recommend you address the issue early in the meeting with the group to set expectations.  I would try a line like, “I know that some of you might be social media experts and others may be less deep on this particular area.  My plan would be to start the presentation at the 50,000 foot view and then dive down to a more granular level once we’re all base-lined.  Does that sound ok?”

This last question is important.  You need to let the energy of the room guide you.  If people want to go straight to details then staying too high level will also irritate people.  But … watch out.  If one vocal person blurts out, “just give us the details, we all know social networking” don’t assume that person speaks for the entire room.  It’s a delicate situation but I recommend saying something like, “OK, that sounds great.  Happy to do that.  Just to check – does everybody feel comfortable going straight to details or does anybody want 2 minutes on the basics before our deep dive?”

I’m surprised in sales situations (and believe me, raising money is a sales process) how often the presenter takes direction from the most vocal person who usually speaks first.  They don’t always speak for the group.

Regarding information asymmetry – take me as an example. I’m no dummy on businesses that are in the financial services sector, but my 3 partners have been investing in the space for 20 years so I’m clearly on a different level.  30% of our last fund went into deals in this sector.  My partner, Brian McLoughlin, attends almost all Financial Services conference, makes a number of investments in the space and has relationships across the sector.  His immediate focus when these companies present is an order of magnitude more detailed and knowledgeable than mine.  In our current portfolio 3 or his 4 investments are in the Fin Svcs space.  But when you present to both of us you still need to keep me in the dialog.  Vice versa is it’s a SaaS platform company where I spent nearly 10 years running companies.

2. Scoring an “own goal” – The most common mistake is one I’d call scoring an “own goal.”  It is when you’re in a meeting and somebody throws out a question that is a slight “red herring.”   They were thinking of the question as you were speaking and they blurted it out.  This happens often is sales meetings or VC meetings.  Some presenters take that as a challenge to inform the person who asks the question about everything the presenter knows on that topic.  What started out as an innocuous question asked purely out of interest can become a total time waster if it’s not pertinent to your storyline that you’re trying to convey.

I saw this happen recently with a VERY polished presenter (and somebody we’ve decided to take to the next stage so it obviously didn’t kill him) but he felt compelled to answer every question asked at great length even when not that important to the overall picture and it was quite distracting to the flow of the meeting.

Use the lesson I was taught many years ago: A, B, C (answer, bridge, communicate).  Answer the question, bridge back to what you wanted to originally talk about and then get back to communicating your messages.  Warning: you need to determine whether questions are really “red herrings” or truly something that the group wants to explore.  If it’s the latter – you can’t move on.  2 quick tactics:

- it is acceptable to say, “did I answer the question thoroughly enough for you?”

- if you’re pretty sure it’s a Red Herring then simply say, “that’s a great question. Do you mind if I answer that a little later in the presentation?  I have a few slides later that address that.” (obviously if you say that you need to come back to the question either later or after the meeting. tip: write it down when asked / parked)

3. The “Detail Merchant” – The third thing you need to worry about in a group presentation is the “detail merchant.”  This is the person who wants to ask you the most detailed questions about every aspect of your business – sometimes details that aren’t relevant to the group getting a good picture of your market opportunity, your team, your competitive positioning, etc.  Sometimes they do this out of interest, sometimes it is to show the group how smart they are and sometimes it’s just because they’re a nudnik.  I’ve experienced this in many sales meetings I’ve made and unfortunately in many VC pitches I made.

These are the bane of many sales meetings but there always seems to be one – even when well intentioned.  The problem with letting the detail merchant take over a big meeting is that they’re driving the meeting toward their agenda and not yours.  More importantly, they’re often driving the meeting to an objective that doesn’t meet the needs of the other participants in the room.

It happens to all of us at VCs – usually in a mild, benign form.  Sometimes I find myself really interested in the technical details of a companies product and after a few questions on the topic I look around and find my partners disinterested in this line of questions.  Other times I find them wanting to know the details of one component of a business before I have understood the market landscape and I’m screaming inside my head that I want to understand the overall concept before the deep dive.  It’s different than a “Red Herring” in that it’s not an irrelevant question it’s just that you’re getting too detailed before the group as a whole understands the complete high-level picture.

Whatever the reasons you need to be conscious of this.  Here’s how to deal with it:

- first, you must always answer and acknowledge the question. Do this be repeating it and writing it down.  “You want to know about the terms of the deal we signed with CBS and the reaction of their new VP.  Let me write that down.”

- If you can answer at the highest level you should.  “The new VP is very supportive of us – we’ve met him three times.”

- As with the Red Herring question you must “bridge” back on the main storyline of your presentation.  You say, “It’s an important topic.  If it’s OK with you I’d love to answer it in just a couple of minutes after the next few slides.  I think the context may be easier.  Is that OK with you?”

- That last question is key.  If they say, “no, I’d prefer you cover it now” then you must.  You can allow a detail merchant to drive you down 1 or 2 rat holes because you need to meet their needs.  But you need to be sure that you’re not meeting their needs at the expense of everyone else.  You need to have a relationship with your sponsor that after 2 rat holes you’ve agreed with him / her that he’ll help you bring the meeting back to a level that’s appropriate for everybody.

- If the detail merchant is really persistent you might try the line, “If you have a few minutes after our presentation or later today I’d love to come back and give you all the details you’d like. I have tons of information I’d be happy to share 1-on-1 with you.” Sometimes that works.

Allowing one partner or one executive in a sales pitch take you down a rat hole might ruin the overall flow of the presentation for the group it it’s entirety.  As both an entrepreneur (in VC and sales meetings) and as a VC I’ve seen this happen many times.

4. The “Naysayer” – Another difficult situation you can run into is the naysayer.  It’s the person who is always flinging out the skeptical question at you like, “Google could easily do this,” “how can you ever get mass adoption on a tool like this” or “not another social network – just what the world needs.”

Naysayers are difficult to handle because they set a negative tone for the room.  I talked about a situation where this happened to me when I was raising money in Silicon Valley for my second startup.

I find with naysayers is to acknowledge the issue they’re negative but to not discuss it in depth.  “I understand your concern about Google.  It’s obviously something we’ve spent a lot of time thinking about as well.  The short answer is, ‘we believe that our niche focus on backing up documents in the financial services sector will mean that their more generic approach of being a platform won’t be a competitive threat for the segment of the market we hope to serve’ but I’m very happy to have a much more detailed dialog with you at the end of the meeting or one-on-one afterward if you’d like.”

Please don’t get me wrong – some questions you will be asked that are challenging your business are totally legitimate and need to be discussed.  I’m mostly talking about when you get what is clearly in your perception questions asked in a hostile tone or that sound negative / dismissive – especially if they persist from one single person.  Judgment from you on the day as to which scenario it is will be very important.

If they persist the room will be aware of it and will start to discount the person as long as you handle it professionally.  Unfortunately if you “take the bait” and seem defensive it normally just makes both of you look bad.  The other great thing about the “cover it later” approach is that it gives you an excuse to all on this person later one-on-one afterward and build a relationship.  Why not follow up after the meeting and ask whether you can come see him directly to show him some data you have.  Any excuse to build a relationship with the naysayer and turn a negative into a neutral.

But the overall advice is similar to the detail merchant – you can’t let the naysayer take your agenda off course or everybody else – including you – loses.

5. The “Silent Partner” – The final mistake that I see many people make is not engaging the “silent partner.”  Just because somebody doesn’t speak up and challenge you in your meetings doesn’t mean that they won’t be against your company / idea when the internal discussion happens.

As a sales person it’s your job to flush everybody out and find out what their thoughts / feelings are.  In a positive way, of course.  The best tool for engagement is the question.  If you notice a partner that hasn’t spoken or seems to not be paying attention (hopefully not on a Blackberry!)?  Get them involved!

Find a way to ask them a pertinent question and ask for their point-of-view.  “Bob, if I’m not mistaken you have some experience in social games through your involvement with EA.  I know that mobile is slightly different but how do you see this space playing out?”

Work the room, folks.  Whether in sales or in raising VC these are often group decisions.  You need everybody engaged, everybody knowledgeable about what you’re doing and you need to get all issues / risks in people’s minds out on the table and in the open.  This will only happen through your asking questions, listening to what each person is saying, writing down key notes and testing with the group whether you have understood all of their concerns.

I was recently in a meeting with a company that had met 2 of my partners twice before our meeting so my partners’ knowledge was already much deeper than mine.  I didn’t ask any questions in the meeting because they were already going too deep relative to my knowledge.  After the meeting the CEO came into my office and asked if I had 5 minutes.  We spent 30 minutes together.  He got all my issues on the table.  I thought, “brilliant.”  He gets it.

Information asymmetry, detail merchants, naysayers and silent partners are all potential landmines.  You’ve got to learn how to deal with group dynamics to avoid presentation rat holes.  All that said the next step is the most important.

6. Pre-Meeting Prep – So much of your performance in the big meeting is tied to the preparation you put in before hand.  It’s so important that it’s going to be the topic of an entirely separate post.  But for the sake of completeness in this post – before you arrive at a big meeting you need to know in advance: who will be there, what their views are, how they normally act in meetings, what the relationship is between individuals and whether they’re knowledgeable about your space.  Just winging it on the day is a much lower probability outcome.

You can only do this if you have a “champion” on the inside.  Make sure you’ve spent enough time with your sponsor in advance of the partners’ meeting that you feel confident they’ll advocate for you on the day.  One sign of whether they’re truly supportive is how well they help you prepare for the big meeting.

Last night I attended the inaugural Open Angel Forum event started by Jason Calacanis, a fellow LA resident.  Jason started the Open Angel Forum in response to his frustration that entrepreneurs were being charged by some angel organizations to present at their events.  He wrote an excellent blog post on this topic.

As a former entrepreneur, I’m a big supporter of Jason’s goals.  Asking young companies with limited capital to pay to present to a group of potential investors is insane.  Yet many would-be entrepreneurs feel that they don’t have enough access to investors and that the opportunity to present to a group will help them short circuit the fund raising process.

This can be true if it’s the right event, but most of these events suck.  And frankly one of the skills of an entrepreneur is figuring out how to get access to people that they don’t know and one of the ways that potential investors (like it or not) can judge one part of your skills is in seeing how you use ingenuity to gain access.  If you want some tips on getting access I wrote a post on how to access VCs but the same logic applies to angels.

The event last night in Los Angeles was great.  Local angel investors totaled 18 people including Matt Coffin, Brett Brewer, Kamran Pourzanjani, Jarl Mohn and many others that young entrepreneurs would be blessed to work with.  Also present were NorCal angels including Ron Conway, Chris Sacca and Shervin Pishevar.  It was also great to spend time with the founder of TechStars, David Cohen, who will head up Open Angel, Boulder.

5 companies presented for 7-8 minutes each followed by Q&A.  2 of the companies were immediately interesting to me and I have already followed up with next steps, which I guess is testament to Jason’s goals of making sure that high quality, early-stage companies get funded.  In my next post I will write about one of the five companies.

Jason plans to set up Open Angel chapters in many US cities and eventually internationally.  My only suggestion to Jason would be to emphasize more of the presenting companies being local.  I think most great angel investing is done at a local level.  At the earliest stages of a company you want to raise money from people local to you because distance = their time, attention and focus.  And that’s really what you want.  It was great to meet some promising companies from outside the area but 4 out of 5 wasn’t the right balance for me, personally.

There was some Twitter chat before the event about whether this “replaces” local angel funding communities like the Tech Coast Angels.  It does not and that’s a good thing.  While TCA has had it’s challenges (and updating your website certainly wouldn’t hurt your image, guys. Seriously, it kinda stinks) it is a legitimate funding source for Southern California entrepreneurs and has produced successes including GreenDot and MyShape.  We don’t need competition – we need more overall organizations like Jason’s to helping young entrepreneurs more easily reach angel investors with no payola.

Hat’s off to Jason – you’ve started something important and of great substance.  I look forward to tracking the progress.

Oh, and hats off to Tyler Crowley and Alex Miller, the magic guys who really do much of the work behind the scenes to pull off these great events that Jason dreams up.  They deserve more credit.

I sometimes think that certain advice is BGO (blinding glimpse of the obvious) and doesn’t warrant mentioning.  But then people’s actions tell me otherwise.

I wrote recently about etiquette when you meet people at conferences or events so now that I have this done I feel I need to say some words about connecting on social networks.

Let’s start with a discussion of existing social networks and then how to approach people on them.

Facebook.  I know some people link to anybody and everybody on Facebook – I do not.  Facebook is a reciprocal (or symmetrical) network and therefore if you want to follow me by default I follow you back.  The problem I have with this is two-fold.  First, I send lots of private stuff on Facebook because that’s where I connect to my parents, my siblings, my classmates and my wife.  Second, I don’t want to clutter up the stream of information that I have in my Facebook newsfeed with information on people with whom I don’t have a relationship.

What I love about Twitter followers is that we can have an asymmetrical relationship.   There are some people I’ve never met that I choose to follow (such as Mitch Kapor, the founder of Lotus) and some people that follow me whom I’ve not met and don’t (yet) follow back.  I DO read all @’s sent to me and I try to respond to most of them.  I check many people’s profiles when they @ me or follow me.  I’m curious who you are.  Occasionally I will randomly follow people I don’t know just because they look interesting.  Usually it’s because your conversations steam looks interesting, your link goes to an interesting blog or website or you work at a company that interests me.  I read posts for a while and if I see stupid stuff I unfollow.  That seldom happens.  I am interested in a conversation with people of done professionally and respectfully.  But I’m just not ready to clutter my stream with that of 4,500 people and lose the stuff I really want to see from the 450 people I follow.

LinkedIn.  The old standard business networking tool.  I used to guard my network here and only link to people who I knew.  I felt that if people were contacting me to say, “so I see that you know such-and-such” that I really should.  Now I know that everybody links to everybody so on LinkedIn I’ve become less selective.  Why?  Well first I never send any private information on LinkedIn nor to I receive any.  Second is that LinkedIn has become a nice deflection for me since I’m not yet ready to connect on Facebook if I don’t know you.

So on to some FBGO advice on how to connect with people:

If you’re asking to “connect” with people you don’t know (or don’t know well), how should you go about it?  Send people a personalized comment on the intro saying who you are and why you’d like to connect.  I do this even for people who I know very well.  Put in any info about people we know in common, places we may have met or some other relevant fact.  Even if we don’t know each other – finding a common bridge increases your probability of getting accepted.

If you connect to me on Facebook and simply have an invite with no explanation and if I can’t figure out how I know you I’ll just hit ignore.  On Facebook there isn’t even a standard “join my network” introduction.  Sending a blank invite is the equivalent of sending your resume to a company with no cover letter.  People do it, but it’s not professional.

On LinkedIn I have a higher tolerance now.  If you connect to me with the generic BS message that, “I’d like to add you to my professional network on LinkedIn” and I know you, I’ll add you begrudgingly and wish that you had better manners to at least say hello.   If I don’t know you and there’s no message I’ll add people 50% of the time – begrudgingly.  If you take the time to write me a small, private note on LinkedIn then I’ll add you 95% of the time.

The main message here is … if you REALLY want to connect with somebody show them some respect and at least write a one sentence original line to ask for the intro or say hello.  The rest I just chalk up as social networking spam.

Business Etiquette Tips for dealing with VCs and Corporates at Conferences

This is part of my ongoing series with Startup Advice.  With the LeWeb conference about to start in Paris I thought the timing of this post would be appropriate.

Right after Techcrunch50 Michael Arrington wrote this great post on how to interact at business events and conferences.  If you haven’t read it, please do.  It’s an important reminder.  But so that you finish reading my post first I’ll give you the summary version – when approaching somebody at a show be polite / respectful of time, try to be introduced if possible and never assume the person remembers who you are.  He gives the example of Roelof Boetha, a very well known VC from Sequoia, who always (re) introduces himself to Michael and reminds him who he is even though Michael has met him several times.

When I first read this post I immediately filed away in memory that there was important information to impart on entrepreneurs and led to this post.  Apologies in advance if it sounds arrogant – just trying to impart some realistic advice.

How to (re) intro yourself.  I do about 15 in person meetings / week … that’s about 750 / year.  Let’s assume 500 are new meetings and that I’m exaggerated by 20%.  That’s still about 400 new meetings that I do every year.  Each one has pitched me for between 30-60 minutes.  Then let’s add on all the conferences I attend where I have literally hundreds of 10-minute conversations (at least 15% of which are after a few beers).  Then I get people sending me Twitter comments, blog comments and tons & tons of email intros.

The truth is that I actually do remember almost all of the people I meet.  But don’t assume that I have a Minority Report like machine that can invisibly and instantly gin up my memory.  The most important advice I can give you is – give me context.

It should start something like this,

“Hey Mark, it’s Mike Schumacher from SchuCo Technologies.  We presented to you about a year ago our company that does voice recognition software integrated with IVRs.  We were introduced through Bob Johnson over at NewWorld Ventures.”

Now wait a moment and let me process this.  Most people are visual thinkers and need to access our visual memories.  You should see a light go off in my head and if not feel free to give more context.

“Last time we spoke you had some insights on how we could partner with Microsoft to power their Zune.  You knew a guy there who said that VR was their next big initiative.  Thanks for the tip – we’re now actively engaged in discussion.”

I am too often in the situation at an event where I see a face I immediately recognize but seeing the person out of context I can’t quite place who they are, what their name is or what they do.  With one visual trigger I can usually remember minute details about our discussion.

How to approach somebody after a panel discussion.  Truth serum – my golden rule is that I never do this.  When there is somebody that I really want to meet I care about the context with which I meet them.  Standing in the “groupie” line after a conference is NOT the best way to meet somebody.

But if you feel that this is the ONE chance you’ll have to meet this person then at least do it correctly.  When it’s your turn in the ambush greeting line get all of your energy pumped up and with great enthusiasm say, “Hey Mark, I really enjoyed your panel on social media marketing.  I have a new startup in the space that I think would interest you.  I know it wouldn’t make sense to pitch you here – do you mind if I got a card to follow up directly with you?”

Be energetic, be very brief, get my contact details (if I don’t have a card ask politely whether you can have my email address to send me a pitch deck) and by all means make sure you follow up.  80% of the people never do.  And when you do email me, make sure to remind me of the context that we met after the panel.

Now if you’ve ever talked to me after a panel you’d know that I am pretty gracious with my time there.  I know that people like to talk after a panel so I always stay until the last person who wanted to meet has the chance.  But I recognize people that don’t have enough Emotional Intelligence to recognize when they’ve spoken for too long and the person after is waiting patiently.  I like people who are self aware so over staying your welcome, while people will tolerate it, leaves a bad taste.  If no one is behind you then feel free to linger BUT make sure you ask the presenter – “do you need to get out of here? I’d love to stay and chat but want to respect your time.”

Why isn’t it a good idea to rush the stage after a presentation? As I outlined in my post on How to Get Access to a VC, it matters who introduces you.  It sets context that you’re a valuable person to know from a “filter” that you trust.   And it also shows you’re an entrepreneur.  If you can’t figure out how to get access to somebody in the era of social networking then you’re likely not going to be a successful entrepreneur.  And this advice applies to any senior exec you want to meet – not just VCs.

How to approach somebody you want to meet.  The best strategy to meet people at a conference is to have some “anchor” people that already know other people.  Hopefully these are people that already know and respect you.  And hopefully they’re people who like hanging out with you because you’re going to need to spend some time as their wingman for a while.  Give them the short list (2-3 people maximum) that you would love their help in meeting.  Ask if they mind giving you an intro to give them a chance to say whether it is or is not a good time for them to intro.

So the line goes something like this, “Hey, I was hoping to meet Bob Johnson – do you know anybody that knowns him?”, “Oh, you know Bob?  Do you know him well enough that you’d mind an intro?”  And make sure you send a nice note later to that person as a thank you for the intro.

An even better way to meet.  My second favorite part of a conference is the hallway.  Any readers of this blog will know that I have ADHD and therefore sitting through presentations is like water torture to me.  I can get through some but I find little value other than getting a sense for what is being said.  But in the hallways you find all sorts of interesting characters.  You find lurkers like yourself that want to meet people but don’t want to sit through another dammed panel on the future of X,Y,Z.  This is the best time to meet people and most people are open to you casually walking up and introducing yourself.  If you see me lurking outside the conference door – you can assume I’m open for business.  I here to meet people – come up and say hello.

The best way to meet. Even better than the conference hall is the after party.  You can only get to know me superficially if you come to my office and present for an hour.  You’ll only get the basics if you catch me outside in the conference hall.  You’ll know me ZERO if you ambush approach me after a panel.  But you’d be surprised how well you can get to know me over a Guinness at midnight.  Ask anybody who went to the W hotel after TC50 whether they got to know people better at the W or the conference.  So don’t go to a conference that is really important to you only to bugger off early to catch up on email.  Waste.

The Rolls Royce of meeting.  This can be hard for people without financial resources but the best way to meet people at a conference is to try and throw (or attend) a dinner.  Often there is a down time between a meeting conference and the nighttime activities.  Book a table for 10 at a local restaurant.  Doesn’t have to be super fancy.  Invite 4-5 people you know and a few people you want to get to know better.  Partner with somebody else who knows people so that you can access multiple networks and split the tab.  Get an anchor tenant that you think people want to meet so you can tell future people, “Steve Sayers and I are hosting dinner at Maximo’s at 7.30pm with 8-10 interesting entrepreneurs.  It will be people like John Wood from KnownCo and Dave Dodge, a VC from Boston.  We’ll be out in time for the after party.

Dinners are where it’s at.  You have a group of people captive for an hour-and-a-half.  Hopefully these are people that will enjoy being together.  You’ll have to be an active host and a conversationalist.  If this isn’t your forte partner with somebody it is.  At these dinners you build friendships that go beyond a conference room table.  You really get to know people.

The real power of a conference comes before & after.  I’m surprised by how little planning most people give before they attend an important conference.  You’re traveling all the way to Paris.  You’re spending money on flights, hotels and food – not to mention the price of the conference.  And many important people that you want to spend time with will be there.  Make sure to put in your efforts before hand.  Email everybody that you already know who will be there and find out what their plans are.  Email people that you want to meet and are approachable (e.g. not too senior) and ask if they have time to meet.  Plan a dinner.  Scope out the after party locations.  Know which panels you want to attend because of who else will be in the room.  Make sure you’re not nipping out at lunch because that’s maximum networking time.

And then there is afterward.  You collected all those cards – don’t make them useless.  If you email somebody right after you met then you lock in a certain relationship.  Keep it short and sweet – no BS novel like this post!  And make sure that if you agreed any verbal actions / next steps with anybody that it is in your email and that you follow up.  If you didn’t agree any actions / next steps with anybody at the conference – WTF were you doing there?  Long way to go to hear people say what you could already read online or watch on Ustream (powered, I might add, by MobileRoadie – go Michael!)

This is part of my ongoing Raising Venture Capital (VC) series

Yesterday I had lunch with a really interesting and capable serial entrepreneur who is raising his A round.  The topic of  ”strategic” investors came up.  It felt like Groundhog Day because I have this conversation again and again – literally dozens of times each year.  And I had 2 “strategic” investors in my first company.

So I thought I’d try to lay out a framework for how you should think about it as many you will inevitably be faced with this experience.

What is a “strategic” investor and why do you keep putting the word “strategic” in quotes?

When people refer to a strategic investor they are usually talking about an investor that comes from the industry you serve as opposed to an independent venture capital investor.  I put strategic in quotes because they are often anything but “strategic” and thus the term can be an oxymoron.   Many serial entrepreneurs who have been burned would use something less kind than quotes.

But they’re promising to massively increase my uptake, they’ll give me huge legitimacy and maybe they’ll buy me some day?

Yeah, I know.  And Microsoft always convinces me that their next version of Windows won’t be slow and I get fooled every time.  When they promise to help you with marketing, sales, distribution, integrated product development, etc. it sure is tempting.  And they probably have every intent of helping you.  But the venture guys don’t make the calls on what the product / business guys  do.  The reality is that their core business is not venture capital.  So push comes to shove they will be driven by their core business (as they should be) – not the $5 million they put into your company.  You are the tail, not the dog.

OK, so maybe they won’t be helpful. Most VCs aren’t either?  What’s the difference?

Great question.  It’s true that many VCs over promise how helpful they’ll be with introductions / strategic advice / recruiting, etc.  But this is benign.  Strategics can have some negative impacts:

1. You’re not their core business – their interest will swing more wildly with the markets

When times are good “strategics” want in.  They’ll pay up for it and promise much.  When times are bad many cease investment activity all together.  OK, I know this is true with VC also, but to a lesser extent.  Investing is our core business.  We have nothing else to revert to.

2. They value their core business more than your success – and they should!

I saw this directly.  I had two strategics in my first company.  One was the hardest working guy on our board and the biggest mensch.  He was also chairman of a $6 billion company!  I loved working with him and learned much from him.  He tried his best to balance his needs and ours.  He was a needle in a haystack in that I think he really cared about my success.  He also wasn’t the venture guy – he was the big cheese.  But even he would feel conflicted when I had to cut the engineering team because he valued our product more than his investment.  When we wanted to sell the company he was very hesitant because he didn’t want somebody to buy us who might not be a good steward of the product going forward.

The other strategic was a train wreck.  One month after investing the guy who invested left his firm.  The guy who took over said, “I never believed we should invest in dot com’s.  I will be on your board but don’t ask me for anything.”  He literally said it that bluntly.  His words were an understatement.  He fought me for 3 years and actively worked against our interests – I think to spite the guy who put in the money.  I struggled to get every signature or consent.  The market knew he was an investor yet he wouldn’t promote us within his own company.  You can imagine how that made us look in the German market where his company is a big deal.

In retrospect he was right for his business but it sucked for me.  Keep that in mind when you’re thinking about ‘strategic’ money.

3. Many strategics have less experience in helping entrepreneurs

Another big question you’ll want to answer is whether your strategic investor has a long history in investing in startups.  How have they behaved in good times and bad?  Make sure to reference check with other portfolio companies.  I often talk about why you want “smart” money (yes, I use quotes because I know it’s not always as smart as it promises to be).  But working with VCs means you’re working with people who deal with entrepreneurs as their career.  When you deal with doctors or dentists for angel money, for example, you’re dealing with people who don’t.  The same can be true with strategics.  So make sure you know what the team and what the individual is made of.

4. Many strategics have bureaucratic decision-making processes

One of the problems in working with corporate entities is that the venture arm doesn’t always have an autonomous decision-making ability.  As a VC I need to get buy-in from my partners when tough stuff comes up.   But I only have 3 of them and they spend every day dealing with these kinds of situations.  Imagine your investor has to call the CEO of a $20 billion company for approval for your merger or sale.  Fun.

5. You may struggle to land their competitors as your clients

So you took money from the largest player in your industry.  That’s awesome because you now have credibility.  But guess what – number 2-10 in the sector now you view as an agent for the evil empire.  It will be much harder to get deals done there and may drive people to your competitors.  I know that you’ll tell them that BigCo owns less than 20% of your company.  Remember, they’re not venture investors.  They don’t see it that way.  They see you as an extension of their competitor and that all information will flow to the corporate parent.

6. You may find that when you want to sell your company it is harder to get a fair price

See point 5 above.  If you thought it was hard to sell your product to the competition try selling your company.  Yeah, I know it happens all the time.  But for an M&A department that is already super busy they don’t want to be seen as a stalking horse for the company that owns 20% of you so sometimes they don’t even want to bother.  Plus, many acquisitions happen when you are already partnered with the company so you may have to get beyond the hurdle in point 5 before getting to this step.  So if you ask many bankers they’ll tell you that there’s a “discount premium” that you’ll get at the time of the sale as a result of having a strategic.

So should I ever consider taking money from strategic investors?

There are times where strategic money makes sense.  I personally recommend it in the following situation: When you have your A round and/or B round done, the business is progressing well and you’re not early stage.  That way the strategic isn’t as involved in the early-stage messy stuff when you need to quickly change direction when your strategy isn’t working and need to get more funding rounds done.

There is a second reason I recommend this.  You can often get 3 or 4 strategics to invest alongside each other and then nobody sees you as an extension of another company.  You may not get fierce competitors to co-invest but perhaps you can get enough closely related companies that you don’t have the branding problem I’ve spoken about.  Also, you have more leverage to not take them all on as full board members.

You may also do your due diligence on the firm you’re talking to and find that they’re an outlier.  You may find that they’ve been investing for 15 years, their entrepreneurs love them and they’re entrepreneur friendly.  So if you get good feedback just make sure that you understand the framework above to think about how to best mitigate your risks.

Are any strategic investors better than others?

Yes.  There are many funds that are associated with corporation that are structured as proper VCs.  Three examples where I know the teams personally, respect them and have heard great feedback are: Steamboat (Disney), Comcast Interactive Capital (CIC) and Intel Capital.  I’m sure there are many more.  What I’d point out in all of these firms is that they have had a long view of the VC market, they are pretty independent from company decision making, they aspire to make money on the fund rather than fuel their core business, they are structured like VCs and therefore attract A-quality people and none of them over promise that their company will ‘make you.’  As a result the market knows this about them and doesn’t view them in the same way.  They are strategic with no quotes

Where can I go for help?

Try VentureHacks, The Funded or OnStartups- three great communities to tap into other entrepreneurs and ask them for their experiences.  Oh, and maybe a few of you will meet me in the comments section to discuss your experiences.  I’d love to get the debate going.  And if you know any great strategics please list them.  I’d love to give them some recognition.