There has been much discussion about VCs doing seed funding in the past year. I’ve written about it myself (Is VC Seed Funding Dead?) and (Is There Really a Signaling Problem with VC Seed Funding?).
Short summary of my posts:
1. There is a structural reason that VCs are investing at early stages,
2. Many (Union Square Ventures, Foundry Group, True Ventures, GRP Partners, Mike Hirshland at Polaris Ventures) do it the right way – we treat it as a normal investment and we don’t have a “options” strategy with our investment. I’ve done 4 seed investments in the past year and they are 100% referenceable.
3. Many firms do it in a way that can be more detrimental to entrepreneurs. They either do too many seed investments (for which they can spend no quality time with any) or they treat it as an option (“if you succeed come back and see us and we’ll match any term sheet you get”) – they view it as a sort of “right of first refusal.”
4. The signaling affect is overrated. Everything you do is a signal. Investors will look at which angels you chose, whether old bosses invested, whether you were an EIR somewhere and did they invest, etc. Future investors will also look at whether your angels “re-upped” if you hit a bump in the road. VCs are just one of many signals future investors at which future investors will look. If you don’t understand the concept of “signaling” please read the blog post I wrote on Understanding VC signaling.
Back in 1999 when I first raised venture capital I had zero knowledge of what a fair term sheet looked like or how to value my company. Due to competitive markets we ended up with a pretty good term sheet until we needed to raise money in April 2001 and then we got completely screwed. It was accept the terms or go into bankruptcy so we took the money. Those were the dog days of entrepreneurship.
But the truth is that I didn’t really understand just how screwed I was until years later when I finally understood every term in a term sheet and more importantly I understood how each term could actually be used to screw me. Things like “participating preferred stock” in legalese unsurprisingly never actually call out, “hey, this is the participating preferred language.” We got a 3x participating liquidation preference with interest (not participating with a 3x cap, but 3x participating. Ugh. I explain the difference later in the post or you can click through on this link above for an explanation).
This is part of my ongoing series on Raising Venture Capital.
I often tell people that raising money is worse than getting married. I have to be careful in how that sounds because I love my wife and am happily married. But the truth is that in marriage if you’re unhappy you can at least get divorced (in most countries). Not so in venture capital. You’re tied at the hip to your VC.
So my first advice is not to rush in the fund raising process. Get to know VCs over a long period of time so that when you’re ready to get engaged you feel you know their character. As in real life – those that rush into marriage often find out what their partner is really like after the fact. I wrote a post linked as follows about how to build relationships with VCs over time.
But what about once you have a term sheet? How do you then reference check your VC to be sure that you’ve chosen a good firm and partner? First, I would say that most entrepreneurs do almost no reference checks or at least do them very informally.
Handling PR with VCs
I recently got a phone call from an entrepreneur whom I respect and who runs a company that I hope will do great things one day. He had pitched me in the past and I told him that for a variety of reasons his company was too early stage for me, but that I would happily keep track of their progress.
He started the call by telling me he had exciting news. He was about to be featured in a major US news magazine as one of their “hot” picks. I think my response surprised him, “Really? Is that why you called? To update me on your PR? That’s what you’ve got? PR? Save it for someone who cares! What progress have you made in your business?”
I don’t think that’s what he was expecting. Entrepreneurs get so used to friends and family congratulating them on their press coverage that they forget sometimes that this isn’t real. A positive news story means NOTHING about the core performance of your business. A good friend of mine was featured on the front cover of the LA Times business section with a glowing article.
This is part of my series on Raising Venture Capital.
I’m sure I’ll spark the ire of some VC’s for saying so, but there is certainly such a thing as black-out days in venture capital. It’s worth you knowing this so you don’t waste your time. It’s also very important to understand so that you can properly plan when you raise money.
Let me first tell you the black-out periods and then I’ll explain why. It is very difficult to raising venture capital between November 15 – January 7th. It is also very hard to raise VC from July 15 – September 7th. (you need to have had your first meeting even earlier.) If you’re thinking about raising VC and have not yet started the process, you’ve probably already missed the boat for 2009.
If you’ve had your first partner meeting but haven’t had the full partner meeting then you had better schedule it for Monday, November 23rd. Full partner meetings are almost always on Mondays and if it isn’t already booked yet for Monday, November 16th (e.g. this coming Monday) obviously that’s not going to happen.