If you want a very quick primer on all the stuff nobody ever tells you about raising venture capital check out this video where Mark Jeffrey & I break it down on This Week in VC. A summary of what we discussed is below:
Not 100% in order of the video, but close. All of this is covered in more detail on the TWiVC video above (and much of it is covered in text on this blog on the “Raising VC” tab)
1. Will a VC sign an NDA (non-disclosure agreement)? No. If they did they would be in constant violation because VCs often see 3-4+ companies in every market that they operation. NDAs would make it impossible to do business. Asking for one to be signed shows naïveté.
2. What is the VC process?
Meet with one person from the firm – partner or associate. If you can meet a partner up front it’s always best but sometimes it’s not possible. The first meeting will often by with an analyst, associate or principal. Often principals are allowed to do their own deals whereas associates are not. Associates are good an important people – I discuss this in the video. Still, “call high” if you can.
Potentially several other qualifying meetings before you get to meet the other partners if the person you have met is not yet convince / wants to do more work.
If you make it past this stage you will go to a “full partners meeting” which is exactly what it sounds like. In the video I describe how to best play this meeting and why, without a champion going into the meeting, you’re unlikely to get an investment.
After the partners’ meeting you should usually get a pretty good steer on where you’re at in the process.
I was recently speaking with some founders about their fund raising process. They had received a term sheet from a VC and were wondering whether to work with this firm. I personally had three separate data points from entrepreneurs who took money from the firm that said “never again.”
I really try to stay out of the middle of these things so I softly said to the team, “maybe you should contact these companies and see how their experience went?” From there I figure they can both figure out what to discuss – or not. One bad comment doesn’t always scare me as there’s often two sides to every situation. But three from different, independent sources? Pattern, me thinks.
This experience made me want to dig into my archives, re-write & publish this piece.
I often tell people that raising venture capital is more difficult than getting married. 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.
And worse still, your VC will have certain controls in the company that don’t make it simply a matter of a “wasted opportunity.
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.
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.