Tell HN: Dealing with VCs, my experience
My background in this is that I did several pitches to VCs and have worked for several VCs in the last couple of years, mostly on the technical side but you get to see a good part of the process as perceived by the companies pitching. I also helped one company get seed capital, because I thought they showed great promise.
So, the following is from personal experience, which is limited but it may be useful.
Some VC's are more forgiving than others when it comes to following proper form, but even if they're forgiving they'll appreciate it if you know your stuff before you apply. Their agendas are almost always quite full and the amount of time they have to spend on you is limited, so you should use it wisely to maximize your chances of success.
== before you start pitching ==
- First off, let's dispel a popular mistaken belief, getting an investment is not 'success'. It's a step towards a possible success, and it may give you a better chance, but it basically comes down to another party estimating that you have a chance of success and that they want a piece of that success in return for an investment.
- You have to know your stuff. This of course, sounds completely obvious but it really is surprising how many people will pitch to a VC (in itself something of an opportunity) and completely blow it by not having done basic homework. A fairly recent example, someone wrote a businessplan around a certain type of person and was pitching for capital. Halfway through the presentation one of the partners of the company being pitched interrupted and asked 'And how many of these people do you know ?'. A sensible question. The answer '0', more or less ended the interview, even though it went on for a while beyond that point, for politeness' sake.
Not knowing your target market, not having done any basic research in to the demographic that you intend to sell your product to is lethal.
As is not knowing your competive arena. If you come up with a brilliant plan that looks like some successful competitor is already executing and you don't know they exist that's probably the end of the ride for you. You really need to spend solid time on mapping out the competition. Know their weak points, know your strong points.
In short, know your stuff, expect to be challenged.
- Make sure you inform your partners about all your moves and get them on board before approaching a new party. To find out that someone isn't on board after you approach a VC is a real problem.
If there is any problem between the founders get it ironed out before you start making pitches, and make sure problems are resolved to all parties satisfaction.
- It isn't a must to be incorporated before approaching VCs, but it can be a problem if you picked the wrong form.
- if there are pending lawsuits it is usually a good idea to get those resolved before pitching as well. This can royally screw up your timing, a window of opportunity can easily close while you attend to this.
- you have to know what it is that you want that investment for, no matter how sure you are that you'll be able to spend it wisely, you need to pretty much lay out how you intend to use the money an investment will bring. This is where a businessplan comes in. These are no longer the 90's, so please no columns with more than 9 0's in it. Keep it realistic and make sure that it contains realistic estimates for the costs of the various components of your business. Factor in market rates for salaries, office space and so on. Get a feel for what it costs a business of a similar size to operate.
- scouting for capital takes time. Sometimes LOTS of time. Make sure you have that time, and make sure that your business does not suffer from this. Farm out as much of the work to your co-founders as you can, spread that load. It will give them more insight in the process and it will get them more involved.
== approaching tar...
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Cheers, Steve
My NDA with the VCs I've worked for is such that I can not give you the names of the companies that I did tdd for without asking them and I don't see how it really would matter which companies they are, but the deals were on the order of tens of millions of euros, so a little larger than your average seed investment.
The principles are much the same at that level but the procedures are far more formal and in depth than at the lower levels of investment. Due diligence for a larger company can take several weeks, at the start-up level there is usually not a whole lot in terms of financial and legal, later those are actually the bigger portion of the time.
There usually is quite a bit of time pressure.
When taken as a percentage of the value of the deal due diligence can cost quite a bit in early stage investments, so it can be a partner or the CFO/CTO of a company 'friendly' to the VC (or one they've already invested in) that will have a thorough look.
Later, as the amounts go up and there is a lot more money available to have this work done by outsiders, also because it usually is too much work to do as a favour.
The VC world is a very tightly interwoven one, lots of partners have a stake in more than one company, some may even have an angel fund of their own. So when you pitch to a VC and you don't get a deal there is still a small chance that one of the VCs partners will do an investment out of their own pocket, outside of the main fund.
And sometimes that's the way to get an investment for a 'stage mismatch', where a VC is interested in you but your current situation does not match their preferred profile. They can then do a smaller investment through one of the partners, it gives them the inside view for relatively little money and it is a way to hedge their bets. By the time you're ready for a larger round they'll have their foot in the door and will be preferred candidate.
Early stage folks tend to be more lightweight than the processes you mentioned. Less technical due diligence (because there's less to investigate, obviously, etc)
> some may even have an angel fund of their own
Increasingly, this is not allowed.
It depends on how far you got under your own power and how big the deal is. Anything that comes from a fund will have the whole show regardless, they have to because otherwise if a company imploded after the deal was done they could be held liable.
And some small time investors are quite savvy, and have their own small army of people to call on. "Angel" deals are different, there it is all much more personal.
But even an Angel deal > 250K will have quite a bit of dd, unless there is a longstanding relationship between all parties.
It's a veritable gold mine for information.
Another thing you get when you post stuff on some blog somewhere that is really written exclusively for HN is that the comments will split between the two pages.
Like this it's all in one place. It's not like I need the pageviews.
http://lab.arc90.com/experiments/readability/
- Don't worry about NDAs with VCs. At least on this side of the pond, no VC is going to sign them. Don't leave your full deck behind in digital form. Leave them a summary deck on paper if you absolutely must. (just assume the deck will get passed outside the firm).
- Do make sure the VC doesn't have a conflicting investment - if so, assume everything you talk about will be going into the ears of your competitors.
- Avoid spotters/associates. Get referred in to a partner by another entrepreneur they've worked with before (work your linkedin or xing). Don't take a 1st meeting with an associate (feel free to chat with them on the phone briefly). If a firm wants to see you, then they can find a partner to talk to you. Associates can only say 'no' and generally have limited deal experience and just may not understand your market (of course there are exceptional individuals and firms where this doesn't apply).
- Timing is everything. When you're ready to go out - have a list of VCs you want to speak with and try to get all your meetings lined up for the same two to three weeks. VCs all talk to each other. Once they hear another firm passed on your deal, it's harder to get the next one to bite. Make it a parallel competition. Don't overexpose your company.
- Do research on the firm and the partner that you're pitching. http://www.thefunded.com is free for founders. Get an account and use it for research. (I'm not affiliated with thefunded, just a fan).
Interesting!
That's in direct conflict with my (limited, European) experience. Usually you don't get to speak to a partner until you've passed muster with one of the associates, they act as gatekeepers to make sure the partners spend their time on those things that they feel are worth it.
I agree with all your other points, the NDAs are not a common thing in start-ups, but at a later stage they are definitely important.
The trick is to get referred in via a stronger link (a referral from a successful entrepreneur they've worked with in the past is usually a quick way to get to a partner. Perhaps even an intro from a fellow that does due diligence for them ;).
If your friends like/respect you, this isn't a big favor.
Yes, I know that if you're rocking it, you don't need the friends. But then, if you're rocking it, you don't need a lot of advice on how to engage VC's --- in fact, you don't need the VC's.
My recommendation is to proceed like this:
1) Tell then a little about your project (not being cagey, just progressive disclosure) and ask if they have any conflicts, such as existing investments or close relationships ti similar companies.
2) If there are no conflicts, then memorialize this via email (maybe you had this whole conversation via email already, so you're done).
3) Save that email, it is evidence of you disclosing enough about your product/service/whatever for them to determine if they have a conflict or not and them representing that there is no conflict.
4) Proceed and peel back some more layers of the onion. Explore together and ask them as many questions as they ask you. Do not fall into the "I'm pitching them" role. You are "pitching" each other, if you insist on using that word. You should be doing due diligence on them.
Most founders and startups are better off bootstrapping and positioning for an early exit than chasing VCs. If you don't know what an early exit is, why it's a good option to have, and why VC's will usually block it, see Basil Peter's blog, http://www.angelblog.net/ (he's compiled much of the info on his blog into a PDF called “Early Exits," which you can find there, too).
I'm digressing, but the point is, VCs are wrong for 99% of startups, and that's a good thing. You do not want them unless you don't need them, in which case they will be chasing you and pitching you, which is the way it should be. Bootstrap or get an angel investor.
Signed, Former Venture Investor, now startup founder
But even with angel investors plenty of these points still apply.
+1
pk
- There are 'middle-men' in the VC world that sell their services to unsuspecting young companies in order to get them capital - so they say. The trick is that once they have your signature on a piece of paper that gives them exclusivity they no longer have to do anything. If you find your own capital they will claim their pound of flesh.
I recently came across someone with biz plan (essentially one-person with a vague plan in his head and some details on a PPT) who has come here in Dubai in search of funding and exploring clients. I tagged along with this founder to a meeting with one such person - (I've never been involved even remotely with any VC/angels/startups - so I'm not really sure if I'm reading your description of middleman correctly) - and I was quite frankly there only to learn how these kind of deals/discussions take place. I was essentially a passive listener while the two of them discussed over coffee.
I was surprised by how it went. He asked for a 7% stake via some kind of a nominee account in exchange of getting a funding of around $1M + some upfront commission % off the actual funds he could get, and 25% stake for the investors. More importantly he said something about this nominee account means he is not listed as a stakeholder in any of company's legalities (I got the impression that he'd not be held for any future liabilities, lawsuits etc) yet he'd share in the profits....that part was confusing to me.
By all background checks, this guy seems like a well-connected investment consultant who has worked on bigger deals and he indicated this nominee stake thing in a off-hand way and said it was an industry norm. And all he would be doing was take this business plan and pitch it to investors in his network.
And get this: there is no real way to even evaluate or even remotely guesstimate the worth of this business, because as I said right now it's just a plan in someone's head, a shoddy website and cheapjack PPT with nothing really fleshed out.
What's the deal with this nominee stake thing? Certainly he needs to be compensated for his efforts but 7% sounded a bit too much. But what do I know.
Can someone tell me, if this is how just deals take place? If so would you call this angel investment or VC? And apart from the funding size, is there any real legal difference between angel investors and VCs?
-know the terminology. If you don't know an NDA from a MOU then you will have to spend some time on that.
Does anyone have any tips on where I can spend some time studying up on that? NDA is pretty much the only term I know.
the middle column, scroll down a bit for the categories list. A goldmine.
Jason and Brad have done a huge service to the community with this site.
The only words you need to know are "term sheet". You will get a term sheet before you get any other form of commitment. You don't care about the other details, because when you get a term sheet, you can tell other VCs that you got it, and now you have competition.
I don't think you need to know the jargon to do the VC thing, other than you should know the lifecycle of a deal, which is something that's kind of missing from this post.
You need to know what should be happening before the term sheet and after the term sheet --- pitching, market due diligence, the partner meeting, term sheet, all the rest of the due diligence, 9 months of waiting with 86.7% chance of flaking, the room at the law office with the papers you have to sign, steak dinner.
The VCs know you're not an MBA, even if you try to sound like one.
One VC, after investing in a company I was at, deliberately fed us the pitches of competing companies that were pitching them. Thanks, VC!
Another VC, in a second partner meeting, stocked the room with the m-team of a direct competitor. After the meeting, the competitor talked about "buying" us. Thanks, VC!
Note: in neither case were this minor VCs. You would recognize them.
Regardless of the truth of an answer received, when we ask questions, we gain information. If you ask a question and are lied to, you have gained valuable information about the person, among other things.
It's all about information and you get that information by interacting with your counterparty. Even if they sit there and don't make a peep while you talk, you should be gaining valuable information (unless you're a unobservant). If they open their mouths, you gain even more. If they put something in writing, you have it in writing.
The most valuable information often comes from what people DON'T say or when they lie. Don't have time to discuss further today, but people figure that out on their own over time. Maybe.
In our "Do you have any conflicts of interests example?" If you ask and you are lied to, you have what you need. They are locked in. They have made a representation, in writing. You have relied upon it, and you have told them that you are relying upon it (before you peel back more layers of the onion). It has legal and ethical consequences for them.
Regarding your examples, sounds like you might have had unethical people inside your company and got what you deserved. Birds of a feather flock together. Also sounds like you guys were as trusting as schoolchildren and got fleeced. You did not ask the right questions, such as about conflicts. You did not require the right, or any, conditions precedent. Smart.
Well, but would you ever want to deal with that VC again ?
Thanks but no thanks, VC. We already know you can't be trusted. I'm actually surprised that you would accept such information, I find it highly unethical.
As for "that VC" --- if these ones were so sketchy, why would I assume the lesser-known ones were better? Maybe they are. I've met some VC's I really liked personally. David Aronoff at Flybridge was fun to talk to, for instance.
I'm sorry for tarring everyone with such a broad brush, but I'll note that Graham made the exact same point in "A Unified Theory of VC Suckage".
You will lose a lot of time from important things at your startup if you can't either have the cajones to pin them down (of course, you're probably going to get a "no") or run your business in a way that works with or without funding.
From cofounding a company that got an A round, having a decent role at a very successful VC-funded company, and going out again for funding in '05, my gut is that by the time they've sent someone out to talk to you about database architecture, you're getting buying signals.
What does happen is that VCs are careful not to burn their bridges, they'll not feel comfortable enough to invest but they can't rule out that you'll pull some rabbit from an otherwise empty hat in the future and then they don't want to have the door completely closed.
This is indeed quite common. But when it's 'no', it really is 'no'.
Another typical VC disease is to want to be the second investor in your company, but never the first.
"Maybe" is so much more expensive than "no".
I'm pretty sure Paul Graham wrote about this in "How To Fund A Startup", but I don't have time to read and he doesn't like being misquoted.
Difficult line to tread, but is it worth it?