After you’ve received interest from a few venture capitalists, you might feel on top of the world. And you have a reason to feel that way—these are smart, focused people whose job it is to find companies that have the potential to be the best. That means you’ve been doing what you do well, which is great. What it doesn’t mean, however, is that the journey is over. A different journey has just begun, and after that there will be many more. For now we’ll focus on what your search for funding has led to: the process of choosing and confirming a Venture Captial firm.
It goes without saying to do some serious research on everyone who’s shown their interest in you so far. But often times founders get excited to see “labels” or successful companies the investor has chosen. The same people get extremely downtrodden to see failures in the company’s past. But here’s an interesting fact: their history doesn’t always matter. If they’ve invested in one billion-dollar company, that doesn’t mean that every company they invest in will be worth that much. The same applies if they’ve invested in one company that ended up failing. Nothing in this industry is concrete—mistakes are made and sometimes successes happen accidentally. You might end up in one of those categories as well, but think of it this way: if you flip a coin once and it lands on heads, how likely is it that the next coin will land on heads? It’s still fifty percent—despite the perceived pattern, there’s no guarantee that things will work out as expected. If your prospective VC seems to be a perfect match but has one failed project under his wing, don’t turn him down. It’ll likely have no effect on you.
What can help is if they seem dedicated to their past projects (though not so much as to give you the idea they won’t have extra time). Another good indicator of success is if they’ve invested in companies in your field that have shown good yields. There are some VCs out there, too, who are so good at the game they’ll have several name-brand successes under their wings. If one is interested in you, their experience with taking more than one or two companies to big heights will be helpful (but it again does not necessarily mean the same will happen to you).
You’ve also got to keep something else in mind: timing. Those new to venture capital might be surprised to discover that there are seasons for collecting it, and seasons in which you might come up empty-handed. Raising Venture Capital from November 15th to January 7th, for example, and from July 15th to September 7th is very difficult, so you should have your first partner meeting outside of those dates. The reason for this is the “blackout Venture Capital seasons”, or the seasons in which you’re unlikely to meet with the Venture Captial firm you’re looking for, are vacation seasons. Many Venture Capital partners take weeks off in August and December, and though some still work it will be tough to arrange a meeting in which they are available. The time they have during the weeks surrounding their vacations is often booked to the brim, and you probably won’t have their full attention. So be wary of the VC vacations, and make sure you book your meeting before or after those times (the best times to start your process are January 6th to May 15th and September 8th to October 15th).
And when it comes time for that anticipated meeting, relax a bit. Though this is an extremely important moment in your company’s life, when it comes to interacting with VCs remember that it is just that: an interaction. Send them your PowerPoint deck ahead of time so they can ask more in-depth questions during the meeting. Talk to them. First talk about yourself (that’s okay here) and how you came to start this company. Later, be able to talk about your company like you would to a colleague or an intrigued friend—make sure they’re engaged and answer all of their questions.
It’s also a good thing to keep in mind that a venture capitalist invests more than money—they’re not just a bank. Though many VCs haven’t been entrepreneurs themselves, all of them have gone through the process of starting a company. They’ve talked with tens and even hundreds of founders and are much more adjusted to this game than you are. No matter how stressful your job may be, theirs’ is not an easy one. So resist any urge to get defensive or act as though you simply deserve the investment because you’ve worked hard. Every founder who makes it this far has spent just as much time perfecting their company. Your goal here should be to work your energy together with the VC’s and to create camaraderie with them. This isn’t a sales pitch—again, this is an interaction. Talk with them, not at them.
After that interaction, make sure you get to know them well. Many people say getting Venture Captial is more permanent than getting married because a marriage can end in divorce. If you lose a VC and they pull their funding, you might not have much of the company left. With that sort of attachment, getting venture capital should be an extremely thoughtful process. Connecting with a VC for a decent chunk of time can clue you into things you didn’t notice at the first few meetings. They’ll also gain a closer personal connection with you. Good or bad, these new discoveries will improve both of your decisions in the long run, and your relationship is bound to be more successful with that benefit.
In the meantime, it would be wise to get a lawyer who specializes in deals. This can be pricy. If you know a lawyer, or know of one who’ll agree to work for minor shares in startups, it’ll be a lot easier on your wallet. But even if you have to pay for one out of your own pocket it’s an important step to take to make sure that all deals work out with both sides knowing what they’re getting into. This lawyer should be knowledgeable with term sheets and be able to help you decode their legal jargon. For a quick rundown on their specifics, check out the infographic on the right.
Term sheets are an important part of VC investing, and they’re one of the first things a company will offer you if they’re truly interested in a deal. They can range anywhere from four to eight pages long, with other documents ranging up to a hundred pages (in which case your trusted lawyer friend will definitely come in handy). But with all that said, a VC only needs three key factors in the sheet. Don’t be afraid to negotiate it down to these three—some VCs may ask for more and put you in a dangerous situation if your company doesn’t do well:
- When things are going well, a VC should have the ability to invest more money to maintain their ownership of your company.
- When things aren’t going well, a VC will (justly) want to get their money out first.
- A VC should have a presence of a seat on the board, which comes hand in hand with the ability to know exactly what’s going on with your company.
Lastly, know what you want and be able to ask for it. Depending on what you want, certain VCs will work better with your company than others. If you’re looking for someone who’ll be able to connect you with certain people, make sure you ask prospective VCs if they can do just that. There’s no other way for you and your VC to work out exactly what each of you wants from your agreement. You have to ask, and they have to be able to provide evidence that they can get you what you want. If your needs don’t line up, it might be best to find someone else.
In the end, when you find a venture capitalist who works for you, your company will blossom. Your work isn’t done, but with the added perspective of a seasoned VC you’ll have the ability to focus on what you do best in your company. And that is a wonderful thing.