Tuesday, August 21, 2007

Startup to IPO: Is the VC you’re presenting to interested?

If you haven’t read Guy Kawasaki’s post “The top 10 lies of venture capitalists” – read it first. I howled with laughter when I read it. And yes, it’s true.

I’ve raised my fair share of venture capital in six rounds over the last 10 years. And have probably given at least 100 (thinking about it maybe 150) pitches. Plus the pitches necessary for my IPO (definitely over 100 there). I've also sat on the VC side for at least 20 pitches and watched partners reactions to enthusiastic entrepreneurs.

My rule of thumb is: if you don’t get a very strong indication of interest in the FIRST meeting, where the VC really engages you, with enthusiasm, about your business idea, customers, market and technology (the interesting stuff that matters, not terms which really don’t until you have a live one) and where he has a clear vision of the next steps, then it doesn’t matter what words come out of his mouth – you’re not getting his funds money.

I was written up in the San Jose Business Journal this week and my current lead investor, Bandel Carano, is quoted as saying that he “agreed to finance FirstRain after a short one-hour meeting”. It’s true. I actually timed him and he gave me terms after 45 minutes. This is in stark contrast to many meetings I had had where the VCs did not understand financial services (odd since they are in it, but there you go) or search (except for Google which everyone wants to repeat but few understand it is just one (very successful) version of search) and so while they’d say many of the things Guy quotes I knew they were not going to bite. While it’s unusual to get terms as quickly as we did with Bandel, it is terrific as an entrepreneur to have investors who can make decisions fast. Yet again I believe it’s as important to assess the VC as a potential member of your team as vice versa - see my post All Venture Money is Not Created Equal.

Entrepreneurs often have happy ears. They hear what they want to hear. Sometimes you have to in order to keep going. Otherwise it would be too hard to get the energy up to sell to yet another group of VCs who don’t really get what you do and are listening only because they don’t want to miss out just in case you've got a hot company.

But, I would add, VCs also have a herd mentality. They’ll wait until someone else puts down a term sheet. So, if you do need more than one investor to fill out the round then it’s worth keeping all the folks on the sidelines warm to come back to – although in my experience if a tier 1 VC really likes your deal he won't usually want to share in his first round anyway.

(A related observation. Reading Guy’s blog he’s very balanced about using “he” and “she” when referring to VCs. There are so very few women in the business that I have only ever presented (twice) to female partners in firms that have already invested in my company. But, I applaud Guy’s imagining a different VC demographic than we have today).

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