This is the eighth and final post in a Friday series on “raising VC money.” I hope the series has been helpful to entrepreneurs. If you liked it, please consider Tweeting it or linking your blogs to it, so that other entrepreneurs can find out about it?

Today, we’ll cover the topic “getting a strong start with your VC.”

So, you’ve finalized the legal documents with your VC (more here). What now?

Well, first up, you’ll sign a bunch of papers. The closing of a financing is a bit like closing on a house. Your lawyer tells you where to sign, and you do it.

Then, company counsel will file a charter with the State of Delaware. Once that has happened, the VCs wire their money to the company bank account.

That’s it. You’re done!

It’s a bit anti-climactic, actually. Your fundraising process is a time of intense adrenalin rushes, and suddenly, it ends. Your company has an eye-popping amount of cash. You’ve done it. You closed a VC financing.

Unfortunately, the work is now just beginning. Many entrepreneurs today shoot for a big financing at a high valuation. That can be a good thing.

But, remember this: VC money is like credit card debt. You have to pay it back and with interest. VCs are targeting 30%+ annual returns on their money. That’s a steep interest rate.

Sure, company failures happen all the time, but the more VC money you lose, the more “explaining” you’ll have to do regarding “what happened.” If you try to raise VC money for another start-up in the future, other VCs will definitely call your first VC for a confidential reference check.

VCs are very honest with each other on these calls. There’s an unwritten rule in the industry that you help each other out when you get a call like this about an entrepreneur. After all, tomorrow, you may be calling that same VC to return the favor.

The best way to have a great relationship with your VC is to kick total butt in your business plan. After all, isn’t it easy to get along when things are going well?

But, what happens when things don’t go well, which is usually the case for a period of time? In spite of your best efforts, your start-up will face challenges and likely have to pivot away from danger and towards a more promising market segment.

Here’s my advice: your first 30 days with your VC will set the tone. So, work hard to build a mutual relationship of trust and productivity. Some thoughts on that:

Advice #1: Clearly establish up front what will be “”success”. I encourage entrepreneurs to get the VC’s buy-in (ideally before closing) on the milestones that start-up will be shooting for. If your business is mature enough to have key performance indicators, which would be ideal. If not, you should articulate what you can accomplish that will clearly increase shareholder value.

There’s an old saying: “activity isn’t always progress.” Nearly all entrepreneurs I know are insanely busy. Yet, there’s always an 80/20 effect. A handful of items really matter and will move the needle on shareholder value. Then, after that, are a bunch of nice-to-have items.

Another important reason you want to do this up front is to put your VC “on the hook.” Let’s say that you do everything you say you’re going to do, but you cannot find a new investor to price your next round. You want to be able to go to your VC for an insider-led financing then. Agreeing on the metrics for a report card ahead of time will help you get there.

The Series B is the hardest round for which to find a new investor, and it will increasingly be that way. So, it’s very important to grease the skids to an inside-led financing as early as possible.

A friend of mine is an entrepreneur, and he had a very frustrating time working with one of his VCs. That VC would not articulate what he wanted to see before he would be willing to go forward with an inside round. This entrepreneur also takes blame because he did not establish a baseline plan for his company up front. He tried to do so much, much later, but by then, his business was not generating much traction. So, the VC was reluctant to be put “on the hook” when the company was clearly going sideways.

Advice #2: Set expectations of what you want from your VC. I remember a board meeting with Gordon Hoffstein of Be Free. Gordon is very savvy. Be Free went public and then sold to another company. He did all this before, during and after the Web 1.0 Bubble and Collapse. Incredibly stressful times. Gordon knows what he is doing.

At the first board meeting, he kicked it off with a bunch of “ground rules” written on a flip chart. Some of them included:

• Start Board meetings on time. He promised that if the VCs showed up on time, he would end on time.
• No checking email during Board meetings. His view was, “Let’s maximize the value of our time together.”

He had a bunch of other ground rules, all of which made so much sense. Here’s what’s scary, though. I’ve been in VC since 1998. Gordon is the only entrepreneur I know to set up ground rules. I think more should.

Advice #3: Be honest about problems, but also, propose solutions. Unfortunately, the VC-entrepreneur relationship is asymmetrical. The VC can fire you. You cannot fire the VC.

So, given this, you must always be honest about concerns about the start-up. When an entrepreneur hides problems, the truth usually comes out, and that really makes Board members angry. However, you must also keep in mind that you must be the author of the solutions. You are at the company every day, and the VC is not. So, always be open about problems, but also, recommended solutions.

If you honestly do not have a pre-determined path, then it’s OK to propose a handful of proposed solutions and to brainstorm together. I think the best entrepreneur-VC relationships are ones whereby the VC wants to help the entrepreneur and doesn’t see investments like lottery tickets, where you chuck out many small checks each year and hope that one “hits” (more here). I know this is a self-serving comment, but nearly all of our in-bound flow at Kepha is from founder-to-founder word of mouth. So, being helpful and transparent is great for business.

So, that’s it. With that, I’ll conclude this Friday series. Thank you all for the kind words of support! I’ve really enjoyed the opportunity to connect with so many new people. I hope these posts have been helpful to you.

This is the seventh post in a Friday series on “raising VC money.” I’ve really enjoyed writing these posts and to have an opportunity to interact with many folks. Thank you for the encouragement!

Today, we’ll cover the topic “how to negotiate the legal documents.”

So, you’ve successfully pitched the VC and his partners (more here) and have negotiated a term sheet (more here). What now?

First, you should really feel great about your accomplishments so far. Fundraising is a very intense time, filled with many highs and many lows. I know this. At Kepha, we’ve done three fundraisings. We’ve done it once in a good economy and twice during massive stock market collapses.

So, I say this as a fellow entrepreneur: enjoy this moment.

Once the term sheet is signed, you’re truly in the 9^th inning. Lawyers for you and your VC will now take the term sheet and translate it into a longer set of final legal documents.

There usually isn’t much for you to do during this time, frankly. The lawyers will draft a document, circulate amendments and generally handle everything. A closing date will be set, you will sign the documents, and the money will be wired into your account.

It’s actually a weird and eye-popping moment to log into your company’s bank account and see a number with so many zeroes.

However, there are a few things you should consider doing:

Advice #1: continue to make progress and publicize any good news. A term sheet is not a binding document. A VC can withdraw from the financing at any time. So, you are still in the due diligence phase and everything you do or say will either help or hinder your cause. So, continue to make progress on your business, and if you do so, share the good news with your VC.

Advice #2: do not over-lawyer this process. Some very young and aggressive attorneys may try to “score points” with you by finding an arcane detail and trying to win it for you. These debates often can delay the closing. I think that good attorneys get deals done.

Make sure you decide and communicate to your attorney what is “must have” vs. “nice to have.” How you manage your attorney is a proxy for how you will manage employees, customers and strategic partners. Impress the VC with how you manage this part of the legal process.

Advice #3: stay in touch with the VC. Negotiating the legal documents takes three weeks at least. It sounds like a lot of time, but these documents are enormous and when one lawyer sends a draft to the other side, they need a day to read it, a day to get your comments, etc.

So, do not let the relationship with your VC go stale. Find a reason to reach out and have a meaningful interaction. One idea is to come up with some draft key milestones for the company and come to agreement on them. That is usually a meaty discussion that is fun, and most important, will create alignment between you and the VC.

A few years ago, a VC friend led a term sheet for a new financing and brought in a partner at one of the most well-known Silicon Valley VC firms. That California VC signed the term sheet, and then, went radio silent. The entrepreneur didn’t really engage that VC.

Suddenly, that west coast VC mentioned that he was pulling out of the term sheet. To this day, my friend has no idea why that famous VC would sign a term sheet and not follow through. But, it happened. So, my advice: be paranoid. You are still in the sales cycle. Make sure you close the VC.

Advice #4: be prepared for a Plan B. If the stock market collapses, or there is a terrorist attack, your VC may waver. I know this sounds unfair, but I remember many VC firms withdrew their term sheets after the March 2000 Web 1.0 crash and the September 2008 stock market collapse. It’s simply human nature. When the future is uncertain, some partnerships will want to hunker down until the dust settles.

The best thing an entrepreneur can do in this situation is create real progress with his/her company. You cannot control what a VC does or does not do. Nor, does it make sense to keep calling on other VCs when you’ve already signed a term sheet. This can be an enormously stressful time for an entrepreneur, but you have to stick to your knitting.

Such a cataclysmic event happened to us at Kepha (and I wrote about it here). We were raising money in the summer of 2008. Everything was fine. Then, as I wrote:

We targeted the closing for the fall of 2008. In September, suddenly, the stock market collapsed.

Lehman failed, bankruptcies started and untold layoffs started. Large investors wanted liquidity and fled from any commitments that locked up their capital, such as with hedge funds and venture capital. The very existence of the free market was being questioned.

Our investors went ahead with the funding. We’re incredibly grateful to them.

Behind the scenes, we were already making a Plan B in case the funding didn’t happen. We were prepared to slow down our investment pace to make sure we had enough dollars for the existing portfolio.

An entrepreneur can decide to go the angel route or skinny down the business plan to need less initial money.

The amazing thing about being an entrepreneur is this: you have total flexibility. Unlike large companies that cannot pivot, you can be very nimble and react instantly. Speed is a start-up’s greatest asset.

Advice #5: follow your gut. Just as the VC is continuing to watch your behavior, you are doing the same thing to the VC. If he ever starts to behave questionably, drop the financing immediately.

This is a very hard to decision. Your company needs capital and you’ve done a lot of hard work to get the money. Why walk away now?

Simply put, I think a VC financing is more than about the money. Ideally, it is about the partnership relationship between a VC and the entrepreneur. If you are feeling concerned about the VC before the closing date, don’t go ahead.

I write this because the downsides of a poor relationship are enormous. First, the VC will forever be a reference for you. For your next company, other VCs will call that VC. You won’t know that these calls are taking place, but I promise you, they happen all the time. And, VCs tend to be very honest with each other.

Second, you and that VC will be spending a lot of time together on very difficult issues. If you cannot have an open and trusting relationship at the beginning, you’ll have very strained interactions that will adversely affect the company’s prospects. Remember, you’re no longer just a founder but the founder of a company that will have employees and shareholders. You must do what is best for the company at all times, even if it is painful.

Third, venture capital money is like credit card debt. You have to pay it back with significant interest. The money isn’t free. Some entrepreneurs today are very focused on raising a big round at a high valuation. That’s all good. For me, I think that’s the beginning of the journey. And, the larger the financing, the higher the VC’s expectations.

So, ask yourself the following questions before your financing closes:

• Is this VC adding real value?
• Do I enjoy spending time with this VC?
• Can I share bad news with this VC, and will he help me productively find a solution?

So, I hope this is helpful. Next issue, we’ll conclude the series with “how to have a strong start with your VC.”

This is the sixth post in a Friday series on “raising VC money”.  For the list of topics we are covering, click here.  In this post, we’ll focus on “how to negotiate a VC term sheet.”

Let’s say that after interacting with a VC, you’re at last invited to the all-critical partners’ meeting (more here) to pitch the group.  After you leave the conference room, the VCs will huddle together to share feedback and decide on a course of action.  If the answer is “yes,” your VC Point Person will contact you very soon to begin the term sheet process.

A term sheet sounds complex but really isn’t.  Many blogs have touched on the various terms in the document, and so, I won’t cover those here.  Instead, I’ll focus on the overall dynamic of this negotiation and how an entrepreneur may handle it.

Advice #1: retain a lawyer who knows well VC financings.  A common mistake I see entrepreneurs make is when they hire an attorney that is very capable, but whose expertise is elsewhere.  VC terms and norms are very specific.  An attorney who covers real estate, general corporate law or leveraged buy-outs will not be calibrated.

In the same way physicians specialize, attorneys do the same.  So, make sure you’re not only getting advice but well-calibrated advice.

For example, a friend of mine wanted to leave a hedge fund and start a new one.  I introduced him to an attorney who specializes in helping people leave hedge funds and start their own.  To save money, my friend instead went to a different attorney, who was not a specialist.  The exit negotiation was a disaster, unfortunately.

Advice #2: own the negotiation.  You should use your attorney as a sounding board, but you should negotiate the financing.  You can call time outs as necessary to call your attorney, but this is your chance to begin a new phase in your relationship with the VC.  You’ll likely have some difficult topics to discuss on the Board down the road, and the ability to have open, honest and direct conversations is critical.

Advice #3: stack rank the open issues.  The VC will propose terms and you will likely have amendments.  Realize that you may not get everything you want, nor will he.  So, if you both can clearly communicate what you really need as opposed to what you want, the discussion will be positive and quick.  This is the “win-win” approach.

It’s also important because you then can inform your attorney what you really want.  Some younger attorneys are very aggressive about showing their value to you and will fight for a particular term to show how they’re helping you.  I think that’s all fine and good if it’s a term you actually care about.

Advice #4: qualify the VC’s interest level.  I would say 90% of term sheets being offered are genuine.  The VC has done his homework and wants to invest.  However, realize that most term sheets have a “no shop” clause, meaning that you cannot speak to another VC.  So, it would be terrible if you signed a term sheet, stopped your fundraising, only to have the VC drop out later.  If a VC has not yet done his homework, do not sign a term sheet.

Advice #5: do not engage in term sheet wars.  I’ve seen negotiations get out of control when the entrepreneur’s attorney makes massive edits to the VC’s term sheet.  The VC’s attorney then responds with an equally onerous draft.  More drafts ensue.  The legal bills pile up.

Rather than telling your attorney to hack the document, call the VC directly and work out the issues.  Have a handshake agreement on a revised set of terms and then inform your attorney of the changes.

Advice #6: always, always remain calm.  A bit ago, we were negotiating a term sheet with an entrepreneur.  He was a very effective presenter and had great ideas.  However, his personality changed during the term sheet negotiation.  He became very emotional, erratic and made bad decisions.  We then caught him telling half-truths.  So, we withdrew our term sheet.  We learned during this process that he couldn’t handle pressure.

We think people’s true selves come out during times of stress, and we weren’t comfortable with what we saw.

Advice #7: be honest.  One time I negotiated terms with an entrepreneur with a great idea.  After we agreed to terms, he tried to re-open the negotiation.  He had changed his mind and was hoping I’d understand.  A few days later, he did the same thing on some other terms.  I drew the line in the sand and we closed on the financing.

A few years later, this entrepreneur left the company and joined a public competitor.   The executives he had recruited to his company were flabbergasted.  I know people need to make a living, but I do wonder whether the vacillation I saw earlier was a sign of a major character flaw.

So, now 10 years later, if I sense dis-honesty, I’m done.  The entrepreneur, by the way, should do the same thing if he senses a lack of integrity in the VC.  The average time to exit for a start-up is now nine years.  Don’t partner with a VC unless your instincts give it a resounding yes.

So, I hope this is helpful.  Next issue, we’ll cover “how to negotiate the legal documents.”

This is the fifth post in a Friday series on “raising VC money”. For the list of topics we are covering, click here. In this post, we’ll focus on “how to handle the VC partners’ meeting.” It is a unique meeting. It’s a smaller version of pitching the Supreme Court.

So, you’ve done some research and have come up with a short list of VCs (suggestions here), you’ve figured out a way to ask the VC for a meeting (more here), and that meeting went well (more here). Your VC will now start due diligence (click here), and if everything looks good, he will then invite you to present to him and all of his partners.

This is a make-or-break meeting. It is the bottom of the 9^th, the bases are loaded, and your team is down by three runs. All eyes are on you. You will walk into a conference room, a bunch of VCs will be seated at a large conference room table, and you will stand up and pitch them. Anyone can interrupt you at any time and ask you a tough question.

Do well in that meeting and you’re likely to get money. Do poorly, and it’s very likely game over for you at that venture firm.

One important aspect is this: if you have yet to be invited to pitch the full partnership, red flags should go up in your head.

Here’s a tough living example. Last week, I heard a horror story from an entrepreneur. He had met with one VC, a junior partner, at a very well-known firm. He had dozens of meetings with this VC. He said he has emails from this VC saying his firm will invest.

Suddenly, the VC passed on this person’s idea. This entrepreneur had raised his burn rate due because he had added employees the VC wanted him to hire. The company folded and the entrepreneur had depleted his savings.

It’s tough to know what really happened in this situation, of course. There are always two sides to a story. But what is clear is that there was a severe communication breakdown between the VC and this entrepreneur.

Also, this entrepreneur had never been invited to pitch the VC’s partnership. He didn’t realize that he was still early in the sales cycle with that VC.

So, the flip side is very positive. If you are invited to pitch all of the partners, here’s the good news: your odds of getting money are decent to very high. Here’s why.

First, your business idea has been discussed a few times at that VC firm—and, you have passed the smell test. When firms meet (and they do so normally on Mondays), they spend most of their time on the investment pipeline. Which new start-ups look interesting?

When an investor likes you and your idea, he will put you on the “meeting agenda” for discussion at the next partners’ meeting. This VC Point Person will then introduce your company idea, and will then see how the partners react. At some firms, a Point Person writes a very long memo, which is circulated over the weekend to “socialize” the investment opportunity.

The goal if this initial intro is the Point Person wants to gauge his partners’ reactions. If many partners have serious concerns about you or your idea, your Point Person will likely “drop” you. It may not be worth his time to try to overcome the opposition.

If your Point Person is junior, or is a new employee with the partner title but without the partner economics, he will be the most sensitive to any whiff of opposition. On the other hand, a very senior partner may feel politically confident enough to do some diligence and try to persuade his group to come along.

Second, your Point Person will schedule a full partners’ meeting only if he feels it is a good use of time. Realize that many large VC firms have 50 to 100 (or more) companies in their portfolios (note, the web sites understate these numbers because seed investments are normally not listed there—more on that here). So, these VCs are working very hard monitoring the investments they’ve already made.

So, it is a very big deal for your Point Person to ask for 90 minutes from each of his partners (a one-hour presentation by you, and a private 30 minute de-brief discussion after you leave). A politically-attuned VC will not do that if he thinks his partners are likely to trash you or your idea. It’s a personal embarrassment, and no one wants to get an internal reputation for wasting his partners’ time.

Third, your Point Person will have done a great deal of work already and enters the partners’ meeting with some momentum. If his partners raise initial concerns about a new potential investment, a good VC will then do some due diligence to try to address those concerns.

For example, perhaps one of the partners has heard something negative about you. Well, your Point Person will then do some confidential reference checks on you. If they’re positive, he will then discuss his findings with that partner who raised the objection. Hopefully, that partner will then back off his concern.

At the next partners’ meeting, your Point Person will then present the diligence findings and suggest you are a good person after all. Objection overcome. The traffic light has gone from yellow back to green for your start-up.

So, given this reality, here’s my suggestion to entrepreneurs: heavily lean on the Point Person for advice.

This VC wants to give you money. He wants his partners to jump and down in excitement. He wants his partners to feel that he is a good VC who sources good stuff. So, your Point Person is aligned with you.

Every VC firm has its own style, and you need to understand how you can best communicate to them about what they care most. So, here’s some advice.

Advice #1: review your presentation with your Point Person. Ask for a meeting and get this person’s feedback on each slide, both on the contents of the slide, and how you deliver it.

Some VC firms want to start with market size, but others prefer that pitches start with the team. Some want a lot of financial projections, others care less about that. The point is this: don’t waste a lot of time on topics that firm doesn’t value.

Advice #2: ask your Point Person to go through each of his partners—and identify the skeptics. This is insanely critical. You want to know which partners are leaning forward on funding you, and which ones are leaning back. Ideally, your Point Person will share with you his partners’ objections and what you can say in the meeting to overcome them.

Advice #3: ask other entrepreneurs about their experiences at that VC firm. You’ll learn a lot if you can get a sense for that firm’s style. Do they have a lot of techie folks who ask a lot about technology, or are most of the guys from sales backgrounds and care more about what initial momentum you can show? Network around. Get best practices.

This is very important: is that firm’s decision-making collegial, or is there a Chief Partner (more on that here) who makes all the calls? You really cannot go to your Point Person for this info because it would be hard for him to admit to you that he may not have much power in his partnership. You need to ask other entrepreneurs.

Advice #4: after the meeting, force your Point Person to show his cards. After a full partnership meeting, you will leave the room and the group will then discuss your pitch.

Each partner will speak and give his thoughts. Some will like your idea, others may not. Your Point Person then has a very delicate job to do. He has to “read the room” very carefully and see if he has enough momentum to take the next step and give you a term sheet.

It is easy when everyone is positive on your pitch. It becomes hard if one partner has serious objections. Some of these debates are short, but some can be quite long and heated.

Regardless, the VC firm will come to a consensus on what to do next: invest, pass, or maybe. The first scenario is obvious. You will then be showered with love.

The next two scenarios can be tough to navigate. A VC firm may want to pass, but rather than insult you or to keep “an option alive” in case you get more momentum in the coming months, will instead say “maybe.” You need to try to find out if a “maybe” is a real maybe or a cover story. Force your Point Person to show his cards. You need to know if a maybe is instead a gentle and diplomatic “no.”

So, I hope this is useful info to entrepreneurs. Next Friday, I’ll cover “what to do when you get a term sheet.”

This is the fourth post in a Friday series on “raising VC money.” For the list of topics we are covering, click here. In this post, we’ll focus on the topic: how to handle VC due diligence.

So, you’ve come up with a short list of VCs (more here), you’ve asked for the meeting (more here), and the first meeting went well (more here).

Now what?

Unfortunately, this is the most challenging step an entrepreneur faces in the VC fundraising process. It’s quite unpredictable in terms of outcome, and there’s a wide range of time associated with it.

A VC after the first meeting may move quickly, slowly, or not at all. He may invest, but may not. His activity may have a stop-start-stop-start rhythm. And, many VCs keep their cards close to their vest and aren’t very up front about feedback. In other words, this process may make you go insane, or at least, make you very cynical.

Let me try to clarify this situation by mentioning a few things. Here are the cold, hard facts: 1. VCs are paid to make money for their investors, not to be business plan reviewers—that doesn’t explain away rude behavior, but that’s the reality of what their “day job” is; 2. Some VCs will not provide honest and direct feedback—they don’t want to insult the entrepreneur; and, 3. VCs are busier today than they’ve ever been since the 1998-2000 Internet Bubble (more here).

The good news is this, however: VCs are paid to invest—they are looking for reasons to say “yes” to your financing. It’s a myth that VCs enjoy taking up entrepreneurs’ time and then declining financings. Instead, VCs are paid a lot of money by their investors to find great new ideas and create new companies. Their funds have to go somewhere. Why not to you?

So, with that, here are some suggestions for entrepreneurs.

Advice #1: ignore what the VC says, and focus on what he does. If a VC is interested in your idea, he will act. The VC will propose immediate next steps. Your colleagues may get a call to check you out. He will be in sell mode.

If a VC politely says your idea is interesting, but takes no action, then that’s what I call “the California no.” For some reason, your business idea wasn’t enough for him to change his schedule and do work. If he’s slow to reply to your follow-up emails, it’s not going to do much to email him a dozen more times, or to start calling.

So, actions speak much louder than words.

Advice #2: don’t stress about what you cannot know. A savvy entrepreneur I know once told me: “I never stress about what VCs are thinking after I pitch them because it’s impossible to know.” His point is that a VC who doesn’t respond strongly to his pitch may be ambivalent for a lot of reasons—and, you will never know why.

Some possible reasons are:

- The VC took the meeting as a favor and was never interested in investing
- Your pitch or delivery was bad
- He doesn’t believe in your space
- He is on too many Boards and is holding out for a later-stage investment
- He is secretly thinking of leaving his firm
- That VC has limited power to influence his partnership
- He wants to see if other VCs show up and validate your idea for him
- He reference-checked you with someone he knows—and, it was negative
- His partners really didn’t like the idea
- He is a new VC– the senior partner supervising him isn’t interested

The list is endless. The point is this: it’s near impossible for you to know what truly happened at that VC firm. So, don’t stress about it. Move on to the other VCs on your list.

Advice #3: understand the VC firm’s decision-making process, triggers, and timeline. Each firm has an explicit process for screening investments. At large firms, there’s a gradual process of escalation. You may start with one partner, then have to pitch two to three, and then, all partners. The VC may have to write an investment memo at some point in the process. At other firms, there may be no written correspondence, but there may be a clear decision-maker. The point is this: every VC firm has a process, and you need to know what it is.

You want to know the process and the steps in the process to gauge where you are. You also want to know what triggers movement from one process to another. For example, at our firm, we have three partners who have to meet with every new investment and sign off. This happens after the partner working the opportunity has done diligence and recommended the investment to the team. We call this “having conviction.” What this means is that it is very hard for us to invest after just one quick meeting, but when we commit to your company, you have the partnership’s full support. It also means that you’re asked to present to the Kepha team, your VC sponsor has already bought into your business idea. That’s all good news. Very few teams pitch to our full partnership, and you’re in the 7^th inning with us when you’re asked to do so.

Advice #4: do what you say you will do. During every interaction with the VC, you are being evaluated. The VC is looking to see how you handle yourself, how prompt you are with follow up, and how organized you are. The idea is that if you’re organized and “on point” with VCs, you’ll be the same way when you’re recruiting impossible-to-get employees and strategic partners. The diligence process is a great opportunity for you to shine.

Finally, I will conclude with this: the process is a great way for you to get to know the VC. Is he straight-forward in his communications? Is the chemistry good? Does he display value-add? Does he have time to work with you?

Well, that’s all for now. Next week, we’ll cover the topic “how to handle the partners’ meeting.” A Happy Passover and a productive Good Friday to all.

This is the third post in a Friday series on “raising VC money”.  For the list of topics we are covering, click here.  In this post, we’ll focus on “how to handle the 1^st VC meeting.”

So, you’ve done some research and have come up with a short list of VCs (suggestions here) and you’ve figured out a way to ask the VC for a meeting (more here).  He accepts.  The meeting is on, and it’s show time.

What now?

Now, this is going to be a strongly-worded observation.  But, entrepreneurs need to know this: after 15 minutes, a VC usually knows if he wants to invest.  Your presentation may last an hour or more, but at minute 15, you are at the point of no return.  The VC will do a lot of due diligence to confirm his instincts, but his “gut” has spoken.

I know 15 minutes doesn’t sound like a lot, but VCs are in the “pattern recognition” business.  They’re like doctors.  When your physician sees you, there’s a Q&A session.  They ask you about symptoms, and quickly, try to get down to some probable root causes.

A VC is similar.  An experienced VC normally is able to get a feel for your team, market and product very quickly, and with some questions, will get a sense as to how attractive your business idea is to him.  Most VCs will say that it takes about five years to develop this mental screen.  It’s one reason why it takes a long time to get decent at the business.

Given this phenomenon of a snap judgment, here is some advice.

Advice #1: present only 10 slides.  When I worked at Bain, we assumed that it takes about three minutes to present each page of a PowerPoint.  Decades later, I still find this to be a rule of thumb.  Now, if the VC asks a lot of questions, go with the flow, but make sure you can cover your part of the meeting in 30 minutes or less.

Advice #2: make a personal connection early on.  This doesn’t have to be much or take a long time, but do it.  I remember the first time I met Tom Burgess of Linkable Networks.  For some reason, we had a cool discussion about cars.  It took 30 seconds, but he no longer became a possible business investment, but an interesting entrepreneur.  He immediately personalized the meeting.

Advice #3: manage the meeting well.  When I meet an entrepreneur, I’m looking for them to manage the meeting.  My guess is that if they cannot manage me in a meeting, they will not be able to do so with recruits, strategic partners, and customers.

Advice #4: read the VC’s body language.  I met with an entrepreneur a few weeks ago.  He had an interesting idea, but started with a lot of slides on his view of the market.  It was thoughtful, but one I knew pretty well already.  So, I told him that it might make sense to skip those slides and get to the product.  After saying OK, he then proceeded to plod through his presentation, at the same pace.  I then suggested a second time.  Nothing changed.  So, I gave up and just let it go.

Similarly, if a VC is interested, they will become increasingly excited.  They’ll get more aggressive with their questions.  They’ll begin to lean forward in their seats.  They’ll start to sell their firm’s capabilities.  They’ll propose next steps.  You have won the meeting.  They’re interested (for now).

Advice #5: don’t lie.  Don’t even exaggerate.  If you don’t know the answer to a question, an “I don’t know” is perfectly fine.  One entrepreneur who does this well is Jay Habegger of OwnerIQ.  In a Board meeting, when asked a question he isn’t prepared to answer, he says: “I don’t know, but here’s our guess and what we’re doing to dig in.”

One thing I’ve noticed is that it’s pretty easy to guess when someone isn’t telling the truth.  They usually either break eye contact or they shift their sitting position.  It’s almost sub-conscious, but it’s something I’ve noticed.  It usually means they’re not telling the truth or they’re making up an answer on the fly.

Advice #6: ask for the order.  When the meeting ends, specifically gauge the VC’s interest.  Fewer than 10% of entrepreneurs do this.  The others are missing a great opportunity to qualify a VC’s interest.  After all, why spend more time on a VC who isn’t interested?

I suggest you be very specific and force the VC to state their level of interest.  Pin them down.  Make them show their cards.  Most VCs hate to say “no,” and so, will be generally supportive but will be very vague about next steps.

Some sample questions:

-          Have you seen any other pitches in this space?

-          How can I improve my presentation?

-          Are you interested in a second meeting?

-          Where does this rate among all the plans you’re seeing?

-          When should I next touch base with you?

Advice #7: go back to Yoda.  Last week, I suggested that you get a warm intro to the VC (more here).  I called this person your Yoda.  I suggest that you go back to that person.  Thank them for the intro and report how the meeting went.  Ask Yoda to then go back to the VC to get back-channel feedback.

You will save a lot of time by doing this.  When you fundraise, you are managing a sales pipeline.  You want to focus only on the high-probability VCs.  Moreover, once you start the VC meetings, you want to move fast.  You don’t want your business plan to be perceived as stale.  So, you need to optimize ROT, your Return on Time.

So, those are my two cents.  I hope this is helpful to entrepreneurs.

Next week, we’ll cover the topic “how to handle VC due diligence.

This is the second post in a series on “raising VC money.”  For the list of topics we are covering, click here.  This post will cover “how to get the VC meeting.”

So, after doing all of your homework (more on that here), you now have a short list of VCs with whom you’d like to meet.  What now?

Unfortunately, the more senior and experienced a VC becomes, the busier he gets.  I wrote last week about how slammed senior VCs are.  I thought I’d expound on that.

First, an experienced VC is usually on 10 to 15 Boards (I have some data here).  This involves: attending Board meetings, having interim calls and meetings with management teams, interviewing candidates, handling in-bound press calls, approving compensation proposals, making introductions to key partners and customers, updates to the VC partnership on key events, and helping management raise its next round of financing.  Moreover, in a group of 15 companies, two or three are likely to be in “crisis mode,” and these companies will absorb huge amounts of time.

The VC firm may have broad scope.  If a firm invests nationally or abroad, tack on a lot of airport and flight time, both for Board meetings and evaluating new investments.  Then, add the recovery time needed from jet lag, and the crush of to-do items that awaits the VC when he returns.

In addition, the VC has firm-wide responsibilities.  These usually include a weekly partners’ meeting at which investment decisions are made, multiple meetings to help partners screen potential investments, quarterly report-writing to the investors, preparing for a very important in-person Annual Meeting with all of the firm’s investors, review of the firm’s marketing activities, and any and all HR issues.

A VC is also taking meetings with potential new investments, and doing due diligence on the most promising ones.  A VC at any point in time usually will be conducting research on six or more new investments at the same time.

VCs are often at outreach events, speaking on panels and going to networking events.  Also, many blog and Tweet.

Moreover, VCs are often approached to join non-profit boards.  Many of these charities are extremely worthwhile, and so, many VCs sit on two or three non-profit boards.  A private school to which the VC sends his children is often on that list.

Last, if a VC firm is fundraising, it is enormously stressful.  Once fundraising starts, there is a huge incentive to finish quickly, so that the new fund is not perceived as stale by the market.  A large VC firm will divide into sub-groups and the teams will travel around the globe giving their pitch.

Partners are often “on call” during this effort, which means they drop everything if a potential investor wants a meeting or a call.  Prospective investors often have data requests that need attention.

Also, there is a prolonged and complicated internal negotiation on the economic splits in the new fund.  Who gets what percentage of the fund’s carried interest and the management company’s cash flow (for more on how VCs are paid, click here)?  Who is fired?

Another complication to VC fundraising is that many institutional investors do not want to be more than 10% of a VC fund.  So, the VC usually needs at least 10 major investors for a fund.  Some of the large funds have over 50 investors!  Unlike an entrepreneur, who only needs one or two major investors in a financing, a VC fund needs a lot more.

Once (and if) a critical mass of interested investors develops, the VC then needs to negotiate the new fund’s legal documents and terms.  This can be complex, as the VC is negotiating with what may be dozens of investors at the same time.  It is common for the VC’s legal bill at this point to run $500,000 or more!

So, you get the idea.  They’re busy.  You have a great business plan.  How do you get a VC’s attention?

The most important thing for an entrepreneur to know is this: a VC is in the business of managing capital, but more important, his time.

There are three major implications from this point of view.

First, it is imperative to get a warm intro to the VC.  The odds of a cold call or a blind email resulting in a meeting are extremely low.  Simply put, every entrepreneur who contacts the VC has a great idea, is in a big market and is an honest and hard-working person.  Imagine if every day you had to watch TV commercials for a living.  Quickly, some of the ads will start to sound the same.  Similarly, a VC almost becomes immune to sales pitches.

So, this information overload forces VCs to use “proxy screens”.  They hope to leverage other people’s assessments at the top of the funnel to triage the flow.

Second, be very efficient with your approach.  When introduced to a VC via email, many entrepreneurs will “seize the moment” and email a very long presentation or very long write-up on their company.  Some even submit a well-written and very long business plan.  Don’t do this!  In the email, your goal is not to sell stock in your company.  It is to get a meeting.

Third, the VC’s Executive Assistant can make or break your meeting.  The EA is the VC’s chief of staff.  He/she will schedule the day, arrange for logistics, and most important to the entrepreneur, will prioritize what the VC does.

You want to be incredibly polite and efficient with the EA.  You want to be on that person’s good side.  If an entrepreneur isn’t organized, polite and respectful to a member of the VC’s team, it’s unlikely he/she will be that way with future employees and customers.  In fact, I go out of my way to know what my EA-colleague thinks of a prospective entrepreneur.

EAs cover the logistics for multiple VCs, and so, you can imagine how many balls they juggle in a single day.  Phones are ringing off the hook, the details of trips and meetings need to be arranged, and there’s usually controlled chaos every day.

So, given this reality, here are the three pieces of advice I’d like to offer.

Advice #1: find someone with street cred.  Since you don’t know the VC, you need an intro.  Ideally, that person has some “street cred” and will encourage the VC to meet with you.

I think first on the list is the founder with whom the VC has previously built a successful company.  There’s a lot of built-in trust in that relationship.  Also, nothing brings up warm feelings like the memory of cash hitting the bank!  This person is your Yoda.  He/she will show you “the way” to the VC.

Next up is a founder in a current portfolio company that is doing well; the company isn’t liquid yet, but things are rocking.  Further down the list are angels, attorneys, recruiters and personal contacts.  The hit rate from these sources, though, is mixed.

One nuance to consider is this.  Entrepreneur X wants to introduce you to a VC with whom he has never worked.  Should you do this?  I think it’s a mixed bag if other VCs previously have backed that entrepreneur.  That’s because the VC you’re targeting knows that he is on the “B list” of prospects.  You’ve probably met those other VCs already, and they’ve already passed on your idea.  No one wants to be second fiddle.

Advice #2: a short email that shows you mean business.  I think the email should include: a clear description of your business idea; cool and relevant parts of your background; any evidence of traction (more on this below); asking for a 30 minute meeting; and a request to be connected with that VC’s EA to coordinate logistics.

Now, you may be at a stage where you don’t have product, but you can still show “traction” by sharing some market research findings you’ve done or list the prominent experts who have agreed to advise you.  You can articulate the pain point you’re solving with a dramatic example.  Show something that indicates some form of validation.  The best sales pitches, like the best writing, don’t just “tell”—they “show”.

Last, I know that a request for 30 minutes feels short.  But, wow, you will impress the VC if you only ask for that.  Everyone wants an hour, and you’ll differentiate yourself more if you ask for less.  If a VC is interested, you’ll find that the meeting will go for longer.

Advice #3: assume everything you say to the EA gets back to the VC.  I don’t have any advice here other than to make your interactions with the EA as painless as possible, and perhaps, write a thank you email to the EA at some point.  It’s probably all the stuff our parents taught us, but seems to get lost in the shuffle of busy days.

So, that’s it for now.

In our next post, we’ll cover “how to handle the 1^st VC meeting.”

This is the first post in a Friday series on “raising VC money”.  For the list of topics we are covering, click here.

In this post, we’ll focus on the first topic: which VCs to target?  I think it’s a critical step in the fundraising process.  You have a new business idea, you’ve spent a ton of time on a presentation, and you already know that random spam-email to VCs won’t get you anywhere.

So, what should you do?

This sounds obvious, but you should raise money from people who can and want to give you money.  There are a few implications to this.

First, understand if a VC firm can or cannot invest.  A VC fund contractually lasts 10 years, but there’s a very important legal term called “the investment period.”  This is the time period during which a VC fund can invest in new companies.  After that period ends, a VC cannot.  A VC can invest in follow-on rounds in companies that already exist in the portfolio, but he/she cannot invest in a new project once the investment period expires.

Investment periods are almost never longer than five years long.  Moreover, most firms “fully commit” a fund in about three years (more below).  After that, they have to raise a new fund to invest in new companies.

Second, an entrepreneur should target a “Goldilocks” VC who knows your space–but isn’t jaded by it.  VC firms encourage their partners to specialize.  It is simply better for the firm if one partner focused on Consumer Internet, another looked at Clean Tech, a different one evaluated Big Data, etc.  Divide and conquer.

So, you definitely want a VC that is up to speed on your space and has the contacts to help.  But, here’s the key: VCs often get jaded.  For example, in the Internet advertising space, some VCs have made so many investments in that sector, that they feel pretty full already.

On the other hand, if a VC has never made an investment in your space, you then have two sales cycles to manage.  You have to sell them on the sector, and you then have to sell them on your company.  That’s a lot to do.

Ultimately, you want the “Goldilocks” VC.  Someone who is expert, but still has the capacity to make more investments in your space.  You want that golden median.

Third, an entrepreneur should target a VC who has power and time.  Working with a junior VC can be very rewarding, but tricky.  That’s because someone new to the business, even if he has the “partner” title, will be given a very short leash by his partners.  So, ultimately, there’s a decision-maker in the background who has to sign off, which can complicate the dynamic.  A senior partner who has power within the partnership can get your idea funded much more quickly, and if you hit a bump, can shepherd through a follow-on financing when you need it most (for more on how VCs get paid, and how power is distributed at VC firms, click here).

Unfortunately, as a start-up’s time-to-exit has increased over the years (and as VC funds grew dramatically), many VCs are on many Boards.  Moreover, with rising VC turnover as partners switch firms or start new ones, the remaining partners inherit the Board seats, which makes the Board seat load even more acute.

In addition, the workload may be particularly severe for the most senior partners.  First, they normally handle the fundraising and communication with their investors (which is a huge amount of time), and second, those partners’ roles may have changed.  They may have gone from being VCs to a general manager of other VCs.

Regarding the latter point, if a firm is very large, the senior partner is keeping tabs on his partners’ decisions.  Moreover, if that firm has an extension fund (e.g., an India fund, a China fund, or a growth equity fund), a senior partner manages that one, too.  So, the most experienced VCs often have the busiest schedules.  As a result, some senior partners rarely make investments.

Given this reality, there are three pieces of advice I’d offer to entrepreneurs.

Advice #1: find out that VC firm’s last fund closing date.  New funds are announced and it’s easy to search for the old announcements.  If a VC’s last fund closed more than four years ago, just “be aware.”  If you can, ask the VC what percentage of the fund they have invested and what percentage is reserved for existing companies.

Each quarter or so, most venture firms engage in a “reserves management” exercise.  They look at each company one at a time and put in an estimate as to how much future capital may be needed for the company, which they then “reserve” or set aside.

Knowing this total number is important.  For example, let’s say that a firm has invested about 30% of its fund in companies.  In addition, they have reserved an additional 60% of the fund for future financings in those companies.  In total, that fund is now 90% “committed.”  It means that they have only 10% of the fund available for new companies.  That’s critical to know.

Also, a fund nearing the end of its investment period may be less open to a very early stage investment.  Since a fund’s life (and fee stream) is 10 years, a VC has an incentive to both invest and exit from its companies in that 10-year period.  A VC can get extensions from investors, but this requires a legal vote that takes time and effort.

If a company these days takes seven years or so from inception to exit, then investing in a seed project in year five of a fund’s life is possible.  But, this company is likely to bump up against the 10-year window.  So, a seed-stage company should just be aware of this.  I don’t think it is a major issue, but again, like with many long-term relationships, an open dialogue is important.

Advice #2: focus on individual VCs, not the firm.  Based on what someone blogs about, or on which panels they appear, you can get a sense for the spaces an individual VC targets.  Moreover, if you look at which Boards they sit on already, you can get a sense for their capacity utilization.  If that person is already on 10 Internet advertising Boards, will you be able to be the 11^th?  It is possible, but just be aware.

Advice #3: target the most senior partner possible, but be prepared to be very efficient with your communication style.  Let’s face it: the senior partners have the power to get things done for you.  Also, in venture capital, experience really counts for a lot and there’s no substitute for someone who has worked with many companies.  You want an experienced VC on your Board, and VC is a difficult business to learn.  It’s a common data point among VCs (and the savviest institutional investors in venture funds) that it takes five years in the business before you really know what you’re doing.

Now, if the senior partner really likes your idea, but doesn’t have time to be on your Board, he will “pass you on” to another partner in his firm.  That’s still a good outcome.  The senior partner has “signed off” on your idea as a starting point, and that’s a great champion to have in the background.  Now, you will still have to convince this other and less-senior partner, but you are on your way: you’re now meeting with a partner who has power and time.

The complication about this advice is that VCs are busy.  You have a short list of VCs, but how do you get the meeting?  We’ll talk more about this in next Friday’s blog post. We’ll cover “how to get the VC meeting.”

Raising venture capital money sounds like something from the Dark Arts, but it really isn’t all that complicated.  Different approaches and different styles work, but there are some rules of thumb that seem to work well over and over.

I thought I’d write a Friday series on raising money from VCs.  I am thinking of covering the following topics

-          Which VCs to target?

-          How to get the VC meeting?

-          How to handle the 1st VC meeting?

-          How to manage due diligence?

-          What to do in the partners’ meeting?

-          What to do when you get a term sheet?

-          What happens when you negotiate legal documents?

-          How to get off to a strong start with your VC?

If there are other topics you’d like me to cover, please let me know.