Raising VC money: getting a strong start with your VC

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.

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