You made it through the partner meeting, your email dings, your phone rings — good news: the VCs liked your company enough to proceed to the next step: due diligence. Usually, the word will come from your “inside coach”, as explained in a prior post.
“Due Diligence” is a broadly defined term with explanations here: WikiPedia, Webster’s, and elsewhere. But, basically, it means researching you and your company to ensure that investors are taking care to validate the assumptions they are making about the worthiness of the deal. There are funds that prefer to do significant due diligence before issuing a term sheet, and some save the bulk of the detailed work for the time between the term sheet’s signing and the actual closing of financing. However the process is split, it is pretty much inevitable and tells you a lot about how the fund likes to operate. And entrepreneurs should be wary of guys offering to “invest on the spot” — they are either clueless or hiding something about themselves. You want a diligence period because this is also a time for you to do your checkup of the fund and the people offering to finance his company. Due diligence is a two-way street. They take their time, and you should take yours.
Remember, we selected your company because of the market it is trying to address, the product it built for that market, and the team that built the product. In our due diligence checks, we want to validate that all the conclusions we made about these important areas are, more or less, accurate. We trusted you and your presentation, but, as the Russian saying made famous by Ronald Reagan goes: “trust but verify.” Due diligence is all about verification.
Typically, a VC team will be using the gathered diligence materials to write some sort of “qualification memo” for internal consumption by the other members of the fund as well as their limited partners. This memo will be a part of the investment documents that the fund will keep to remind itself and their own investors about their assumptions at the time of making an investment in your company. This memo is an important document for your VCs, so you should try to make its writing as easy and as accurate as you possibly can.
- Prepare the paperwork. You should have these documents ready, in theory, before the presentation. You will need them if all goes well.
- a list of 3-4 customer/user references (even if it’s a B2C business, have a few “fans” ready to talk). Don’t worry, you’ll have a chance to warn them that a call is coming, but have them ready and, obviously, make sure they have good things to say before putting their names down.
- a list of 2-3 professional references on each of the founders
- incorporation documents
- capitalization table (who owns what). Even if there was an informal split agreement between partners, at least put it into a spreadsheet
- any patents and filings for patents you have claimed. I, for one, place relatively little value on patents because I invest in software. There are investment areas where validation of patent claims are critical.
- financial statements since the company’s founding. MBA types, take it easy, but you should be able to produce basic financials.
- prior financing documents (including angel or friends and family rounds). Obviously, these are important.
- provide a complete package of documents (described above) at the start of the diligence process, all at once, rather than tricking emails over the course of the week. The fund will, most likely, have a team of people doing due diligence on your deal, so it’s easier to split up the work if all the materials are available at the outset. Send them to the one person in the fund that is coordinating the process.
- expect us to call your customers to validate market conclusions. Warn your customer references that they will get ONE call from each VC doing due diligence on you and that you appreciate them taking 30-45 minutes to talk.
We will be asking them the following questions of your business users:
- are you really experiencing the problems that the company described?
- does the company’s product help solve these problems? how?
- what were you doing before you met the company and how much were you spending (time and money) on doing this?
- how has the company’s product changed the way you do things?
- can you quantify what the overall impact of the company’s solution is on your organization in terms of time and money? are you saving money? are you increasing revenues?
- how much will your company use the product and how much will it eventually spend with the company if all needed features are delivered?
- what has been your experience working with the team? do they seem knowledgeable? are they responsive?
We will be asking the following questions of your consumer users:
- How did you find out about the product? Word of mouth is fine, but we also want to know what marketing programs (if any) you used and how they worked.
- How often do you use the product? If you are building a business dependent on traffic, this is important.
- Has your usage of the product increased or decreased with time? See above.
- Are all your friends using the product? We want to determine the “viral” qualities of the product.
- Would you recommend this product to your friends? See above.
- How would your life be worse without the product? Important. Is this something “nice” or something addictive and needed.
- Would you ever pay for a product like this? Will be asked gently, but it helps us understand how much you value the product.
- expect us to schedule a technical session with your product team to validate the product conclusions
- there should be an on-site visit from one or more members of the technical due diligence team (or your team will be asked to visit the VC again)
- no slides – whiteboard. We want the presentation to be a freeform discussion using graphics and drawings to make points. You will be explaining this to your customers and your developers — we want to see how well you can do it.
- we will want to talk understand the product architecture
- a block diagram of the product’s components and how data and function interact
- inputs/outputs to processes in the diagram
- internal and external interfaces to the product (REST, ATOM, etc.) and formats for all
- languages, frameworks, libraries used
- we will want to understand any immediate robustness issues
- extensibility: how does the software incorporate new technical features and extensions
- portability: how easy is it to move between platforms
- openness: how easy is it for others to integrate with the software
- standards compliance: are you paying attention
- scalability: when and why will we see “the twitter whale” on your home page. What if you had 1000x the traffic you have now — what would be the first thing to break?
- we will want to understand the product construction mechanics
- development infrastructure (servers, storage, machines) why?
- IDEs used (TextMate, Eclipse, IntelliJ, Visual Studio, etc.) why?
- Version control systems in place (SVN, Git,….)
- Build tools (Bamboo, Hudson, n/a …)
- Defect tracking systems (Jira, YouTrack, …) how are they used?
- Development methodology: Scrum, Extreme, Kanban, etc
- we will want to understand the product management/engineering/QA/acceptance workflow
- how are features introduced (customer -> PM -> Engineering -> QA -> PM -> customer)
- how is QA integrated into the development process
- who has final signoff, who decides when the product “ships” or “goes live”
- how are bugs handled
- how are customer requests handled
- how is the beta program managed
- expect us to call your professional references to validate the team conclusions
These can be your former partners, your reports, your former company’s partners. We will ask them….
- What is it like to work with this person? We would rather not deal with assholes.
- Is the person honest and trustworthy? This is very important. Sometimes being classified as a “consummate salesman” raises eyebrows. We value honesty.
- Is the person smart? Needless to say, we prefer genuinely smart people leading our companies.
- Does the person learn new things? Flexibility is important when growing a new business.
- What is the person’s management style? Depending on the company and maturity of the team, management style matters. A person who is used to commanding an army of followers may have a difficult time running a company of five where everyone expects to be heard. On the flip side, consensus is good within reason. Sometimes the CEO has to be firm and make decisions.
- What things is the person strong/weak at? Please, don’t let us hear “he needs to stop working so hard.” Everyone has areas for improvement and it’s totally normal.
- Is this someone you would work with/for again? This is important. Even if companies fail, there should be a willingness to trust the person in new ventures.
But, remember that this is also a time for you to do your due diligence on us:
- research the fund’s financials. The VCs should answer these questions. Information is also available online on various sites (crunchbase, thefunded, etc.) though it may be out of date.
- How much money is in the current fund? Understand the difference between the fund that’s investing in your company and “assets under management” that is usually a much larger figure. Often, funds list “under management” as the sum of all the assets they have ever managed. So, if they are on fund SIX, it means that they have been successful enough in funds 1-5 to warrant a six but, also, that the money for your company is coming from fund six which can be a much lower figure than the total.
- When was the fund raised? This is important for understanding whether the fund is in “management mode” or “investment mode.” Usually, VCs are actively investing new money during the first 3-6 years of a fund’s life (typically 10 years). During the first few years, they are actively looking for new investments and then focus on managing companies, follow-on investments and raising the next fund. You prefer to get an investment from the “new money.”
- When will the VC be raising another fund? Remember, usually VCs don’t invest cross-fund so you’ll be stuck for follow-on investments from the fund that originally gave you money even if they raise more in a couple of years. If the fund that backed you is in its late stages, has not had a lot of exits, and doesn’t raise the next round, you’re screwed, most likely.
- How much money is left in the current fund and how much is reserved for follow-ons already in the portfolio? If you plan on raising significant additional capital, you should make sure the fund has enough money reserved to at least have an option of following on to this investment. If they don’t, you’re basically left raising money from scratch again the next time around.
- research the fund’s track record to figure out where your company fits in
- Has the fund made investments in your company’s area of specialization? If they have, and they are still hungry for more, means they have had a good experience and have built both expertise and a contact network to help your business grow. There may be new partners in the fund that came from another fund that really know your space so don’t overlook that fact either.
- Have they had many “home runs”? On the one hand, this is great and means the fund will probably be around for at least another iteration. On the other hand, they are now looking for big hits to equal the prior ones and if your company is not one of those hits it will get less attention.
- Are they spread too thin? A fund should have a reasonable number of current portfolio investment per partner. These numbers vary, but they are usually somewhere around 5-7. If there are more, you will get less attention. Fewer, and there’s a chance you will get micro managed.
- understand the fund’s operating style
- How often do they require board meetings? Monthly is the norm, but, remember, these are emotional circuses and resource drains. See if monthly reporting and bi-monthly meetings have been done (a much better scheme).
- Are you getting a “super star” investor? Though having a big name VC on your board is prestigious, they are often too busy doing other things to pay attention to your company. The big shot VCs are often shadowed by more junior members of the firm at board meetings and that, usually is a good thing.
- How responsive is the investor? If they are hard to get a hold of during the “wooing” period prior to deal closing, they will be even harder to reach once the deal is done. Then, it’s just money, and you don’t want that. You want your lead partner’s phone number on your speed dial.
- do personal reference checks on the partner that will be leading the investment
- Does he understand my market? Usually, this means having operating experience at companies like yours. There are few other ways to really get an understanding of the players in your space. They should have street smarts as well as book smarts about your market.
- Does he appreciate the technology? The partner should know which things are technically difficult and which are easy. The partner should be able to sit through a design session with your team (though it will rarely happen) and not act smug or chuckle about everything being over his head.
- Has he been in your shoes? Empathy for the things you will experience is built over time, in personal crucibles. Best VCs are often ex-entrepreneurs who have started companies themselves — started, not walked in and managed. They know what it’s like to hear an echo in an empty new office and run downstairs to buy coffee for the new coffee machine, to drink it sitting on the floor. They know what it’s like to lose a deal or get screwed over by a partner. They know how hiring mistakes feel. (Blows my mind, but there are actually VCs out there who have NEVER MANAGED PEOPLE — stay the hell away).
- Is he an asshole? This is the biggest concern. There are positive assholes and negative assholes. Having someone who is tough and demanding (good asshole) is a plus on your team especially when he isn’t really there bothering you every day. Someone who is just full of himself and commanding without rhyme or reason is a bad thing. Whenever you hear the word “asshole” in any personal reference checks, beware and do a double take.
- Can he actually help? Usually, VCs help with two things: ideas and recruiting. You should ask your reference what new ideas did the VC bring up that were not useless drivel (e.g. “It is very important to have paying customers. — I was actually told that by a VC on my board). What people did the VC actually help recruit vs. just spew about the importance of having good people on board (e.g. “You should really hire only the best. – ditto, heard it from a board member)?
- talk to failed companies in which the fund invested. Funds will happily give you names of CEOs from companies that are doing well of have already succeeded. But it’s the failures that are interesting. CEOs of failed companies don’t usually badmouth past investors strictly for emotional reasons — they have other companies to do and are worried about their reputation as much as the VC. However, you should talk to the companies that didn’t work out to understand how the VC responds in times of crisis. Take these calls with a grain of salt and filter them through your own lens of understanding. Just because a VC shut down a company does not necessarily mean he did the wrong thing. It’s how he acted that matters.
- What was the reaction of the VC when the company started heading downhill? Was it a knee-jerk “cut staff” call or was it more thoughtful? Was he strong and supportive, or a baby?
- Did the VC try to pull any clever financing tricks when the company was up against the wall? (“I will give you more money at 5x preference” — actually happened, ”I will give you a loan that you can not repay secured by your IP that I will move over to another company if you don’t” — actually happened). Were they courteous or assholes?
- Would you have this person on your board again? Why or why not?
- clearly explain what is needed for the due diligence process from our side. In a succinct email, we should let the CEO know what documents will be required, what he should expect from us, and the deadline by which these materials are expected. We should ask for all the materials once and not have requests trickle in as we think of them.
- ask what the entrepreneur needs from us to complete their own diligence. We too should be “reference selling” ourselves. We should offer them a list of people they can talk to about our work, offer an opportunity to meet the rest of the team, and, in general give them a sense of comfort for the group. We should understand that they have as much hand in this relationship as we do.
- propose a schedule for completing due diligence. In most Series A financing, due diligence should take two weeks max prior to term sheets. Additional diligence takes place during the financing paperwork phase which should not take more than six weeks. There should be an outline and a plan.
- not take too long. Due diligence should be a process engaged in by two parties whose ultimate goal is to get the deal done, not to find flaws in the deal. Both parties should feel the time pressure set by the schedule. I have seen some organizations take months (!!!) to complete due diligence. Entrepreneur, walk away from these people and never come back. Due diligence is work, but it should be done with maximal effort and support from both sides with the goal of making it accurate, complete (within reason), and quick.
- limit the number of reference calls. We should not need to speak to 10 references or 10 customers. This is overkill. If the first three all give us a mixed message, there is a problem and we should re-consider the deal. Same is true of references. There is no need to go fishing for either good stuff or bad stuff. The facts should speak for themselves, simply and clearly.
- do our own market research. We should know and understand the competition in the field and not just take the entrepreneur’s word for it. We should make sure that the experts giving us opinions about the market are real experts and not just people “more technical than us.” We should make sure our market information is timely — a software CEO from 10 years ago who has been “investing” for the last 7 years is rarely an expert on the modern software market. We should have a battery of trusted authorities who provide points of view for our analysis. We should not base our conclusions on the praise or the condemnation of any one external specialist.
- do our own personal reference checks. The company will, obviously, provide references that are good. We should look through our own Rolodex and find people who know the team. The goal should not be “digging for dirt.” The goal should be seeing a balanced picture. There are few angels or devils walking the earth. Each person has character flaws and wonderful qualities that your standard professional references, coached by the individual being references, rarely provide.
- not pull the rug from under the entrepreneur’s feet. If we discover something in the due diligence that significantly changes our perception of the deal, it’s probably best to stop the negotiation, explain why, and walk away. We should not try to change the deal terms such as valuation, board composition, preferences, etc. post facto.
The term sheet should appear sometime during this process (by the end, definitely). Often, a term sheet will be issued subject to completion of due diligence. You are almost there…
NEXT POST: Step 5 – The Legal Grind
Welcome to the next step in your funding journey: the partners’ meeting. If you have followed this series, by now you will have gathered your materials, approached the right VCs (and succeeded), and made it through the first meeting with someone at the firm. Congratulations. You’re farther along than most companies ever get. Since you will have reached out to many investors, connected with several of them, and made it through the first meeting with a few… you should have a partner meeting or two on the calendar.
“Happy families are all alike; every unhappy family is unhappy in its own way.” So wrote my countryman Leo Tolstoy opening his Anna Karenina. That line always came to mind as I presented at VC partner meetings. Most funds, as most families, seem happy. And while some actually are, in my experience, many are somewhat unhappy — each in its own way and to varying degrees. Presentations to partners are more about psychology (some call it politics) than substance, about how you say things and to whom, and not what you say. These meeting are less about substance because you should know that the fundamentals are right or you wouldn’t have been invited to present. Still the presentation guidelines for the first meeting, but…
- Have a coach. The person inviting you to the partners’ meeting who heard your presentation live should be your coach through this step. This is very important. You need a friendly sherpa with inside information who can guide you away from the psychological land mines and explain the characters you are about to meet. Almost always, the person that suggested the partner meeting will be your coach. He is, in a way, putting his reputation on the line and has a lot at stake in making you look good. Use this to your advantage.
- Know the audience. You should know who will be at the meeting. And you want the meeting to have, ideally, enough members of the fund to make a decision. You should know their names and their titles. Get this information from your coach. It is now up to you to try to create a profile for the key players. If there is a teleconference with another office, fine, but you will, inevitably, focus on the people in the room.
- Research. You should know where the players on the other side came from and what they did in the past. You should know what boards they serve on, what investment areas they prefer. You should know their schools and majors. You should read through their blogs. Many VCs (including this one) clearly signal what they are looking for in their social media interactions.
- Identify players. Titles and roles in a VC fund are often confusing to the non-initiated. Here are the basics…
- Associates: usually, they are VCs “in training,” straight from (business) school. They are there to show their investment mettle to the rest of the partnership which they hope to join or to build a reputation that will advance their career at another fund. Smart ones also care about their reputation with the entrepreneur community and, thus, care about what you think of them, because, chances are, you will meet again in another venue. They can be the strongest allies you have, but, occasionally, or can come off as insufferably arrogant. You have to worry about the latter for the duration of the meeting, but, in the long run, they won’t last, so just note who they are for the future. Good associates tend to have a “pro-entrepreneur” bias which is generally forgiven by the partnership because of their inexperience and eagerness to find a big hit. Associates do not say “yes” but can certainly sway the decision. They do not officially say “no” either, but, depending on the fund, get heard. There is competition between associates on who can outsmart the other, so be ready for seemingly clever questions. They care deeply about what the other people at the table think of them so do not put them down even if you feel you can. In general, they are smart, energetic, and want to see deals happen. Associates should be your friends.
- Principals/Jr. Partners/VP’s: up and coming investors hoping for a partner role, usually at the fund where they now work. VC funds raise money infrequently, and, thus, there are long waiting periods for an opening in the partner ranks. They should be on a few boards — find out which ones because that indicates their specialization. They tend to be more neutral in their approach to companies, often skewing their questions to the business side of the matter because it is the safer route. Again, they could be very valuable allies, especially if they seem to be the heirs to the fund’s partnership roles or rising stars in the VC community. But, stars have egos and want star treatment — treat them with care. They can certainly influence things in a big way, though probably won’t make the final “yes” or “no” call. They tend to be more conservative than the associates because, at this stage in their careers, they are worried about getting a “track record” of investments in which they take part in order to score a partnership role. You should offer to discuss any of their concerns in detail and after the meeting in person — shows respect and neutralizes at the same time. You may want to hint that you would want their involvement in the company down the road — vote for longevity.
- Partners: obviously, the most important group. But, in general, partners have their own investments to worry about and unless the coach happens to be one of the partners, your role is to show all of them how valuable their opinion and insight may be. Don’t be offended if a partner is silent at this meeting. It does not necessarily mean he doesn’t like what you are saying. Partners tend to specialize in industries/markets/technologies so it may be that what you are talking about is simply outside of their comfort zone. That doesn’t mean they will say “no.” Hopefully, they will be open to opinions from more deeply engaged partners in their decisions. In most funds, no single partner can say “yes” but any one of them can certainly say “no.” Don’t piss off any of them, and don’t argue. The decision is usually made by consensus (though some funds have strange point-based voting rules) so it’s important to get all the partners to at least “neutral.”
- Senior/Managing Partners: if the fund has this title, this is an important, usually more experienced person and thus, should be treated with care and respect. Try to find if the control model is more of a “Roman republic” (which had two equal consuls), “classic Roman Empire” (which had one omnipotent emperor) or “late Roman empire” (where the East and West were split between Rome and Constantinople). The classic empire model is simple — make sure the guy at the top agrees. This model tends to be most dysfunctional, so, you’re really rolling the dice unless the top guy happens to be your coach. The late empire is also simple — make sure you know which part of the realm you belong to and act accordingly. The “consulship” is tough. There is competition among the top ranks and you have to walk a delicate line in pleasing two or more often contradictory parties.
- Venture Partners/hired experts: usually, people who are “trying out” venture capital, on their way up, or, getting out of the business, on their way out. They don’t have as much at stake and tend to care less about fund politics. Can be valuable allies, but rarely make any consequential decisions. They can certainly help make your case behind the scenes.
- EIRs / ex-CEOs: persons using the VC fund as a stopover to doing another company. Could a strong asset if they focused on the same business earlier in their careers. They could actually become your CEO if you need one. They are usually seen as “experts” and their opinion matters. Important to have on your side.
- Understand “fund bias”. It is important to slant your presentation correctly to protect yourself against unstated prejudices a fund may have. If a fund has had one big hit after another, they tend to have a negative bias toward any company proposing smaller, more down to Earth businesses. These funds tend to look for the next Google. Ask yourself, does my business have the right outcome down the road to move the needle for these guys? If a fund is looking for “big” you should pitch “big.” If they are comfortable with getting you through a couple of rounds to an acquisition, pitch small(er), but, remember, everyone still secretly wishes for the next Google. Does the fund have enough cash to get you through the four series of funding you will need as you build the next Groupon? Are they early in their fund’s life-cycle and willing to take more risk?
- Understand “fund focus”. Are these people comfortable investing in your sector and at your stage? Contrary to common belief, most VCs are not daredevil risk takers. Venture Capital is about pattern recognition, not risk. And once the fund recognizes the routing that works, they are unlikely to step outside their comfort zone. Strange things happen, but odds are against it.
- Formulate a meeting strategy. Schedule a 30 minute call with the coach a week prior to the presentation. Explain your understanding of what you are going to present. Ask him to confirm or help with any personality interpretations you have made. Ask for advice about people who will be in the room and what they want to hear. Write it down.
- Bring a team and understand who does what. You should be bringing a team to these presentations. One of the best posts on this subject comes from one of my favorite VC bloggers, Mark Suster, and can be found here. Make sure everyone knows who is covering which questions during the meeting. It’s shouldn’t be a “CEO show” with a bunch of silent cameos. Everyone should have a chance to say something. Make sure the CEO knows what every team member will say. Make sure everyone on your team knows whom they are covering.
- Follow the basic presentation you gave during the first meeting, and do not change it dramatically as most people will have seen your original deck. Do adjust the pitch based on the people dynamics you uncover and the fund bias that may have been determined.
- Take about 30 minutes. You have an hour, but the pitch should be a little shorter than the first meetings’ one because there should be more questions and you want to answer all of them. You also want the partners to have time for discussion after you leave.
- Give technology enough time but do not let it be the focus of the presentation. You should answer the questions from the more technical members of the fund, but, offer to do an in-depth walk-through as a follow-on. However, the CEO (yes, the CEO) should know how the product works and be able to cover the basics. Don’t ever say something is “over your head” — you are the head of the company, nothing should be over it.
- Dispel fears about competition and expect the inevitable “what about?” questions that will come (usually from the more junior members of the fund). Know your competition, especially if you see people in the fund with LinkedIn connections to competitors’ CEOs. You should have a list of “what about…” questions they will ask and know your answers to those questions. You should ask your coach who else in your space the fund has seen. Obviously, if they invested in one of your competitors (and it’s not public), they will not invest in you so you shouldn’t be doing this presentation at all.
- Sell your value proposition from an investment perspective. “You give us X dollars and in X years, you will have another Y (Google, YouTube, LinkedIn…) on your hands, worth 10x the dollars, and have a hand in creating one of the major players in the industry that you can put on your “exits” web page.” Maybe don’t make it that blatant, but that’s what you want them to think.
- Explain your valuation expectations and where the proposed funding gets you. This is important. You do not want to go through a few weeks of due diligence only to find you’ve set these expectations incorrectly.
- Let them know who else you’re seeing. At this point, this should not delay the decision. VCs should not be waiting to hear what the others say. However, if you’re talking to a competing fund (yes, all VCs are friends, but some are better friends than others), you might want to make that known. Talking to rivals adds fuel to the fire.
- Try to smile and make friends. You hope to work with these people for several years and they should like you and you should like them. Make sure everyone on your team understands that. If there is anyone in the fund that you just don’t like, chances are, things are not going to go smoothly.
- Don’t say “it’s a great question” (unless it really is and very few are). If is not a good question, or an obvious one, chances are the other people at the table know it and you are not making yourself look any better.
- Leave with minimal expectations. Understand that investments rarely “happen on the spot” (if they do, it’s very unusual and you should ask yourself “why” and “perhaps I should shop this around some more.”). The decision should come during the following week.
- Keep the spotlight on the company and not make the presentation a personal battleground. Rarely, but I have seen this happen: fund members turn their personal disagreements about investment strategies into an open forum during the presentation by covertly asking questions that are posed simply to prove a point to another. It’s a bad thing to do and these issues should be aired out after the company is gone or before agreeing to see them.
- Be brief in our introductions because all the relevant information about us is publicly available and the company should have read it. Just your name, rank, and serial number. There’s not enough time for much more.
- Pay attention. Same rules apply as during the first meeting but are harder to follow. The temptation to check your blackberry, start side conversations, or fall asleep should be wrestled to the ground. This is especially hard when the company is presenting something in an area that you don’t really care about. But, courteous we must be.
- Ask questions that are actually relevant vs. smart-sounding. This advice is especially applies to the more junior members of VC funds. We really don’t want this meeting to be about us and our careers, but, rather, about the company and its business. Save the cleverness for the emails we will write about the company or for the later discussion.
- Come ready. We should know the issues we need addressed before the meeting starts. Write more questions down during the presentation. Ask them at the end.
- Come to a conclusion immediately after the meeting while the impression is still fresh. We should make sure the company’s coach know what the decision is and what to do next. By the way, “we don’t know” = NO.
- Make this the last meeting. There should be no reason for a company to present again until their next round of financing. We should have all the information we need to decide on whether next steps are warranted.
- Respond within a week. If the decision is made, one way or another, we should let the company know what to expect — short and courteous as always.
- If the decision is a “yes”, clearly explain what due diligence steps are required, what materials the company will have to prepare, and communicate how long you expect things to take.
What happens now?
NEXT POST: Step 4 – Due Diligence
A series of articles about getting through the VC process from a serial entrepreneur who now sitting on the other side of the table.
- Be flexible. Most VCs like to complain about how busy they are. Some of them actually are and the busy times do come and go. Schedules are usually filled for a week or two in advance. Don’t consider it a sign of rudeness or disinterest if a VC offers a time two weeks out. It should never be more than four weeks (come on, no one is that busy unless vacations are involved). I use tungle.me and my make my schedule available for you to self-schedule. Other “important people” (or people trying to look important) do scheduling through their admins. In either case, you will have a choice to pick a couple of one hour time slots. My advice: pick mornings, definitely before lunch. You want to have everyone’s undivided attention.
- Do your homework. You should know a little about the individual(s) you are meeting — look at their LinkedIn profiles, read their blogs, look at their twitter stream. Are they business or technical? Do they have strong opinions about your competitors? Do they have a sense of humor? If they have shown up on any videos, how do they sound? Are they dry as a bone or is there still a spark in their eyes? The more you know, the better prepared you are and it will help set the tone for subsequent discussions. Understand the roles in the firm: Partner, Principle, Associate and what they mean. Meeting with ANYONE at the firm is a good thing, so don’t let the titles bother you, but realize that the person you meet in the first encounter is unlikely to say “yes” — but that any one of them, no matter what the title, can surely say “no.”
- Bring enough people, but not too many. Unless you are a one-man startup (and probably shouldn’t be talking to VCs), there are other team members. You should bring one or two (but not more) to the first meeting if possible. Don’t make it crowded, but since team quality often sets the tone for events that follow, showing as much team depth as you can is important. Your “technologist” should be capable of speaking and your “sales guy” should not be obnoxious.
- Arrive a little early. Unless you’re stuck in traffic, it’s a good idea to show up on time. Chances are, there is another meeting following yours and you don’t want to be cut short.
- Dress appropriately. OK, in this day and age, you don’t have to wear a suit and tie. There is nothing wrong with dressing up, but not if it looks contrived and unnatural. However, don’t show up in shorts, T-shirts, rubber shoes that look like feet. Take a shower. You’d be surprised how many people don’t do that. Polo shirt + slacks — totally fine.
- Bring the right equipment. Sadly, most VCs are still a Windows/PowerPoint/VGA shop. Some, strangely, don’t have a whiteboard. Pretty much all have WiFi. I always brought my Mac, a VGA and HDMI dongles, a WiFi modem (just in case), and a USB key with the presentation in Keynote, PPT, and PDF. I had a pad of paper in my bag to draw things in case the conference room didn’t have a whiteboard.
DO NOT: bring printed copies of your presentation. VCs will skip ahead and not listen. You should have sent them the deck and offer to send it again if they need it. However, if there are spreadsheets with hard to see figures, offer to hand those out, but later in the presentation.
- Try to relax. VCs are not as intimidating as they seem. We understand that you’re nervous and that this moment is important to you. Try to be casual and relaxed in your demeanor.
- Keep the pitch to 40 minutes. You will typically have an hour on the calendar. However, there may be time spent getting the machine hooked up for the presentation or a demo. But, more importantly, you want to leave time to get feedback and answer questions. If there are 10 minutes left after all the Q&A it makes it harder for VCs to dodge the “What did you think?” question with the usual “I have to discuss this with my partners” line.
- Follow basic good presentation techniques.
- Speak at normal speed. Very often, companies presenting try to squeeze too much information into the allotted time by using “too many words.” Make the points, be succinct, make sure the audience has time to digest.
- Pause. It is OK to pause for a second between sentences as God intended. It’s not a sign of not knowing what to say.
- Avoid jargon. Try not to use the “hip phrases” you read in the press. Some professional terms are fine, but sentences composed of clichés are annoying. That doesn’t mean you should not be technical where appropriate… there is a difference between being specific and spewing meaningless phrases.
- Avoid superlatives and bombast. If you are really the next “Google” or will “revolutionize the way people work” — let us be the judges of that.
- Show you’re human. It’s OK to smile, respond to the audience, and look like you’re enjoying this (even though you may not be).
- Don’t go off on tangents or let your “flow” be ruined. If you are really going to get to this point later in the presentation (remember, they can’t skip ahead), say so politely. Nothing wrong with that.
- If you see that the other person is an asshole, wrap up quickly. No point in wasting your time with them. Just thank them, speed up, conclude, and move on.
- Do some homework on the people you are meeting. You should know what they are interested in, what they blog about, what their tweeter stream feels like. You should know where they went to school. You should know what boards they are on. Read their blogs, watch their videos on the internet.
- Keep the introductions short. Give a very brief bio and let your words show them how great you are. This is not an interview for a job and they don’t need to know how you blew away your numbers for the last six quarters or where you grew up.
- Keep the presentation simple.
- Talk about the problem. What is the world doing that you are trying to change, how is what it’s doing wrong, how you think it should be. Answer the “Why now?” question.
- Talk about your solution. What do you do? Is it a product or a service? How will it address the problem? What is unique about it? Explain the technology. You never know, someone like me might be on the other side of the table and I will want the gory technical details. With me, don’t ever refer me to the “technical guys” unless it is REALLY technical. The CEO should know how the product works. Answer the “Why this?” question.
- Talk about what you’ve done so far. I am amazed by the number of people who don’t talk about this. You should have done something already if we’re meeting. More than just putting together a slide deck that talks about the future. Explain what you have built, what customers you have, what they are doing with your product. Throw names (company names, not people names) around if you can.
- Explain the team dynamics. Is the team complete? Are you all working on this full time? Is everyone in the same city? Will any of these things have to change. Go light on the “advisors” you have — no one really cares who they are, we want to see the results of their advice in the presentation.
- Talk about how much money you need. We will want to know how much money you are raising. This number contains an “implied valuation” that, depending on the series of funding you are seeking will let the VC calculate some financial ramifications of the deal. If you are raising $1M, you can’t possibly expect to have a $20M pre-money valuation. You should be raising $5-$10M in that case. Importantly, explain why this is the amount of money you need. Where will it get you? When will you be having this conversation again with your investors and at what stage you will then be. Talk about getting to profitability, but be realistic — most companies will need to raise more money. Just make sure we understand how much and when.
- Summarize. Tell them what you’ve just told them. Sometimes I like to pre-empt this and give my own summary to the company that just presented to make sure they see that I understood what they just explained and that I listened. Companies feel good when a VC actually “gets” them. This does not mean that you will get the money. There are still many things that need to happen, but it’s a good sign nonetheless.
- Wait up to a week. Unless you get a clear signal that there is a next step (10% of the time) or that this is not going to work out (40% of the time), you should wait, patiently, for the response. What you are hoping for is another invitation to present, to a larger audience. You may be asked to speak to someone else in the firm or to an expert that the VC knows. Do it — it’s a next step.
This wait, painful as it is, can last a week or so. No one should leave you hanging longer than that. During this period, the VCs will be doing some “individual diligence” on you and the company which can include…
- Finding out more about the founders
- Reading what the press/blogs say
- Looking at your competitors
- Reading and studying the market
- Anything that lets them prepare a better case for presenting your company for a review at the partner meeting, which usually takes place the following Monday
- Accept the decision. If the decision is a “no” it will come as a simple, short, email. Don’t argue, accept it, and move on. You have wasted one meeting and one week waiting. Chances are, if there wasn’t a “no” right after the presentation, the VC spent more time thinking about it than you spent presenting. Some VCs will offer to guide you to another investor, or to meet with you as a post-mortem. This is a good sign. Means they liked you, but just didn’t think an investment would fly at this stage of the game. Accept those offers. Some of my best VC relationships came from people who passed on my company at one time or another.
- Be prepared within reason. Some VCs do a ton of research before the meeting. This is certainly not a bad thing. However, I don’t really think it is a good use of time (I’d rather see more companies). Of course, we should look at the materials, think about the questions we may have, and do research on the people we’re meeting. But too much research before the first meeting, in my opinion, tends to provoke pre-judgement. We should come to the table with ideas, but should let the company tell the story its way.
- Be on time. If we are late, there should be an excuse. We should not keep a nervous team waiting while we finish our call unless it is actually important and we can explain why.
- Keep it personal. Our first meeting should be informal and relaxed. We are meeting the team for the first time and we should make every effort to make them feel comfortable. Dispense with a lot of the formalities. Get them a soda. Smile. The more relaxed they feel, the better we will get a feeling for who they really are.
- Pay attention (no email, phone, etc.). As if a plane was coming in for a landing, all electronic devices should be off. This is why I don’t like people bringing laptops to the meetings. iPads are OK, but it’s all too tempting to start reading email. I do use an iPad to browse through the company’s web site or look up things during the meeting — but they are all meeting related and I explain what I am doing to the company presenting. I take notes with a LiveScribe pen so I can go back and review the audio. I often record the WebEx calls for the same reason. But, the focus should always be on the presenter. Eye contact matters.
- Not talk about ourselves. Our background is not all that interesting at this point. The only reason I sometimes bring up the details of my past is to give the team a sense of what I know so they can adjust the presentation. With me, they can go heavy on the technology side, they shouldn’t try to bullshit about certain areas.
- Not play the “do you know game.” I have seen the first 10 minutes of a VC meeting turn into the dreaded “do you know so and so” game that I recall from my frat party days. We shouldn’t do it. No one is impressed by having contacts in common and this is not a dorm social. Important is what you know and what they know, not whom.
- Make the entrepreneur feel relaxed and important. To quote Franz Liebkind from “The Producers,” ”You are the audience, I am the author. I outrank you.” The entrepreneur is the author, even if the play is bad. Let them present, let them present what they want, how they want it. We shouldn’t ask people to skip around their presentations or deviate in new directions. We should keep the mood upbeat and friendly. We should not look bored. We should not fall asleep.
- Try not to sound too smart. We tend to come from fairly select backgrounds. Most good VCs have been around for a while, most have started companies, most have managed people, and most have seen economic waves, fads, and disasters. However, if we can, we should save our lectures for the closing remarks and not interrupt with self-promoting tirades. Ironically, the younger the VC, the less experience he has, the more he tries to appear smarter than necessary. Avoid it.
- Try not to sound too stupid. Occasionally, I’ve seen us try to pretend to need things dumbed down. Usually, there are smug comments like “this is over my head, heh heh,” or “pretend I’m your Mom and you’re explaining this to me for the first time.” Well, if this is over our heads, we should not be the ones listening to this and should say it. And I have always felt insulted by the “mom” comment — first, what does that say about mothers and, second, why am I talking to you when I could be getting a home-cooked meal from mom. See my post on the “mother” line.
- Have someone credible at the meeting. If I don’t know the topic the presentation will cover, I won’t take the meeting or will ask to be treated as a student rather than as an evaluator. I will ask this before the meeting starts. Alternatively, we should have someone else at the meeting who actually understands what is about to be discussed.
- Summarize our understanding of the company. At the end of the presentation, we should be able to explain, in our own words, what the company is all about, its target market, its product, its revenue model. It is the entrepreneur’s job to make that summary accurate, it is our job to think through this summary ourselves and try our best to make sure we really heard what we were supposed to hear.
- If the answer is “no” say it there and then. We should not tell a company that we will “get back” to them later when the decision will clearly be “pass.” And everyone in the firm should be empowered to say “no.”
- Followup within a week. If we need some time to think and talk to others, that’s fine, but here is no excuse to take longer than a week unless you’re going on vacation or something unpredictable happens. None.
- Say no concisely, definitively. Short email. Explain why in a sentence. Wish the best. Move on (both parties). but…
- Always keep the door open. We never know if the person that came to see you won’t be the next tech giant. And, we always want to make sure to offer help and advice to the people you want to see come back.
- Say yes and clearly outline the next steps. If this is a company we’re interested in, we should clearly outline the next steps the company will have to go through. This is typically the “partner meeting” presentation — a unique mating dance of its own which I will explain in the next post.
NEXT POST: Step 3 – The Partner Meeting
- Getting Funded: Step 1 – Getting VCs to notice (thansys.com)
- Getting funded: Step 0 – Prepare (thansys.com)
- Entrepreneurs are from Mars and VCs are from – Mars (informationarbitrage.com)
- What VCs Are REALLY Thinking When You Pitch Them (businessinsider.com)
About MeI am the Managing Director of RTP Ventures, the U.S. operation of a $700M+ international Venture Capital fund. I was also a Venture Partner at Greycroft. I am a three-time founder and CEO of software companies including Plumtree Software and Elastra. Spent most of my life working on databases and working with VCs. Finally bit the bullet and joined one. Ready for something new. Passionate and intense about Software and New York City. (I know where the title comes from, and... the falcon can not hear the falconer)
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