Entrepreneurs struggle to handicap VCs during the fundraising process – something we see all the time in our portfolio company fundraise cycles. When you combine entrepreneurial passion, tenacity and emotion with typical elusive VC behavior, most entrepreneurs grossly over-estimate actual VC interest.
Why are VCs so difficult to read? As Chris Yeh points out, one answer is that VCs don’t like saying “no” because we want to maintain option value. The idea is that if a VC say no, she may never see the opportunity again – even when it’s ready for her money. This wastes a lot of entrepreneur and VC time, but is a reality in the market. At HPVP, we say “no” (or no for this round) in most initial meetings where there isn’t a fit, and entrepreneurs seem to appreciate it. But we also make mistakes and let deals drift….
Chris says the best way to measure VC interest is whether they put in time or money. By the time you get the money, it’s too late to handicap! So how do you measure time?
This is how I advise our portfolio companies on handicapping VCs
Early in a relationship with a VC, these all mean NO:
1. They said they will bring the deal to their partnership on Monday and get back to you.
In most cases, this leads to a no or one of the four slow “no” outcomes below. VCs know quickly when they like a deal and will usually schedule a follow-up meeting with themselves or another partner without having to go to the dreaded “partner meeting”. Exceptions: If you’re talking to an associate, this might be the firm’s process. If so, make sure the next meeting is with a partner.
2. They said “Let us know when you find a lead”
If they don’t have the conviction to lead or aren’t willing to help you find a lead (if their fund is too small), the VC is not interested in investing time or money. Exceptions: If the VC has a stated Seed Program – where they invest money in small rounds others lead – they might actually be interested. But don’t invest more time until you have a lead! Really.
3. You haven’t broken through associates to a partner(s)
Sell to power. While there are some associates who have juice at venture firms, you need an investment of partner time for your deal to go anywhere. Exceptions: none
4. They move a meeting other than your first
Yes, we all know VCs are bad about moving meetings. I’m guilty of this too. Don’t worry if your first meeting is moved. The VC doesn’t know how awesome you are and what he is moving. If he moves your second or third meeting, however, consider it a NO. Exceptions: Sickness or death
5. Silence: Echo, echo, echo. Exceptions: none
Let’s say the VC has been good about everything above, has invested time, made talent and customer intros to be helpful and generally seems to be moving the ball down the road. Must be headed towards a term sheet, right? Not necessarily. Maybe they just like you. Maybe they don’t know yet.
If the following are negative, you’re not getting a term sheet:
6. Have you met their partners? Have they met yours?
VCs invest in teams, not just the CEO. If they haven’t met your team, they aren’t serious. The reverse is true as well. Exceptions: none
7. Have they visited your office?
An office visit is basic hygiene in due diligence. So if they haven’t visited, they probably aren’t serious, nor are they selling themselves well. Do you want to work with a VC who doesn’t want to come to your office and always summons you to his? Exceptions: A VC who is long distance might legitimately be interested without a visit but only if they’ve met most of your team some other way. But if they never visit even after a term sheet, do you really want to work with them?
8. Have you talked key hires and board structure 1:1?
These conversations are akin to talking kids with your girlfriend or boyfriend six months into dating – matching cultural values, playfully testing each other on what the future could be like. Board structure also needs to go in a term sheet! Exceptions: rare
9. Have they asked for your cap table?
If they haven’t seen your cap table, it is very hard to write a cohesive term sheet because they won’t understand your current capitalization and option pool. Exceptions: I’ve seen a few term sheets so simple they could have been written without a cap table, but this is very uncommon.
10. Do you feel comfortable texting or calling the VC? And they you?
If your rapport is not already evolving to a working relationship, it is very unlikely that a term sheet is coming. People invest in, and conversely take money from, people they trust. Trust is built through familiarity and informal communications as well as formal ones. Exceptions: Probably quite a few. Everyone has different communication styles, but this is still something to consider.
So, stop wasting time with VCs who aren’t serious, and don’t be shy about calling them to the mat. Challenge the VC to meet your team, you theirs and to visit you. If they pass on these activities, pass on them.