"negotiations" part 5.1 of the series six steps to venture capital

finding the right vc is difficult. getting a good investment deal is worse. though with the right preparation, much can be done to achieve a result, which is mutually favorable.

this is the 5th part of the "six steps to venture capital" guide, where the systematic approach to acquire venture capital for a start.ups is discussed. after the motivation got sorted out in step 1, the a-b list of potential investors in part 2 (part 1, part 2) got filled. the battleground got prepared in step3. now it is all about bringing home the money.

experienced investors will take advantage of unprepared start.ups. therefore key topics have to be covered before going into the actual negotiations. to know more about strategy and preparation, see sun zi, moltke and douglas adams for start.ups. basically every contact with the vc can be considered as part of a negotiation process.

overall
time line - term sheet - contract signing & closing are the cornerstones of vc- negotiations. after the 2nd meeting the vc should have figured out the idea, market, business model, competition, exit channels and team - the investment story of the start.up. that done, it is all about nailing down a deal. that´s the same for the potential investor as for the start.up.

time line
the time line outlines the time frame from the beginning of the negotiations until the money flows. agreeing on the time line is rather non controversial and allows to get know to each other. simple does not mean irrelevant. by committing to a time line (especially) the vc has to reserve resources, meaning money.

term sheet
next thing is the term sheet. using common (non lawyer) language, all the important topics of the investment get outlined in it. it is basically a multi-page text document which both parties sign. example see here. whatever key topic relevant to the start.up or vc has to be part of the term sheet.
struggling for compromise is part of this process. moving key topics to be solved „afterwards“ or through proposals of lawyers in the final contract often leads to late break ups. thus involving high lawyer bills and wasting weeks of negotiations. typical time line to reach a term sheet is four to eight weeks. every party covers their own costs. granted that the negotiations were successful, it´s then about fixing a contract.

contract
the final contract gets drafted on the basis of the term sheet. it should merely be a reformulation in lawyer-language. a common lawyer between the vc and the investee reduces costs. based on a well negotiated term sheet, it rarely leads to a break-down of the investment process. the paperwork can produce contracts between 35 to 100 pages.

the costs are typically covered by the start.up after the investor injected money. a maximal allowance for the cost should already be settled in the term sheet, anywhere around thirty thousand dollars/euros. anything above is to be covered by the respective parties.
time line for the contract should be four weeks. two weeks for signing and another two to four weeks for closing finalize the process.

giving the general line (term sheet - contract signing & closing), there are some topics which deserve an in depth coverage, like knowing the terms, break-outs or tiredness.
this will be covered int the upcoming part two on "negotiations" of the series "six steps to venture capital"

linktip: for the MIT 100k participants: executive summaries

"preparing the battleground ", part 3 of the series: six steps to venture capital

this is the 3nd part of the "six steps to venture capital" guide, where the systematic approach to get venture capital for a start.ups is discussed.

after the motivation got sorted out in step 1 and in step 2 the a-b list of potential investors (part 1, part 2) got started, it is time to "prepare the battleground".

it would not be wise, to contact the top 3 vc on the a-b list to start with. even after the excitement of achieving a list after quite some work, this would be a bad thing to do. first, because the potentially best investors should be kept for later, when a routine in pitching was developed. secondly because what would happen if a contacted (still potential) investor directly calls back and ask for the executive summary and you do not have one yet? and no, sending out something that was just compiled in a couple of hours, is not a good idea. not even for the bottom three vc from your a-b list.

following the advise of general sun zi (read more about sun zi, moltke & douglas adams für start.ups here) you should only go into a battle when you know that you will win. therefore preparation before contacting future financiers is key. there are four things that have to be in place:
1) investor picht slides (30-20-10),
2) an executive summary (2 pages, includes financials),
3) business plan (20 pages total, including all attatchments & 1 page financial summary),
4) references.
the best way now is to work through the list top - down.

plan to spend around one week on preparing your investor presentation and executive summary. follow 30 (minimum font size) - 20 (time of presentation) - 10 (number of slides) guideline from guy kawasaki. stick to this rule, do not try to improve it, it only reduces the chances of funding.
use the following headlines, kawasaki again: 1) problem, 2) solution, 3) business model, 4) underlying magic, 5) marketing and sales, 6) competition, 7) projections, 8) team & 9) status & time line.

the structure is the same for the investor presentation as well as for executive summary. for more details, read "the art of the start", or "reality check" from guy kawasaki.
the executive summary shall not succeed more then two pages. and that includes a summary of the financials (projections for revenues, number of customers contracts, personnel & other costs, number of employees, total cash requirements, sources of funds).

focusing that much requires a clear focus of the aim of the start.up and how to achieve it. if two pages are not enough, more thoughts have to be spent on the start.up.

based on the presentation and executive summary the business plan can be compiled. sticking to a readable 20 pages is key again. no vc will read a 60 page manifesto. after the focusing work was done in the executive summary, filling in the prosa can be done in 2 days. if not, going back to thinking for the exec. summary is imminent.

having followed the chronological order of the "battleground" preparation it is time to think about the start.up's references.
first, who can be the references? choose from former employers, colleagues which already made it, customers, former investors, well connected lawyers, reputable professors. whoever can give valuable, connected reference can make sense. a similar procedure as compiling the a-b list can be applied. not everyone which is known by the members of the start.up is a valuable reference for potential investors though.
as the executive summary is ready by now, it will be easier to get 2-3 references on board, using the key pitch topics is the thoroughly prepared "ammunition" at hand.

being prepared with all the materials required and the investor targets identified, it is time for approaching the investors. this will be the next part of the series, six steps to venture capital.

recommendation: while preparing the a-b vc list, create 1) pitch slides (30-20-10), 2) an executive summary (2 pages including financials), , 3) business plan (20 pages total, attachments & 1 page financial summary included), 4) prepare 2 to 3 references.