"surviving after investment", 6th and final part of the series "six steps to venture capital"

a successful venture capital investment into a start.up is a big step. having taken this hurdle, it is all now about staying in the game through fulfillment and transparency.

this is the final and sixth step in the series about approaching venture capital, 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 2.1, part 2.2) got filled. the battleground was prepared in step 3, and how to approach venture capital in part 4 (part 4.1, part 4.2). the art of negotiating was the focus of part five (part 5.1, part 5.2). finally now it is all about surviving after the investment.

the entrepreneur has to be prepared to fulfil what he promised when searching for investors. the ultimate consequence of not doing so is simple: losing her job and/or the shares in company.
under-performance in revenues, product delivery and cost discipline lead to additional cash requirements, speaking vc investments. such a „down round“ (lower valuation then in the first round) is mainly done by the first investor. only some start.ups survive this without changes in management and none without the founders loosing substantial shares.

this in mind, a less ambitious company valuation and reachable key metrics (revenues, expenses, cash flow) can lead to a more desirable outcome for the founders already in the mid-term. in vc-language: increase in company value compared to the investment date.


being a start.up, it is evident that not all goals aimed for or promised get reached. ultimately the investor always finds out. many start.ups think they do not - but they always do. from customers, unsatisfied employees and latest when the company runs out of cash.

rather then „performing“ in board meetings transparency is key for survival. no investor, no advisory board member shall ever get surprised in a board meeting (link sun tzu). setting up a three to four week „one-pager“ reporting schema, outlining the good and the bad is one way. involving the investor in a „srum“ like company development process another. demanding input and such giving responsibility to the investor is crucial.

through fulfilment and transparency the so called „shit meeting“ can be avoided. this is the first meeting between investors and start.up after the investment, when the difference between the investment story presented and the reality come to the surface.

recommendation: 1) only promise what can be fulfilled, 2) fulfil what got promised and 3) always be transparent.

this „six steps to venture capital“ series is a guideline on how to get investor on board. every start.up is different, no product, market, investor or founder is alike.
it needs a compelling business opportunity and a thriving start.up team combined with a structured approach and some luck. then venture capital investments are just another task to work on.

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"negotiations" part 5.2 of the series six steps to venture capital

the negotiation process is key for a good contract. in "negotiations" part 5.1 of the series "six steps to venture capital" the general framework got laid out. in part 5.2 it is all about the details.

key points first

time line, term sheet, contract. in that order. never avoid any critical topic at the beginning. they will sooner or later surface anyway, so they shall be dealt with directly.

know the aims
it is vital to know the aims of the negotiations before they take place. the negotiation team has to decide beforehand what they aim for and how much compromise is acceptable.
one way to do that is to sit down for half an hour, discuss, decide and write down the aims to visualize and remember. then destroy the paper, as it must not be seen by the vc by any accident in the meeting afterwords. this holds for each separate meeting. no-one alone compromises the agreed terms in face of the investor. if a rethinking of the agreed aims is necessary, a break out session is necessary.

break out sessions
they are a common way to take speed or emotion out of tense negotiations. every party gets time to rethink, to cool down or to gather required information. start.ups can co-ordinate their negotiation aims. whenever necessary break-out. rather one break out session too much than having agreed to anything without realizing what it means. having experts on stand-by is recommended.

experts on stand-by
lawyers, technical experts, general advisers or friends are source for support during negotiations. they are to be informed ahead so they can be reached when required.



know the terms
drag along, take along, liquidation preference, right of first refusal, pre-post money valuation, milestones, catch-up, pay to play, ratchet, signing-closing, advisory board, due-diligence,... they all can be looked up. e.g. on investopedia or wikipedia. this is investment language, nothing really complicated about. one just has to be able to deal with them, know them by heart and be able to „play“ - meaning negotiate on the different aspects - them.

tiredness
bad negotiation results can not be excused with tiredness. if necessary take break outs, get food, go scream on the balcony - whatever is necessary. then get back and keep negotiating hard.

socialize
vc are (also) humans. they have hobbies, family, worries, hopes. they are like everyone else. avoid the hawks through checking their references (discussed here).

heart & hard
being respectful and friendly is key. negotiating hard at the same time is no contradiction. not only for the negotiations and the daily life after with vc. it also holds for customers, suppliers, sales partners or employees.
at the end of a long negotiation process both parties are supposed to be unhappy with the results - but still happy to have closed the deal. with the negotiations finalized and vc money injected it is all about fulfilling and surviving. more on why it is necessary to deliver in the upcoming sixth and final part of „six steps to venture capital“.


recommendations: 1) define aims: time line & term sheet key elements, 2) take break outs, 3) have experts on stand-by and 4) know the terms.

in the final part of the series six step to venture capital read on how to survive after the investment. clearly not a trivial task.

"approaching venture capitalists", part 4.2 of the series six steps to ventture capital

at the 2nd round meeting it goes along the same lines as on the first round. know your pitch, stick to your talking time. know who answers which questions. do not correct each other giving answers.

now it is time to hand out your references. and again: set up the schedule (yes or no, negotiation schedule, term sheet, final contract signing-closing). this tests the real interest of the vc, namely through assigning resources for the evaluation. having mastered the 2nd meeting, this either leads to a „no“ or a jump directly into the negotiation part. this will be the next part of the series.

having reached the 3rd round brings one positive problem: the vc´s approached until now were form the b-list. the leanings form the presentations and meetings will pay off, through refining the approach, the pitch. based on this, it is then time to go ahead on a-venture firms. keeping the b-vc as back up can be helpful.
following the same procedure as outlined above it is about making it to the 3rd round with two a-vc. the main difference now being, not to learn & to improve but getting qualified a investors.

there remain some side topic on approaching vc, which are worth looking at: timeframe, lawyers, costs, consultants and exclusivity.

as a general time frame, 6 month from the start of approaching vc until closing an investment are a reasonable timeframe for europe. 4 month are more seen in the anglo-saxon world.

lawyers are generally only necessary after drafting the term sheet. until then common sense suffices as singning anything which would cause obligations on the start.ups side are not necessary.

until a term sheet is signed, no costs of any kind should be accepted from the start.up by a credible investor.

if any kind of corporate finance/m&a,... -consultants which promise to bring investors to the start.up are involved, special care is required. upfront payments may sound plausible but as cash is a scare resource, only success fees should be accepted, based on real cash inflow on the start.ups account. generally start.ups have more then sufficient capabilities to acquire vc interest - if they do their homework. and paying a consultant just to be told to do the homework could be seen a waste of money. the combination of a compelling idea with preferences (see part 3) opens vc doors without the help of others.

recommendation: 1) approach 3 b-vc, 2) follow up after one week, 3) fix 1. meeting/conference call, 4) be prepared, 5)push for go/no + next meeting, 6) reach 2. & 3. meeting. 7) watch timeframe, lawyers, costs, consultants and exclusivity.

how to succeed in the negotiations with the investor will be the focus on the 5th part of the "six steps to venture capital" guide. that much can already be said: the aim is, that both parties are unhappy but still want to close the deal.

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are YOU venture capital compatible?

5 out of 10 to reasons to invest for venture capitalists are related with the entrepreneurs experience and personality.
this was true in the 80ies when this survey has been done, but still holds when looking at today’s investment scene.

if you want to prepare yourself for funding, take care of the following . * mark personal criteria of the founder. failing more then two criteria gives good chances for not getting financed.

* capable of sustained effort
* knowing your market
5-10 times return for vc possible
* ability to evaluate risk and act accordingly
investment can be sold easily
big market growth
* track record in field of new venture
* ability to express
intellectual property rights protect able

while the analysis was new york focused, expect experienced venture capitalists applying the same in europe. which means: take care of sun zi.


p.s. by the way, why as an entrepreneur not evaluate your potential vc on the same criteria?!

source:
ian c. macmillan, robin siegel, p.n. subbar nar asimha, "criteria used by venture capitalists to evaluate new venture proposals", journal of business ventureing 1, 119-128 (1985) in: venture capital, volume II, edited by mike wright, harry j sapienza, lowell w. busenitz, edward elgar publishing.