NextWeb – How to deal with VCs

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NextWeb live blog: Adeo Ressi, Entrepreneur, Environmentalist, and founding member of TheFunded.com gave a amazingly detailed and blunt rap about who to deal with VCs – who he is clearly cynical about. Among a range of points he said there are more VCs working against startups than for them. But the good news is that everyone is waiting for you to show up at their door with your dream. Today is one of the best times in history to start a company, given the low costs of starting up, low cost technology, outsourcing etc. You can even out-source to the US now.

What kind of company gets financed? Ones with a big vision, in a growing market, with a new approach and new technology.

How do you play the game? Understand the motives of the investor you’re talking to. (A raise of hands showed that it looks like a lot of the startups here have already raised funding)

Most venture exits walk away with over 80% of the value generated, even though it often appears like 25% on paper.

Lawyers are paid by the VCs. All the fees get paid at the end by the proceeds of the investment. You pay both VCs and lawyers on the exit. The only time lawyers are honest is when you interview them to hire them to close your deal. After that trust nothing that they say, because they want to close the deal to get paid by the VC.

He suggests you find 3/4 firms that have done VC financing before and ask them some hard questions before going into the deal with the VC.

How to pitch?

Make it 20 mins long
push the big vision
push the differentiation
avoid detailed financials
avoid confidential information
Also go into the VC pitch with a friend and if the partner writes down where it happened in the presentation and go back and fix it

Prepare your approach:

Meeting Powerpoint
Capitalization Table
Working Financial model
Competitive analysis
(Audit financials etc)
Industry research

Saying we’re like Facebook meets Bebo is a good thing – it helps them understand where you sit.

Goal: Pitch 30 firms in 2 weeks. They with hare your presenation and trash you to other VCs if they like your idea to put other firms off.
Expect a low success ration, and expect investors to talk between themselves.

Leverage your law firm, friends, Associates, – set up meetings over the phone and face to face not email.

Good signs are thoughtful questions, bad signs are no questions “maybe” or “but” or you get handled by associates not partners at a VC firm.

Lots of venture funds to competitive research because they are looking at another deal, not yours.

Focus on interested firms and then ignore the rest. You’ll get a lot of maybe’s. Too many startups try going back to the uninterested VCs. Pointless.

Negotiate
Don’t accept the the first term sheet
Time is on your side
Exlusivity and expirations are tactics

Key Secondary terms -

Liquidation preferences: 1 times is good, 3 times is bad

Close the financing:
Dilignce: Prepare your references
Say no when its excessive
Legal: The deal is more important than you
The details matter
Have a Plan B

Tips:
Do not outsource your fundraising
Do your homework
There is no “Industry Standard”
There is no confidentiality
Understand exit scenarios
Inform targets of progress during the negotiation

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