NextWeb – How to deal with VCs

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NextWeb live blog: Adeo Ressi, Entrepreneur, Environmentalist, and founding member of 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.

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

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

  • Joe Drumgoole

    Brian Caulfield (a VC here in Dublin) talks about focussing on the cash waterfall, that is, what happens at exit in a trade sale.

    Founders often obsess about hanging onto to a large % of their stock, but forget that things like ratchets, preferences and double dips can render a holding a large percentage of the stock meaningless.

    Instead focus on what happens to the cash at a typical exit, i.e. the cash waterfall.

  • luca

    I would add: if they ask you how to prevent other companies to do the same you are doing, tell them that EVERYONE can do the same, you cannot do anything to prevent it, but you just do it better.

  • Danvers Baillieu

    Wow – I know people can be cynical about lawyers but that comment about the Company’s lawyers only being interested in the deal closing so that they get paid by the VC made me drop my dictaphone…. On the one hand lawyers are criticised for putting up too many roadblocks and not being commercial enough, and now on the other, not giving straight advice so that the deal goes ahead despite the interests of the Company. I for one, have been happy to tell clients that a VC is asking too much and they should walk away (despite the impact on potential fee revenue) – much better to live to fight another day than do the wrong deal. Equally, clients can be unrealistic as to what must be surrendered and sometimes it is up to the lawyer to give the client a reality check to prevent unreasonable positions screwing up the whole deal….

    The rest of the advice is pretty sound though.

  • Yakov

    Great advice! shall use it!

  • Adeo

    Thanks for the great feedback on the talk! Always a pleasure to help start-ups on your birthday and get a positive reaction.


    To clarify the “lawyer” point in the article, I am a firm believer in the strategy of “trust, but verify” when it comes to term sheet negotiations by counsel on your behalf. Entrepreneurs the world over should not assume that something in your legal documents is an “industry standard” just because that is the opinion of your counsel. Do your own research.

    For example, publishes term sheets from all around the world (available to Members), and there is nothing standard about the deals being offered in any respective industry, region, or stage. Terms are all over the map, and everything should be properly understood and negotiated by the entrepreneur before executing the documents.

  • Danvers Baillieu

    Adeo – I agree completely with you about the use of the phrase “industry standard” – it is usually relied on when there is no other possible justification for the term being in the term sheet. However, it often comes down to strength of bargaining position in the end.

    If VCs claim they “always get” a particular term, it is definitely worthwhile doing some research – either by speaking to any other companies they have invested in (if you know them) or by checking publicly available filings which might allow you to verify this. It is amazing how easy it is to catch someone out on this.

  • Shawn

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

    Can you explain what you mean by that? Both “exits walk away” (is that
    the investor gets 80% back?) and what is “value generated”?


  • http://Stealth Dotcom Entrepreneur

    Adeo, this is an eye-opening post that is very timely for me.

    I have a telephone meeting with a VC tomorrow. He said he would prefer to have a first conversation on the phone, even though I told him that said I will be in his area that day anyway.

    I am planning to call him today and respectfully decline that phone meeting, for two reasons:

    – I truly believe that my story is best told face to face.
    – He is the ONLY VC on my list! I fully agree with your post I need to expand my VC list to 10+

    Any comments or suggestions?

  • JMO

    “or by checking publicly available filings which might allow you to verify this.”

    Danvers, thank you for mentioning this. People seem to forget that we have built a database of venture regulatory filings, already analyzed, so that they can have the ammo to back up their term sheets and validate whether or not something is (or isn’t) industry standar

  • Adeo

    The slides from the presentation have been posted now:

  • Siim

    Would you say that the same principles still apply in current economic situation as well, or the principles have somewhat changed?

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