7 Things No One Ever Tells You About Raising Venture Capital Financing

signing a contract

There are numerous great resources out there to help you raise venture capital or angel financing. Hopefully I’ve helped in some small way with my thoughts on pitching VCs and reviewing financing options.

But there are some parts of the process that few people talk about. And they’re important; especially for startups raising money for the first time.

  1. Signing a term sheet is only step one. Of course there are many steps involved in getting a term sheet. You’ll submit an elevator pitch (followed by a bunch of other things), have numerous meetings, negotiate, etc. — all before you get the beloved term sheet. Getting a term sheet is a significant milestone but if you think the process is smooth sailing after that, think again. Post-signing of the term sheet is when the real work begins!
  2. It might not be worth negotiating the finer points of the deal at the term sheet stage. The fact is, everything can be changed once a term sheet is signed, so negotiating on the finer points of it may be overkill. You may push hard to have very specific language in the term sheet only to realize when you get to the real agreement that it will be re-worded anyway. This doesn’t mean you shouldn’t negotiate for what you want and believe in, but recognize what the term sheet is: a letter of intent to invest, not a binding or absolute contract.
  3. Due diligence is an “interesting” process. And for most entrepreneurs it’s a completely foreign concept and frustrating experience. You’ve just got a term sheet, you’re excited, you’re ready to roll, and suddenly you get a rather extensive list of questions and deliverables the venture capitalists would like to see. Furqan Nazeeri does a very good job of explaining due diligence. He even includes a typical list of questions/requirements that Softbank uses (where he works.)
  4. The paperwork is extremely detailed and extensive. Maybe this won’t come as a surprise (because legal documentation is in a special category unto itself), but when the closing paperwork for your financing is in a binder so heavy it’ll collapse your desk…that’s something! And even with good lawyers on your side to wade through things, there’s a good chance you’ll be neck-deep in legalese.
  5. Most of the deal focuses on negative details. This is the sad truth of legal documentation and contracts. Most of what you’ll negotiate, and most of what will be found in the contract between you and the venture capitalists is there to account for potential problems. This can be frustrating because you want everyone on the same page; everyone’s excited and eager to turn the business into a success, but here you are negotiating what to do when the shit hits the fan.
  6. You pay all the legal bills. Apparently this is standard practice, although others may tell me otherwise…but it’s something that first-time entrepreneurs wouldn’t expect. You pay the legal bills of the venture capitalists. So they hand you the money, only to require that some of it go right back (to the lawyers.) Of course you pay your own legal bills too, so that’s a potential double whammy. The best advice I can offer is this: Find out what others are paying to close similar sized deals and try to get a cap on fees.
  7. Don’t just focus on how much you’re raising and what chunk of the company you’re giving up. The amount you’re raising and what you’re giving up in terms of ownership are extremely important, but there many other things to think about as well. For example: the composition of the board of directors.

For entrepreneurs raising money for the first-time there’s no experience quite like it, nothing to really draw a parallel to. The best thing you can do is find others that have done it before and get their advice — get them on board as advisers if need be. Find a lawyer with experience in these kinds of deals, especially within your industry. And educate yourself.

November 12, 2007 Posted in Startups by

  • http://www.instigatorblog.com Ben Yoskovitz

    @Tony K: All good questions. Here are some thoughts –

    1. From my experience (and speaking to others) you can expect fundraising to take 4-6 months. Perhaps a bit less, perhaps a bit more. If you’d done it before and were well-connected in hotbeds like Silicon Valley, I’d say less.

    2. There are people on both sides of the debate as to whether you need a business plan or not. My recommendation would be to start with a deck. I’ve written about VC decks in the past, and if you search on Google for things like “investment pitches” you’ll find good content.

    Guy Kawasaki has a couple of great posts on what he likes to see in pitches.

    Honestly, the best thing you could have to get funding is a product. Or at minimum a prototype. If you have a product AND you’ve launched AND you have some traction, even better.

    Showing VCs something on paper is much harder.

    3. The best way to get into meeting VCs is through a connection. Lawyers are great for this if they’ve worked with VCs on financing deals in the past. Experienced entrepreneurs as well.

    I’ll also take a crack at the other questions you asked:

    4. At some point you do have to take the plunge and take the risk. But what worries me about your thinking is that, “if you don’t get the funding, you give up on it.” Finding money is hard, and the further you can get in the process without it, the better.

    If that means working 22 hours / day to have a full-time job + an entrepreneurial project on the side so be it.

    Also, do you NEED funding? Lots of startups don’t. There’s a whole world of MicroISVs (small software companies run by 1 or 2 people) that aren’t funded. And many of those guys do it on the side … because they love the work + the product.

    If you can formulate a plan that doesn’t absolutely require VC capital I think you’ll be in a much stronger position. Doesn’t mean you don’t go out and raise money, but it means that raising money isn’t the blocker to realizing your goals in some capacity.

  • Tony K

    Thanks for the great points.

    I was wondering if you can please elaborate on what does it mean to start with a Deck? Does it mean to have a slide show expressing the key points? Also, do you know where i can locate Guy Kawasaki’s presentation on Pitches?

    I am going to try not to get discouraged if VC’s does turn our application for funding. I think being a beginner and not having great connections, you almost have to expect that you wont; get funded. I know you mentioned that the best way to secure VC’s meeting is too have connections with lawyers or expericed entrepreneurs who has been through a VC funding process. I am hoping to meet an experienced enterpreneur who has been through the cycle.

    So your suggesting that for beginners, the best way to get funded is too have the product made already right? I think the ironic situation with that is, what do you do if you need the money to create or launch the product? Correct me if I am wrong, most of the money that enterpreneur recieve goes into development right? Or is it marketing?

    Thanks again.

  • Tony K

    Thanks for the great points.

    I was wondering if you can please elaborate on what does it mean to start with a Deck? Does it mean to have a slide show expressing the key points? Also, do you know where i can locate Guy Kawasaki’s presentation on Pitches?

    I am going to try not to get discouraged if VC’s does turn our application for funding. I think being a beginner and not having great connections, you almost have to expect that you wont; get funded. I know you mentioned that the best way to secure VC’s meeting is too have connections with lawyers or expericed entrepreneurs who has been through a VC funding process. I am hoping to meet an experienced enterpreneur who has been through the cycle.

    So your suggesting that for beginners, the best way to get funded is too have the product made already right? I think the ironic situation with that is, what do you do if you need the money to create or launch the product? Correct me if I am wrong, most of the money that enterpreneur recieve goes into development right? Or is it marketing?

    Thanks again.

  • http://www.entrepremusings.com Aruni Gunasegaram

    Hi Tony – Again, I totally agree with Ben. You most certainly can work on your business plan while you have a full time job, but if you are serious about raising funds you will have to miss a lot of work to set up meetings if you don’t already have a ton of connections. Plus as Ben said having a product or at least a prototype shows investors how much you have really though through the process.

    One thing you should also be aware of is that investors are also wary of investing in individuals who are gainfully employed because of non-competes and IP ownership issues. Depending on your agreements with your current employer you may have already signed away your ideas/inventions you come up with while on the job (even if you are not officially on the clock) resulting in increased risk to the investor if you happen to get sued by your existing employer.

    I would also advise staying away from VCs until you have more traction under your belt. Read Fred Wilson’s A VC blog for mroe insight. You could look to friendly angels. If they believe in your idea and you then they are more likely to take a risk with their own money. Just my 2 cents. Good luck.

    Ben – hope I’m not abusing your blog commenting policy (if you have one). :-)

  • http://www.entrepremusings.com Aruni Gunasegaram

    Hi Tony – Again, I totally agree with Ben. You most certainly can work on your business plan while you have a full time job, but if you are serious about raising funds you will have to miss a lot of work to set up meetings if you don’t already have a ton of connections. Plus as Ben said having a product or at least a prototype shows investors how much you have really though through the process.

    One thing you should also be aware of is that investors are also wary of investing in individuals who are gainfully employed because of non-competes and IP ownership issues. Depending on your agreements with your current employer you may have already signed away your ideas/inventions you come up with while on the job (even if you are not officially on the clock) resulting in increased risk to the investor if you happen to get sued by your existing employer.

    I would also advise staying away from VCs until you have more traction under your belt. Read Fred Wilson’s A VC blog for mroe insight. You could look to friendly angels. If they believe in your idea and you then they are more likely to take a risk with their own money. Just my 2 cents. Good luck.

    Ben – hope I’m not abusing your blog commenting policy (if you have one). :-)

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  • http://baltimorerealestateinvestingblog.com/ ncarey

    Good post. I am going though a lot of this now. Fortuneately I have it a little easier as I am in Real Estate so I am funding existing project with a track record. But the hoops I have to jump through are pretty much the same.

  • http://www.asykral.blogspot.com asykral

    thats good. now ? started to interesting with finance yet.. thanks for your posts.

  • http://www.instigatorblog.com Benjamin Yoskovitz

    Thanks for the comment. Although I can't imagine real estate – given the economic situation in the US – is any better than anything else these days, from an investment-perspective! But I wish you the best of luck.

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  • http://www.motociclist.com Motociclistul

    good post. Good luck with your latest deal.

  • http://www.grikare.com Reseller Hosting

    Honestly, the best thing you could have to get funding is a product. Or at minimum a prototype. If you have a product AND you’ve launched AND you have some traction, even better.

  • http://www.herseyvarmis.com hersey varmis

    I am in Real Estate so I am funding existing project with a track record. But the hoops I have to jump through are pretty much the same.
    thanks

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  • http://www.mobilhat.com mobil

    thanks you :)

  • http://www.onlinebingofun.co.uk/ Online Bingo Fun

    Nice and grate article for me. I'm in the process of going out for angel financing and it's a interesting to see what the current thought about that.
    Now this just reaffirms that I wont be wanting or needing it.

    Great Post Ben Yoskovitz.
    Thanks.

  • http://kutahotelsbali.com/ kuta hotels

    for article specially point 5 i agree with you, cause i have been there, is really frustrating

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Ben Yoskovitz
I'm VP Product at Codified (makers of VarageSale).

I'm also a Founding Partner at Year One Labs, an early stage accelerator in Montreal. Previously I founded Standout Jobs (and sold it).

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