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

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  • http://www.audiomecca.com/download-music/ Download Music

    You are quite right. People who have raised venture funding do not wish to share all the gory details that you have now so nicely addressed. While it will indeed be very helpful to get advise, people with experience, except the consultants who get paid for it rarely wish to spend time with you on this subject. I wonder why! One has to go through the painful process and learn for oneself.

  • http://www.audiomecca.com/download-music/ Download Music

    You are quite right. People who have raised venture funding do not wish to share all the gory details that you have now so nicely addressed. While it will indeed be very helpful to get advise, people with experience, except the consultants who get paid for it rarely wish to spend time with you on this subject. I wonder why! One has to go through the painful process and learn for oneself.

  • http://www.advicenetwork.com/contest Advice Network Writing contest

    Every day I hope and pray I can boot strap on the seed money I have. If I never have to go thru any of that, i will consider myself a lucky man.

  • http://www.advicenetwork.com/contest Advice Network Writing contest

    Every day I hope and pray I can boot strap on the seed money I have. If I never have to go thru any of that, i will consider myself a lucky man.

  • Commenter

    Great Post. I never knew much in regards to the steps and procedures needed to obtain venture capital. Now this just reaffirms that I wont be wanting or needing it.

  • Commenter

    Great Post. I never knew much in regards to the steps and procedures needed to obtain venture capital. Now this just reaffirms that I wont be wanting or needing it.

  • http://endorseyou.wordpress.com Al

    You’ve become a master link baiter. I really like how you can pull out all the good related articles and bring it together – I just need to bookmark this page now :)

  • http://endorseyou.wordpress.com Al

    You’ve become a master link baiter. I really like how you can pull out all the good related articles and bring it together – I just need to bookmark this page now :)

  • http://blog.shaneandpeter.com shane

    Nice article Ben. Out of curiosity – how many times have you been through the funding dance? I have alwaysh ad the blessing of being self funded and come up with cheap ideas!

    =)

  • http://blog.shaneandpeter.com shane

    Nice article Ben. Out of curiosity – how many times have you been through the funding dance? I have alwaysh ad the blessing of being self funded and come up with cheap ideas!

    =)

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

    @Al: Thank you. I sort of thought I was a master linkbaiter before, but I’ll take that as a compliment. *smile*

    @Shane: I’ve been involved with funding a few times.

    I don’t want to give the impression that raising money is a BAD thing. It’s not. Having a business that’s underfunded can kill it completely. I’ve seen and experienced that too. These are just things that many first-timers might not realize come with the process of raising money. It’s not an easy process; then again if it was, everyone would do it…

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

    @Al: Thank you. I sort of thought I was a master linkbaiter before, but I’ll take that as a compliment. *smile*

    @Shane: I’ve been involved with funding a few times.

    I don’t want to give the impression that raising money is a BAD thing. It’s not. Having a business that’s underfunded can kill it completely. I’ve seen and experienced that too. These are just things that many first-timers might not realize come with the process of raising money. It’s not an easy process; then again if it was, everyone would do it…

  • http://anjamerret.com Anja Merret

    Excellent points. Really good advice.

  • http://anjamerret.com Anja Merret

    Excellent points. Really good advice.

  • http://devthink.com Ian

    Very interesting article. Especially about about paying for their lawyers. I would imagine there would be substantial variation in even these basic details firm to firm, no?

  • http://devthink.com Ian

    Very interesting article. Especially about about paying for their lawyers. I would imagine there would be substantial variation in even these basic details firm to firm, no?

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

    Ian – We’d have to get insight from other people who have raised money in the past, but my understanding is that this is common practice.

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

    Ian – We’d have to get insight from other people who have raised money in the past, but my understanding is that this is common practice.

  • Commenter

    I know the good guys at SEOmog .org just got about a million in VC capital. Hope it works out for them

  • Commenter

    I know the good guys at SEOmog .org just got about a million in VC capital. Hope it works out for them

  • http://www.entrepremusings.com Aruni

    Nice article. I’m in the process of going out for angel funds and it’s interesting to see what the current thought is. I raised angel and VC financing back in the late 90′s and in 2000 for my first company so it will be interesting to see how things have changed and how they have stayed the same.

  • http://www.entrepremusings.com Aruni

    Nice article. I’m in the process of going out for angel funds and it’s interesting to see what the current thought is. I raised angel and VC financing back in the late 90′s and in 2000 for my first company so it will be interesting to see how things have changed and how they have stayed the same.

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  • http://canentrepreneur.blogspot.com Rick Spence

    Great post, Ben. I have linked to this post at Canadian Entrepreneur.

    Good luck with your latest deal.

  • http://canentrepreneur.blogspot.com Rick Spence

    Great post, Ben. I have linked to this post at Canadian Entrepreneur.

    Good luck with your latest deal.

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  • http://www.dreamhouselv.com reshmi

    Great post Ben, People who have raised venture funding do not wish to share all the glory details that you have now so nicely addressed

  • http://www.dreamhouselv.com reshmi

    Great post Ben, People who have raised venture funding do not wish to share all the glory details that you have now so nicely addressed

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

    @Aruni: Thank you for the comment – I appreciate it.

    I didn’t raise money “back in the day” so I can’t really speak to how it’s different. I’d like to think money is being spent better than the dot com days.

    Best of luck in raising financing, and hopefully you can share some lessons learned with the rest of us!

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

    @Aruni: Thank you for the comment – I appreciate it.

    I didn’t raise money “back in the day” so I can’t really speak to how it’s different. I’d like to think money is being spent better than the dot com days.

    Best of luck in raising financing, and hopefully you can share some lessons learned with the rest of us!

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

    @Rick: Thank you for the comment and linking back, I appreciate it…

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

    @Rick: Thank you for the comment and linking back, I appreciate it…

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  • http://www.myfancircle.com Tony K

    Hi Ben, Nice post. I am an entrepreneur who is looking to raise some VC or Angel funding for the first time.

    The question that i have is, you mentioned there are numerous meeting take place before you get the term sheet. If you currently work 8 to 5 at a company, how much time do you need to invest to meet with VC, how often do you have contact them? In your opinion, is this something that can be manage while you have day time job? Also, how much capital do you need to have upfront to get the ball rolling? I know you mentioned the lawyer costs, is there other costs?

    Thanks
    Tony K

  • http://www.myfancircle.com Tony K

    Hi Ben, Nice post. I am an entrepreneur who is looking to raise some VC or Angel funding for the first time.

    The question that i have is, you mentioned there are numerous meeting take place before you get the term sheet. If you currently work 8 to 5 at a company, how much time do you need to invest to meet with VC, how often do you have contact them? In your opinion, is this something that can be manage while you have day time job? Also, how much capital do you need to have upfront to get the ball rolling? I know you mentioned the lawyer costs, is there other costs?

    Thanks
    Tony K

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

    @Tony: I’d say it’s going to be very difficult to start up a company and raise capital at the same time while working a full-time job. Investors may also question your dedication to the project…It’s a tough situation to be in.

    In a case like that, you’re probably better off bootstrapping as long as you can … try to launch and get some traction. You’ll have a more compelling story for the VCs for sure.

    The capital needed upfront depends on a lot of factors. Lots of people have started successful companies on the side with little to no capital … it takes longer, but it’s doable. And again, that might be your best approach.

    And yes, there are always costs. In terms of raising money though there aren’t any huge costs (other than the lawyer fees.) Except, of course, time — because it takes a lot of time to raise money.

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

    @Tony: I’d say it’s going to be very difficult to start up a company and raise capital at the same time while working a full-time job. Investors may also question your dedication to the project…It’s a tough situation to be in.

    In a case like that, you’re probably better off bootstrapping as long as you can … try to launch and get some traction. You’ll have a more compelling story for the VCs for sure.

    The capital needed upfront depends on a lot of factors. Lots of people have started successful companies on the side with little to no capital … it takes longer, but it’s doable. And again, that might be your best approach.

    And yes, there are always costs. In terms of raising money though there aren’t any huge costs (other than the lawyer fees.) Except, of course, time — because it takes a lot of time to raise money.

  • Tony K

    Hi Ben, thanks for the respond.

    Few more inital thoughts:

    On average, how long does it take to raise money (to get the first check)?

    Here is my understanding of how the process works, please correct me if i am wrong.

    Step 1: Create a business plan, which include what the product is, what the competition is, mission statement and etc. Do folks use some standard templete or is there something special that VC’s like to see?

    Step:2 Find funding VC’s or Angel funding and apply. I know there are lots of VC’s around the nation, I live it Chicago, is it proper to find a VC that is in Chicago or is it better to seek VC’s in Boston or Silicon Valley? I would think it would be cheaper to find VC in Chicagoland area because you can make meeting without flying to other states right? At the same time seeking Silicon Valley has advantages as well right because they are so many VC’s in the valley.

    Step 3: I would asssume if VC’s are interested in the project they would try to set up a meeting to elaborate the business in detail right?

    I have additional questions but I don’t want to overwhelm you with questions :).

    Thanks again.

  • Tony K

    Hi Ben, thanks for the respond.

    Few more inital thoughts:

    On average, how long does it take to raise money (to get the first check)?

    Here is my understanding of how the process works, please correct me if i am wrong.

    Step 1: Create a business plan, which include what the product is, what the competition is, mission statement and etc. Do folks use some standard templete or is there something special that VC’s like to see?

    Step:2 Find funding VC’s or Angel funding and apply. I know there are lots of VC’s around the nation, I live it Chicago, is it proper to find a VC that is in Chicago or is it better to seek VC’s in Boston or Silicon Valley? I would think it would be cheaper to find VC in Chicagoland area because you can make meeting without flying to other states right? At the same time seeking Silicon Valley has advantages as well right because they are so many VC’s in the valley.

    Step 3: I would asssume if VC’s are interested in the project they would try to set up a meeting to elaborate the business in detail right?

    I have additional questions but I don’t want to overwhelm you with questions :).

    Thanks again.

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

    Hi Tony – Ben is right re: working a full time job, writing a plan, building a product, and raising funds. Not only might investors question your dedication but also your ability to execute. You might be interested in a few recent postings on my blog http://www.entrepreMusings.com. I did one on Choosing A Corporate Attorney and one on My Fundraising Toolkit (that was re-published on Found|Read). Hopefully in the next few weeks I’ll finally get around to doing one on my past experience with Angel vs. VC money. I’m in the process of finishing up my exec summary and financial model.

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

    Hi Tony – Ben is right re: working a full time job, writing a plan, building a product, and raising funds. Not only might investors question your dedication but also your ability to execute. You might be interested in a few recent postings on my blog http://www.entrepreMusings.com. I did one on Choosing A Corporate Attorney and one on My Fundraising Toolkit (that was re-published on Found|Read). Hopefully in the next few weeks I’ll finally get around to doing one on my past experience with Angel vs. VC money. I’m in the process of finishing up my exec summary and financial model.

  • Tony K

    Hi Aruni- Thanks for the follow up.

    I have been reading your post as well, I know you are currently working on a funding to get started on your new project. I know you have raised money from VC’s in the early 2000 and i know your currently seeking funding for a new project. I am also very curious to know your finding about current VC’s requirements. I am sure VC’s have a new ways and process in funding money compared to late 90′s. I am a novice when it comes to seeking funding yet very eager to get the ball rolling.

    You did mention that its very hard to write a plan, build a product, meet with clients, etc while having a full-time job. What i am very curious to know is, do majority of entrepreneurs just take a big risk by quitting their job and hope they will get funding? For someone who doesn;t have much saved up, isn;t quite risky to quit your job to start a startup hoping you will get the funding? I would think people can manage to create a business plan while working an 8 to 5, and i guess you wont; have to start working on the product until you get funding, in which case you can actually quit your job then right?

    Thanks again.

  • Tony K

    Hi Aruni- Thanks for the follow up.

    I have been reading your post as well, I know you are currently working on a funding to get started on your new project. I know you have raised money from VC’s in the early 2000 and i know your currently seeking funding for a new project. I am also very curious to know your finding about current VC’s requirements. I am sure VC’s have a new ways and process in funding money compared to late 90′s. I am a novice when it comes to seeking funding yet very eager to get the ball rolling.

    You did mention that its very hard to write a plan, build a product, meet with clients, etc while having a full-time job. What i am very curious to know is, do majority of entrepreneurs just take a big risk by quitting their job and hope they will get funding? For someone who doesn;t have much saved up, isn;t quite risky to quit your job to start a startup hoping you will get the funding? I would think people can manage to create a business plan while working an 8 to 5, and i guess you wont; have to start working on the product until you get funding, in which case you can actually quit your job then right?

    Thanks again.

  • 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.

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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