Over the past six months we have been doing the venture capital financing dance with a certain vc firm, which shall remain unnamed. What an eye opening experience it has been. I thought I would jot down few notes/tips that should be helpful to anyone going down the VC path.
- Always go down the path with at least two VC firms if possible. Should you choose to do otherwise, the VC's power position is just too great. They can string you along for months with due diligence items, until you've burned all your cash. This does two things for a VC: One, it mitigates their risk (the more time that passes before they put their money in allows them to better gauge the company's chances at success); two, once you're cash is gone your VC has you against the wall and they often will renegotiate the terms of the financing grossly in their favor.
- Conduct due diligence on potential VC financing partners.
- Ensure you know who is paying for their lawyer's fees. Also, if you are paying, make sure there is a cap.
- Don't underestimate the capacity of angel investors. Accepting money from a large number of angels is probably a bad idea because then you have too many needy investors, (which could dampen the productivity of the company); however, accepting large chunks of money from a few value-added investors is great. They often will contribute more than any VC, and you can often get better terms. Network, network, network if you want to go this route.
- Ensure that you understand the exit needs of the VC in regard to your company's financing. It is usually the case be that your VC requires an liquidity event within 2-5 years of their investment depending on the terms of the fund from which they are operating.
- This reiterates some of the points above, but I think it is the most important. As with any deal, make sure you have a walkaway. Whether that's in the form of an angel, alternative VC, bluff, have something. When it gets down to the wire VCs love to play chicken, and often can afford to risk having you walk.
- Always remember that you and the VC are adverse parties at the start. They may be very complimentary, offer great insights into your company, and seem like they are the sage you want on your board, but until the financing is complete they are adverse.
I'll add to this list as more thoughts come to mind.
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