Raising money from VCs is just like dating!
February 20, 2013
The first two times I raised VC money, until success simplified things, it occurred to me how the process really mimics real world dating. Observing many other entrepreneurs similarly struggling with the process over the last few years only corroborated my thesis. Unfortunately for the most part, we entrepreneurs play the role of the desperate nerdy guy while the VCs play the role of the extremely desirable and seemingly unobtainable pretty girl. This is all the more true in the current Series A crunch as more and more seed funded entrepreneurs are chasing a smaller number of VCs writing $3-7 million Series A checks.
Getting that first date (or meeting) is often the hardest part. We reach out to many VCs by every way possible, preferably through introductions, but often at conferences or even via cold emails. At best we are turned down immediately, but are most often ignored. I can’t begin to recount how many excuses I heard for being turned down, but the list is seemingly endless: you are too early stage, you are too late stage, it’s out of our core focus, I am conflicted, I would love to, but my partners would not understand it, it’s out of our geographic focus… The good news is that, like in dating, you quickly realize that rejections don’t really hurt. It also helps to think that it’s really their loss (as delusional as the thought may be).
Once in a great while we manage to ensnare a VC and convince one of them, usually a junior associate at the firm, to give us a hearing. We hone our presentation and like supplicants appear at the meeting, typically scheduled a few weeks after our first conversation. The date lasts around one hour as we portray why we are a good dating material (or more) for them. The associate will write a meeting summary for his partners with a recommendation. More often than not, it will be a recommendation not to pursue at this time. At this point, we are often left in limbo as the VC will be too polite to explicitly let us know we are not in the running. This is akin to not getting a call back after a first date.
If, miraculously, our pitch struck a chord, the associate will follow up with detailed questions about our business model, assumptions, etc. This email flirting lasts a few weeks and allows the associate to confirm his initial hunch and make sure we are ready for our meeting with his partner – aka the second date. This second meeting will also last one hour and will for the most part be a reiteration of the first meeting as we repeat our story to the newcomer though the second half of the meeting will delve deeper into questions they have about the business.
Should the second date go well, we might have a few more email exchanges and meetings over the course of a few weeks to prepare us to present to the partners of the venture firm at one of their Monday partner meetings. This judgment day will determine whether they will extend us a letter of intent saying they want to invest in our company.
This meeting will also last around an hour and have us, yet again repeating our story and answering questions the partnership may have. Should it go well, they will extend to us a non-binding letter of intent which essentially plays the role of an engagement proposal: we want to get married, but are not bound yet.
The next two to three months will have us negotiating over and drafting a multi-hundred page stock purchase agreement: our prenuptial agreement or marriage contract. Finally, an exhausting 6 months after that first fateful meeting with the venture firm, we will be married and the money will be in the bank.
Make no mistake selecting a VC is like getting married and selecting the wrong partner can be very detrimental to your well-being. It’s easy to be impressed by the prettiest girl (e.g.; the VC offering the most money at the highest valuation or with the best reputation). Ultimately, like in marriage, it’s more important to select the person who is right for you, who gets you, whom you trust and respect and who will support you in good times and bad times (of which there will be plenty). Note that that person is the specific partner who will sit on your board. The firm’s reputation is irrelevant, it’s the person you work with who maters.
It’s worth mentioning that once in a great while the tables are turned and we entrepreneurs, usually through sheer luck, happen to run the hot startup of the moment. We have incredible traction in a sector that is booming and attracts the interest of countless VCs. In those rare moments, we are the hot girl who plays hard to get and the VCs are our desperate supplicants. If you are lucky enough to experience that moment count yourself extremely lucky. Feel free to make the most of it by having the VCs prove their worth to you by granting ever more generous marriage proposals, but remember not to become too arrogant and to price yourself out of too many exits because for every Facebook there is a Digg – a former high flyer fallen on hard times. Yet again, pick the right partner, not just the one offering the most.