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What to Know Before You Go to the VCs

Entrepreneurs waste a lot of time soliciting professionally managed venture funds. Venture capitalists operate according to their own largely unwritten rules. In order to play the funding game, you must learn these rules. Below, I’ve listed some of the most-common mistakes. They won’t tell you everything you’ll need to know, but these simple rules should help you understand the VC process and avoid an enormous waste of time, energy, and opportunity.

Entrepreneurs waste a lot of time soliciting professionally managed venture funds. Venture capitalists operate according to their own largely unwritten rules. In order to play the funding game, you must learn these rules. Below, I’ve listed some of the most-common mistakes. They won’t tell you everything you’ll need to know, but these simple rules should help you understand the VC process and avoid an enormous waste of time, energy, and opportunity.

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1. Choose the appropriate audience. VC funds collect huge sums of cash, and managers must put it to use within four or five years, or risk losing it. Despite their vast resources, venture funds’ staffing is generally lean and mean — managers cannot afford to look at investments that involve, from their perspective, trivial amounts of funding. If you’re looking for very early-stage funding (the so-called “angel round”) or financing under, say, $5 million, don’t go to a professionally managed venture-capital fund. Find angel investors instead. They specialize in taking a company from inception to the next round of financing.

2. No NDAs. Never ask professional investors to sign a nondisclosure agreement (NDA) up front. They won’t do it. VCs will immediately view you as a rookie if you insist on an NDA before they’ve even reviewed the materials, and that will undercut your position from the start. If there is sensitive information in your business plan, don’t provide it at the start. Once you’ve garnered investors’ interest, you can start to let them in on the secret. Some VCs will sign an NDA but only after they’ve made up their mind to invest — and that’s many meetings down the line.

3. Forget cold calling. Don’t bother submitting business proposals over the transom to the VCs in Pratt’s Guide to Venture Capital Sources. You will be wasting your time. You must find a contact, a midwife, who knows the investor to introduce the opportunity. Unsolicited business plans are returned just as quickly as first-time novels.

4. Keep it short. Venture funds receive hundreds of business plans every week. The longer the plan, the more likely it will be put aside for later reading that often never occurs. Never submit a full business plan to a VC. A three-page executive summary is the outer limit that they will read.

5. VC money is nervous money. After the NASDAQ meltdown, no individual wants to be the next bozo, sinking millions into a boo.com. VCs look for a low burn rate, a solid revenue model, grizzled management, and partnerships with genuine strategic value.

This anxiety has ushered in lower valuations. The pre-money valuations of companies have tanked since March, sometimes cut by as much as two-thirds. It is a waste of time, and potentially off-putting, to even discuss an overly aggressive evaluation for your business.

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6. Follow through. Don’t count on the VCs to get back to you on their own. Keep in touch. The trick is to stay just this side of being a pest. Many entrepreneurs have a “good meeting” with the VC and begin to count on receiving cash, neglecting other sources of capital. You haven’t gotten to “yes” until the term sheet has been initialed and the VCs’ lawyer has started to do due diligence. Until then, keep looking.

7. Don’t stop looking. There’s a corollary to the last point: Remember that, until the company is public or is sold (sometimes even after it becomes public), you must continuously hunt for investment capital. Every executive must be on the alert, looking for sources of money. Don’t neglect or delegate this obligation.

Find out more about Joseph Bartlett and venture capital at VC Experts.

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