Why Entrepreneurs Should Never Meet VC's Unless They're Formally Pitching

[Addendum to the original post:  The next post attempts to clarify the positions of several, apparently contrary blog posts, as well as some of the comments generated by this post.]

One of the things I do for my "Sherpa" companies is help them raise money.  Recently, I've had the same discussion with several of them:  whether to have 'informational' meetings with VC's as a prelude to later, full-on 'pitch' meetings.  My advice to entrepreneurs and startups is that, on balance, 'informational' meetings have more risk than reward -- so don't do them.

First, regardless of the nominal reason for the meeting, VC's always assume that entrepreneurs are meeting with them to pitch.  VC's have money; entrepreneurs want it.  That's the fundamental nature of the relationship.  When the meeting is premised on the notion that it's just 'informational', there is a risk that the entrepreneur is too casual, not well-prepared, lets down his guard and does not put his best foot forward.   And, because they're wired this way, that is what the VC is likely to remember:  a lousy pitch.

Second, as I've written elsewhere, although I've never heard of a VC "stealing" an idea from an entrepreneur, VC's do learn from every startup that pitches them.  No surprise: VC's, even in their field of speciality, can't focus as much on any single startup idea as the entrepreneur(s).  The risk here is that, the VC, now smarter thanks to the entrepreneur, "passes" on the entrepreneur's deal (even though he wasn't being pitched) for any one of a number of reasons, but then meets another startup team that he likes and that is doing something similar, or hires an entrepreneur-in-residence with a similar idea.   Now, the VC has a 'prepared mind' and can be of more help with what could turn out to be a competitor.

Third, the first thing VC's do when they meet with other VC's is talk about interesting startups they've seen.  If a startup has just met with a VC, even for an "informational" meeting, that VC is likely to mention it to colleagues and other VC's, although likely not with the qualifier that "it wasn't a real pitch".  Several months later, when the startup is 'really' fundraising and they meet with the VC who heard about them several months ago, the startup may appear shopworn; that is, the VC may well think something's wrong with the startup -- he first heard about them several months ago and they "still haven't been able to raise money".

In my experience, entrepreneurs usually give two reasons for wanting to have "informational" meetings with VC's.  They think it improves their chances of getting money when they ultimately pitch the VC for real (because the VC will, in some sense, be more up to speed and a more sympathetic listener, and/or will be impressed by the progress made since the non-pitch meeting), and the VC might get so excited by the non-pitch that he makes a pre-emptive offer (i.e., one that is so high, no other VC will beat it).

Neither reason is good.

While there is an old saw that "...when you ask a VC for money, you usually get advice; if you ask for advice, you're likely to get money...", I don't believe it.  The best way for an entrepreneur to get a VC interested in his startup is to have a great idea and pitch it in a formal, polished and impressive way.

And, finally, no self-respecting VC will make a pre-emptive offer (even to get a deal early) if he thinks that he's got the inside track on a deal.  The only way to get a pre-emptive offer from a VC is to have other VC's interested.  No entrepreneur ever got a VC to substantially increase his initial offer merely by presenting more data (even great, persuasive data), showing why the startup should be valued higher. 

Entrepreneurs -- if you want to get a VC to make a pre-emptive offer, get other VC's interested in your deal.

Comments

[daniel aaron bernal]

Good article, good points.

[Alex]

Awesome. Subscribed.

[Kenneth Seville]

Mark Suster says that he invests in lines not dots, and therefore entrepreneurs should get in touch earlier rather than later: http://www.bothsidesofthetable.com/2010/11/15/invest-in-lines-not-dots/

It seems like the two of you are saying opposite things, am I understanding correctly?

[Allen Morgan]

Thanks for the comment. Mark Suster (who is a friend), is one smart dude, and the question under discussion in my post is certainly one on which reasonable minds can differ.

Most of Mark's very good post is written from his POV as a VC -- and the process he outlines serves his interests, as a VC, very well. VC's (me included) will always want to have the chance to look at a deal over a long period of time, seeing how it develops, etc. See my post on this topic at: http://allensblog.typepad.com/allensblog/2011/06/walk-the-walk-not-talk-the-talk.html.

That's all in the VC's favor, so no surprise. My post, however, was specifically written from the POV of advising entrepreneurs and their startups. If you're pitching Mark, who is a great investor/mentor, then you may have to spend a lot of time with him (silver lining: he's fun to spend time with!). But, there are costs associated with that and it's those costs on which I focused in the post. For a great VC like Mark, the costs may (just may) outweigh the benefits. If you have a hot deal, however, Mark will behave like any other smart, rational investor and react only to competitive pressures.

[Mukund Mohan]

This is fairly incorrect. People invest in people, not ideas alone. All things equal you'd rather invest in someone who you have some relationship with than not. So, while it may be better to not talk about your company, at the first meeting, its always better to build a relationship with investors WAY ahead of your need to raise money.

[Abhishek Balaria]

This post is spot on! Earlier this year, a friend suggested that he will put us in touch with VCs, just so that they know about us. Needless to say, VCs expected full-blown piches and we were not even looking for money. We were well capitalized and profitable! We ended up wasting a lot of our time (and theirs too) and getting distracted.

Lesson learned! Thanks for sharing.

[AdamSingolda]

Allen,

Good read, and I agree.

Wrote about it few days ago.

http://agoldsin.com/?p=406

Adam

[Saadiq]

Hey Allen,

First, when next you're in New York, it would be great to catch up.

To the question at hand, what you say makes a lot of sense. Never meet with a VC when you're not prepared. Regardless of if you're raising, having a lousy first impression has negative ramifications for you.

However, what is the best way, in your opinion, for an entrepreneur to create new relationships and figure out who they want to work with? I meet with people who can potentially be helpful at many points and those that show they can be the most helpful will clearly be within that set I pursue when I am looking for new investment, but your advice seems to run contrary to that.

Thanks.

Saadiq

[twitter.com/bfeld]

Allen - I put this up with some discussion as the VC Blog of the Day on Ask the VC at http://www.askthevc.com/wp/archives/2011/08/morgan-why-entrepreneurs-should-never-meet-vcs-unless-theyre-formally-pitching.html.

While I respectfully disagree with your perspective, I think it helps make the point that there are (a) plenty of different points of views, (b) that not all VCs, and (c) this means that entrepreneurs should know who they are dealing with before they just start pitching, or even building a relationship.

[Allen Morgan]

Thanks Brad. [N.B., entrepreneurs, this thoughtful reply is why you want someone like Brad and his Foundry partners to invest in you (Suster, too)]. Smart reply, frames the debate well and (Brad & I know each other) civil attempt to do the most important thing, which is advance the debate to help entrepreneurs be smarter about the 'black box' VC financing experience (see this post: (http://allensblog.typepad.com/allensblog/2011/06/the-vc-black-box.html)). The more we help entrepreneurs and startups navigate this process, the better for all of us.

I'm working on a "reply" post that will attempt to highlight points of agreement among the posts that have been mentioned, as well as refine the point I intended to make in my original post - which I would still urge entrepreneurs to follow. But, being forced by folks like Brad to re-examine and improve your arguments is always a good thing.

Thanks again, Brad.

[Allen Morgan]

Saadiq,

Great to hear from you. As mentioned in my reply to Brad above, I'm working on a follow-up post that will hopefully advance the ball on this important (set of topics). But, for now, my point is not that entrepreneurs should become hermits and/or avoid contact with VC's in between fundraising events. Entrepreneurs should absolutely be "out in the traffic" at startup events, panels, etc. (interestingly, I think this is easier to do comprehensively in NYC than anywhere else). My point (more to come) is more along the lines that entrepreneurs should not have informal "informational" presentations about their startups to VC's - that the costs outweigh the benefits. Being on a panel and impressing the VC with your expertise is fine, great actually. Just be aware that VC's will always be evaluating you and be at your best whenever that happens.

I'll try to make this more organized over the next several days as I get time to compose the post.

[Angelinvestor8]

It really all depends on the entrepreneur's motives, really. There's nothing wrong with building some kind of rapport with a VC prior to going for a full-blown pitch.

[Mmmichaelfox]

Allen, it's a really interesting article and you make a good case.

How would you suggest going about politely declining a meeting with a VC in a case like this while still keeping the bridges open should you want to make a formal pitch in the future? I feel like having turned down an opportunity to speak in the past may make it harder to get a positive meeting in the future.

[Gobind Shahbaaz Singh]

Love it!!

Nicely written there.

[Account Deleted]

No wonder VC returns have been miserable over the trailing 10 years.

All I hear from this article is a "follow the leader" mentality. Get other VCs interested, and then you might get an offer. Other VC are often a) poor decision makers and b) too busy to do their own, full diligence.

VCs should help entrepreneurs as much as entrepreneurs should help VCs. That you suggest that these parties don't speak until a pitch is "formalized" is destructive to the spirit of the Valley.

[Mark MacLeod @startupcfo]

I am definitely in the camp that wants to meet entrepreneurs as early as possible. Suster put it well. I think entrepreneurs should intro themselves to VCs before they need money and socialize the team and idea so that they have a qualified prospect list when they do raise. Also, by meeting VCs before you can accelerate credibility building by i.) telling them what you're going to do; and ii.) come back after and hopefully you've done what you said you would.

[UNYstartups]

Nice post Allen.

I can see it equally from either point of view really, but I'm inclined to agree more with Kenneth and BFeld. If during an informal encounter an entrepreneur is having an off day and makes a bad impression, well that's unfortunate but also human nature. Personally, I like to see people over time and under varying pressures to learn about how they react to new situations. Can they pick their head up quickly? Identify when they've done something counterproductive? Identify when they've done something hugely beneficial? Etc.

Julian

[web design Landon]

I focused in the post. For a great VC like Mark, the costs may outweigh the benefits. If you have a hot deal, however, Mark will behave like any other smart, rational investor and react only to competitive pressures...