Last week, I wrote a post advising entrepreneurs to avoid 'informational' meetings with venture capitalists, but, instead, to meet with them only when doing a formal, prepared pitch (see also this post by Adam Singolda). A number of comments and questions ensued, as well as references to seemingly contrary blog posts by venture capitalists, Fred Wilson, Brad Feld and Mark Suster, as well as serial entrepreneur and active angel investor, Chris Dixon, all of whom I know and respect a great deal – and each of whom is a very smart guy. Given the attention the topic generated, I thought a follow-up attempt at clarification would be worthwhile.
As one would also expect on a topic like this, there are areas of (1) misunderstanding-posing-as-disagreement, (2) different-perspectives-posing-as-disagreement and (3) honest-to-god, good-faith disagreement. It’s important to be clear that on this topic, like all important topics, there are few absolutes. Here, as elsewhere in important matters, there are pluses and minuses, pro’s and con’s. As I wrote in my original post, “…, on balance, 'informational' meetings have more risk than reward…”, so entrepreneurs are best advised to avoid them. Reading what Fred, Brad, Mark & Chris had written forced me to refine my thinking -- always, a good thing.
First, entrepreneurs should NOT “hide out” from, or “shun” venture capitalists until they are ready to pitch. Far from it. Entrepreneurs should absolutely be ‘out in the traffic’ in the relevant communities (e.g., entrepreneur meetups and other social events, participation on panels at conferences, etc.). Having a highly-visible role as a respected thought leader in the entrepreneur’s relevant startup ecosystem – which will involve informal interactions with venture capitalists, among others -- is a benefit when one starts fundraising. Entrepreneurs: get out there and get involved!
What I was suggesting, rather, is that entrepreneurs not formally meet with venture capitalists (e.g., in the VC’s office going through a PowerPoint deck) to give an update on their progress unless it’s a formal pitch. That interaction has the risks that I outlined in my original post, and my advice is not to do it.
Second, the contrary posts lamented the fact that, in this frothy market, some venture financings are happening too fast, with inadequate time for due diligence (on both sides). I agree: it’s a bad idea for entrepreneurs to take money from a VC whom they’ve only just met and don’t know anything about (and vice-versa). Speed dating VC's is a high-risk strategy for entrepreneurs. As I wrote here and here, we are definitely in a bubble, with higher clock speeds on deals, and it’s definitely a bad thing.
But "deals-gone-wild" (1) doesn’t happen that often, even in bubbles (the attention that the relatively few, high-profile examples receive distorts the true, broader picture), and (2) was not what I was suggesting. By far, the majority of venture financings do not happen quickly. Frustratingly to entrepreneurs, most financings take 3-4 months from the first meeting with the first venture capitalist until money’s in the bank (which may not come from the first VC firm one meets). Most startups have to meet between 4-10 times with partners at the firm and/or other people affiliated with the venture firm that eventually proffers a term sheet (most firms use a variety of outside folks to help with due diligence). This gives the venture firm plenty of time to “get to know” the entrepreneur (plus, all VC’s spend a good deal of time formally and informally checking references on entrepreneurs in whom they’re interested).
Summing up: (1) entrepreneurs should definitely be mixing it up out there in the startup communities and (2) financings that happen too fast often result in problems when the startup hits a pothole; but the ‘normal’ venture financing process generally gives time for the VC to get to know the entrepreneur.
In my current role as a “Sherpa”, I structure my role (including compensation) to be aligned with the entrepreneur, and it was from that POV that I wrote my original post. Mark, Brad & Fred (and, to some degree, Chris) write mainly from the venture capitalist’s POV (See below in Section 3 for my response to their thoughts from the entrepreneur’s POV). Not surprisingly, these perspectives are different, even opposed to some degree. Just as one would expect in a relationship that is, at its core, based on a financial transaction in which zero-sum and non-zero-sum aspects are intertwined.
From the straightforward POV of the VC, it’s easy to see that having a long time to evaluate an entrepreneur and his startup is preferable, indeed, for the VC to wish the opposite is irrational. Any of us wants as much information as possible before making a risky decision like investing in a startup. I know I do.
So, no disagreement here. When I was a VC, I always tried to figure out how to meet interesting startups and entrepreneurs over as long a period of time as I could.
This is how VC’s should behave. After all, they’re fiduciaries for their LP’s money.
3. Honest-to-God, Good Faith Disagreement:
The contrary posts give two bits of advice to entrepreneurs, however, that purport to be in the entrepreneur’s interest, and this is where we have a respectful, good-faith disagreement.
“It’s a Marriage”: The contrary POV argues that, because an investment is like a marriage, it’s in the best interest of the entrepreneur to spend time with venture capitalists prior to the pitch to determine whether the “marriage” will work out.
In a perfect world, this is true. But, (1) over the course of interacting with the VC as part of the normal, several week- or month-long process of getting financed, the entrepreneur can perfectly adequately do this after making the initial pitch, plus (2) there are a myriad of easily-available sources of information, formal and informal, about VC’s that entrepreneurs can access (before and after the initial pitch). As I point out in my original post, given this, I think the risks of ‘informational’ meetings outweigh the benefits.
“You Need to Do It to Get Financed”: Finally, an implication of the contrary POV is that, because VC’s view it as so core to their process of evaluating startups, entrepreneurs maximize their chances of getting funded by having ‘informational’ meetings with VC’s before pitching them. Said another way: (1) such interaction is highly desired by the VC, if not a prerequisite to getting an investment, (2) given the asymmetric power relationship that most often obtains between VC’s and startups, (3) entrepreneurs need to comply.
Fred, Brad, Mark & Chris are highly-sought after investors (for good reason – I’ve referred a number of my “Sherpa” companies to each of them for financing, and would have them involved in all of my deals if I could). They, together with a few, elite other venture capitalists, may add so much value that entrepreneurs should be willing to have ‘informational’ meetings with them to increase the odds (however, slightly -- given the low odds of any particular startup being funded by them).
But, even with respect to them (and certainly all other VC’s), and, “on balance”, the entrepreneur is best advised, as I argued in my original post, to (1) figure out which VC’s should be approached, (2) get warm introductions to them, (3) make a polished, well-prepared pitch and (4) be 100% on the ball whenever dealing with the VC (as Mark Suster says, ”always be pitching”) throughout the financing process.
Brad mentions that his firm, Foundry Partners, has done pre-emptive deals without the “pressure” of interest from other VC firms motivating them. If Brad says it, I believe it. But, if this is true, Foundry is rare (as I’ve mentioned, it is a very good, very successful firm), but, even for Foundry -- and, certainly, for most, if not all, other firms -- a certain level of competitive pressure among VC firms looking at the same deal is most beneficial to the entrepreneur. To maximize their outcome, entrepreneurs should strive to generate this (more on how in a future post).
[Postscript: Immediately above, I say that, from the entrepreneur's POV, "a certain level of competitive pressure among VC firms" is a good thing. Too much pressure, however, can be counterproductive. Some of the best VC firms will withdraw from a deal they consider "overheated" (i.e., around which there is too much competitive pressure), rather than enter the competition. This, however, is quite rare.]