Entrepreneurs, here's another surprising subtlety that you might not think of when raising money from venture capitalists: even with a solid track record of accomplishment over, say, the past year, don't try to raise money too close to an upcoming major milestone, or inflection point, in your business (e.g., big product release, significant new customer agreement, important senior hire).
Two main reasons: (1) to a venture capitalist, it feels too much like gambling, and (2) VC's worry a lot about the "schmuck factor".
Venture capitalists, when they're acting in their roles as investors, don't like to gamble (though many do in their "off-hours"). When evaluating a startup, venture capitalists like to have lots of data to analyze about markets, customers, entrepreneurs, etc., etc. They don't like to have an investment decision about a startup hinge on one major risk factor, or inflection point. All investment decisions in startups are high-risk, and, by following a disciplined process, the venture capitalist can feel comfortable that he's "done his work".
When venture capitalists don't feel comfortable, they don't invest.
This is, counter-intuitively, true even if the venture capitalist believes that the milestone will likely be accomplished, and that the startup's valuation will increase as a result. When it comes to major inflection points, venture capitalists would rather pay a higher price for less risk.
This derives from the "schmuck factor". VC's live in a high-risk, competitive world. Their competitors in other firms, and, importantly, their partners and other colleagues in their own firms, put a lot of pressure on them to follow thorough due diligence processes in arriving at an investment decision. Especially in today's envrionment with limited exits, this makes venture capitalists more conservative, and causes them to avoid situations that, if they turn out wrongly, provide ammunition for their competitors and colleagues to think of them as "schmucks". In the present case, this means not investing too close to a major milestone, or inflection point. If the milestone isn't reached, the investor risks being considered a "schmuck" (ie., why didn't he wait to see?). If the milestone is achieved, the investor can decide whether to invest at a higher price; this may hurt investment returns, but it avoids the "schmuck factor". That's a trade-off most VC's will happily make.
So, entrepreneurs, in thinking about when to raise money, and how much to raise, make sure that you have the runway to accomplish your big milestones before you go out to talk to venture capitalists -- and, as I wrote here, that, when you do start the discussions, you still have four months of burn left in the bank.