As in many other situations involving asymmetric power relationships, VC’s (who usually have the power) like to preserve optionality with startups in which they’re interested. That is, VCs generally will try to keep interesting deals “on the hook” until they have to make a decision (usually driven primarily by the concern that other VC’s are converging on the deal). From the VC’s POV, this is eminently rational. Why make a risky decision (i.e., whether to invest) until you have to – waiting may allow more data to emerge that will inform/improve your decision. Accordingly, VCs, good ones anyway, become quite skilled at saying things, whether or not true, that make entrepreneurs think there’s serious interest in their deal.
For the entrepreneur, this frequently leads to disappointment.
Experienced entrepreneurs know that they cannot rely on anything a VC says about where the VC really stands. Here’s the only way to tell if you’re making progress with a VC: is the VC rearranging his schedule to work on your deal? If not, you’re making no progress. Whenever a VC misses a deadline in getting back to you, it’s a bad sign. In general, given how time-consuming the fundraising process is, the entrepreneur should consider that VC a “pass”, and focus fundraising efforts elsewhere.
[As an aside, in the roughly 20 years I spent as a lawyer representing entrepreneurs, I used to tell my clients that the worst curse they could inveigh against a competitor was that the competitor had to seek venture financing. That guaranteed that the management team of the competitor would have to take their eye off the ball for 3-6 months.]
Even “scheduling-altering behavior” by the VC, however, is not always a good indicator of an eventual offer. Many deals evoke an initial burst of activity by a VC (especially if the deal is perceived as “hot”), only to have the activity level fade and turn into a “pass”. Not infrequently, in my experience in representing entrepreneurs as their lawyer, the last thing an entrepreneur may hear from a VC before “We’re going to pass.” is “Would you consider raising a bigger round?”. The only certain way for entrepreneurs to know their deal is closing: when the VC’s wire transfer hits their account. Until then, best to remain skeptical, and keep plugging.
[Further aside: VC’s often “communicate” that they’re not interested in an entrepreneur’s deal by going radio silent. A frequent lament from entrepreneurs is that most VC’s with whom they meet once never get back to them. Another lesson for entrepreneurs: if you have written to a VC twice, without reply, it’s a pass, and you should move on. For some reason, it’s a hard lesson for many VCs to learn that the second-best answer to an entrepreneur is a quick “no”, even with no explanation. Open loops are mentally and emotionally draining, especially for entrepreneurs raising money, so the fewer the better].
This should be required reading for everyone.
Posted by: Semilshah | June 16, 2011 at 02:57 PM
Allen - Great post. Nice and concise way to put it: "schedule-altering behavior" = VC is in fact interested.
Posted by: Yarone | June 17, 2011 at 02:07 PM