The venture capital vernacular has been around for decades. Round sizes morph (“old” versus “new” Series A) and new classes emerge (“super angels” and “micro-vcs”) but I continue to hear some investors talk like this:
- “We’re so excited to welcome [Startup] into our portfolio.”
- “[Startup] has been a great deal for us.”
- “We really made a big bet by investing in [Startup].”
- “I’m so proud of our great company [Startup].”
I know these vcs mean no harm, but statements like this come off as pompous and arrogant. Founders, teams and startups are not “investments in a portfolio” or “deals to be done.” Last I checked, unless one owns 50.1% of a company, it’s not technically “theirs.” And don’t get me started on the “I’m so proud of” tweets…
While vcs get to invest in numerous companies at a time to mitigate their risk, founding teams go all in with their personal and financial capital. Founders are the ones that have the guts to quit their jobs and start something from nothing. Startups have to build teams and products, sell their vision to customers, and manage cash wisely before running out of oxygen and heading back down the mountain.
The best investors care deeply about their founders and teams, and help them in every way they can to build a company that will change the world. There’s plenty more characteristics than the 10 below, but you’ve selected investors well if they:
- Continually ask, “How can we help?”
- Make meaningful double opt-in introductions (more on this here and here)
- Are always on-time and prepared for calls and meetings
- Ask the hard questions and help confront issues — no sugar-coat rule
- Don’t send random articles about new competitors every week
- Always tweet and forward meaningful news about the team and startup
- Helps team steer away from common pitfalls
- Keep their mouth shut about your confidential information
- Help bring new investors to the table when fundraising
- Do what they say they are going to do
Angels and vcs should worry less about the return aspects of backing a team and more about how one can open up his or her network in every way, shape and form to benefit the startup. Ultimately, investor returns have a way of showing up the more an investor is an asset to the startup. Amazing how that works.
I’ve heard some recent stories of short-fused expiration dates on term sheets for competitive rounds. No, this doesn’t mean we’re in a bubble but it does signal a lot about these investors.
Quick Primer on Term Sheets:
When an investor leads a priced-equity round, he or she formally submits a signed term sheet (or “LOI” — letter of intent) to the startup. (For convertible note financings, generally a note is just drawn up and sent). The term sheet is legally not a commitment to invest, and is conditioned upon completion of due diligence, legal review, and closing docs satisfactory to lead investor.
The term sheet contains the pertinent information about the round, notably:
· Offering terms (how much new money, how much lead investor is taking)
· Securities sold: convertible note, preferred stock, series
· Board makeup
· No Shop/Confidentiality
The term of expiration date typically gives the company three days to sign the LOI. If the company does not sign by this date and time, the LOI “explodes” and is no longer valid. Once the term sheet is signed, both parties move in good faith to expeditiously move toward a closing.
Additionally, a summary of key financing terms is included after the key terms which give an overview of terms contemplated within the charter, stock purchase agreement, investor rights agreement, voting agreement, etc. At the end, a proforma cap table is included.
Typically, the only items on an LOI that are binding upon signing are the 30-day no shop and confidentiality terms (company agrees not to disclose terms of LOI to anyone, agrees not to solicit or negotiate with any other parties, etc.).
Crazy LOI Expiration Terms:
In hyper-competitive rounds, sometimes the expiration term for LOIs is shorter than three days. Two days, one day — I recently heard a story of a two-hour expiration. These investors are trying to pressure teams into signing and doing the round with their firm with these extremely short time frames.
Never take it. (Did I say never? Yes, good. Never.)
If anyone throws a short-fused expiration date at you other than the standard three-day period, ignore it. Why founders feel that they have to sign something like this in such a short period of time is beyond me. If the investor loved you before the two-hour expiration, they will love you after. And if they don’t love you after, you don’t want them as investors.
You are about to get married to one of the most important people in your company’s history (lead investor, board member) with whom you will ride the startup bus for many years and you are forced to sign the LOI in a matter of hours?
Note I’m not saying that founders have license to string investors out on whatever schedule they see fit. Startups should respect the three-day expiration period. If that is too quick, ask the investor to extend it. We have had founders ask us to extend this period due to special circumstances and we’ve had no problem extending.
The manner in which investors act during the fundraising process highly correlates with their character moving forward. (And founders, the same goes for you). Playing games with terms never gets one anywhere, and it’s incredible the speed at which this information can travel these days.
Step back, take a breath, sleep on it — patience and prudence is something we all need more of these days.
How to Not Raise Capital (Ridiculous But True Founder Statements)
I’ve riffed on silly vc comments before, but here are some actual founder statements in various emails/decks I’ve recently received (oh come on lets have some fun).
Numerous founders could write a similar list of ridiculous statements that have come out of my mouth (not casting stones!). Listen, I’m all about the hustle, but, well, you be the judge on the effectiveness of the following:
1.“We are Uber for [insert].” (I lost you at “We are…”)
2.“We achieved 1100% revenue growth month over month” (off $750 base)
3. “Let’s change the world together.” (Or maybe not)
4. “Hello nice to meet you. Let us know if you want to invest in our round by the end of this week.” (what’s your name again?)
5. “This is going to be big!” (Yessiree!)
6. “Hello nice to meet you. I’ve included closing instructions with our deck.” (thanks for putting everything, and I mean everything, in one email)
7. “Are you interested in speaking today to see if you can get into the round?” (Absolutely! Hope I get in!)
8. “We’ve been tripling the DAUs every week for last month” (yes but you launched last month)
9. “Then we will own the market.” (and rule the world)
10. “Thank you for the update. Let’s stay close in the future and maybe we can work together when the opportunity presents itself.” (Yes lets)
And while we’re at it, here are my current favorite startup words/phrases I still see in pitches:
1. “killing it”
2. “rock star”
3. “100x engineer”
4. “blowing up”
6. “crushing it”
9. “on the planet”
10. “world class”
You may now return to conquering whatever massive industry you were born to disrupt.