by Mark Suster
This is a hot topic I’ve been asked a lot about recently.
- You’re on a first date with a VC – how much should you tell them?
- You’re heading into a full partner meeting and you’ve been asked for a full data pack before – should you give it?
- When is it appropriate for a VC to call your customers?
There is no universal answer and my discussions with various VCs on these topics have yielded many differing opinions. Having been on both sides of this sensitive topic, the following is my personal advice.
The First Meeting
I have seen some entrepreneurs go into first meetings willing to share almost anything about their company. I have seen others who seem guarded and cloaked about what they’re working on. There is certainly a delicate balance between these two extremes.
I often caution entrepreneurs about seeing too many VCs when you’re beginning your fund raising process both because information tends to leak and because if you see too many people who talk with each other you’ll soon have whispers amongst all of the VCs who “passed on you” and your deal will seem over-shopped and lacking in momentum.
On the other hand, if you’re in a meeting with a VC and you’re overly guarded it will be an immediate turn off and it begs the question of why you’re even talking with VCs in the first place. I’ve seen this back fire on entrepreneurs who say things like,
“Well, we’re not talking financials with investors yet.”
“We’re not really fund raising yet so I’m not prepared to have that discussion.”
“So why are we here?” (which really means, are you really so naïve as to have a discussion with a VC and you’re worried about sharing your high-level financial results and forecasts?)
The best advice I could give you for first meetings is that you should have a limited number of discussions until you’re pretty sure that you’re likely to have positive results in fund raising and you should be open in the meetings that you do have. There’s no sense in having an investor meetings and turning them off (permanently) in the first meeting.
But you can engage in a serious discussion about your business while keeping your financial projections high level and not immediately talking about your most sensitive plans. There is nothing in revealing your past performance that should impact your ability to execute going forward so that’s not an area to be sensitive in my opinion.
The main thing to guard is an strategy direction in your future that you feel is proprietary. Since the game of competing is always “where the puck is going” you can have a detailed conversation without completely letting on what your future strategy will be.
Don’t mention that you have strategic initiatives that you can’t talk about. You’ll just sound cagey. Simply don’t bring them up. Don’t allude to them.
Now, I’m not saying you shouldn’t share any strategy with potential investors. That would be dumb and you would sound unplanned and uninteresting. I’m simply saying that if YOU feel there is a certain part of your strategy that you feel sensitive about – don’t mention it.
If you show a list of key customers or key business partners and if this list is sensitive (READ: If you don’t want VCs calling them) then you need to make it explicit with the VCs.
I personally believe it is appropriate to say
“We are sharing with you our list of key customers / biz dev partners. Obviously if we continue in discussions with you we would be more than happy to organize reference calls for you to validate our success.
PLEASE do not call and enquire about us without checking with us first. These relationships are sensitive and we don’t want to bombard them with unplanned VC calls.”
Please know that of all of the areas that VCs are poorly behaved this is the number one area. It drives me freaking bonkers.
When I was raising money I pitched to several VCs. I instructed each one as above. I specifically asked them not to call Salesforce.com – my largest customer. They knew I was fund raising but I didn’t want to annoy them with unnecessary calls.
One VC (I won’t name but with whom I still won’t work today) called Marc Benioff directly. They somehow figured I wouldn’t find out. What did he do? He forwarded an annoyed email to my main contact at Salesforce. He contacted me annoyed that I was encouraging people to contact Marc. Shit rolls downhill.
Another VC called the co-founder & tech head – Parker Harris. Another called one of the top biz dev guys. So I have taken to recommending to some of my portfolio companies a small addition to my statement above to say, very casually
“Obviously if we did get feedback VC calls were being made it would affect our decision of which VC we would likely work with.”
But very few companies can get away with this. It’s certainly hard in the A round when you’re scrapping to get your first institutional dollar. It’s easier when you have traction and a competitive process for your funding is likely. So if you add the addendum use it wisely and carefully.
And I should tell you that some VCs with whom I’ve debated this topic think it’s always fair play to call your friends at Facebook, Google, Salesforce or wherever to get feedback on you early. Summarizing their feedback?
“If you’re not ready for that kind of scrutiny you’re not ready for fund raising and wait until you are.”
I’ve had to politely agree to disagree.
Follow Up Engagement
By the time a partner shows you some interest and has take 2 or more meetings they are probably beginning to ask you for more information. It is always appropriate for a VC to ask you for your past 12-month financial performance and your going forward forecasts. Quoting my friend above, “if you’re not ready for that, you’re not ready for funding.”
If you like the partner and imagine you could work with them then I would slowly reveal more of your strategy and ask them to debate it with you. Nothing tells you more about whether they would be good to work with then hearing how they debate your strategy. After all, one of the most important roles of a VC is as a sparring partner.
I often coach that this period is often when you can engender great confidence from the partner. If they ask you for a certain type of analysis (cohort analysis, margin analysis, competitive assessment, whatever) it’s a chance for you to turn it around quickly and do a thorough job in answering their question and with professionally produced materials. It’s the best way to give them confidence that you’d be a good partner to work with.
There are some partners that after the first meeting ask for belt-and-braces document exchange. They want to see your cap table, your legal documents, your major contracts, your full financial model, etc.
In my opinion that is totally old school. There is no reason to part with your cap table or legal docs until you’re convinced that they’re actually committed to doing work with you in due diligence. The only real benefit of their having this information is in preparation for a term sheet. They can get at the most important information early on by simply asking you :
How much of the company do the founders own?
Have you invested money directly?
What was the post money on the last round and how much did you raise?
Fair questions, all.
The Partners Meeting
Going into a partners’ meeting you want to know whether your lead partner is really a champion or not. They ought to be preparing you for the kind of meeting you’d expect. They ought to outline who will be in the meeting and what their likely responses will be. Any great champion would do that for you if you’ve spent tons of time helping them get up to speed on the opportunity.
And if they do seem like they’re championing you and are engaged, I would certainly allow them to make some careful calls into customers or partners. This not only helps them to be more bought into the opportunity but it also provides them necessary ammunition to lobby their partners before and after your meeting.
It would not be uncommon for partners to ask after you’ve left the full partner meeting, “have you spoken with any customers? What did they say? What competitive products did they consider? Why did they select company X, etc.”
Heading into a Term Sheet – Final Due Diligence
Obviously once a partner seems inclined to work on a term sheet you can expect a proctology exam and this gets even more intrusive after the term sheet. Here you need to line up customers calls, discuss all future strategic plans, redo the financial model if they felt it wasn’t complete and so forth.
Make sure to disclose anything major that you believe would seem disingenuous to tell the after the term sheet. You’d be surprised the stuff that comes up:
- Major lawsuits
- Founder friction / departures
- People who were convicted of felonies
- Major firings from previous companies (as in a reference call that isn’t going to go well)
All of these things – major disclosures – are overcomeable if disclosed at the right time and the right way (Obviously circumstances matter, too. For example, a felony for financial fraud and I can assure you that you won’t raise VC under any circumstance.)
I always tell people, you need to disclose to champions before they ask for final approval because they can’t go back after they get approval and say, “oh, and one more thing.” They’d sooner drop you than tell their partners that they found about a major mishap AFTER they submitted a term sheet.
Dealing with VCs can be a time consuming and trying process. If managed correctly you can limit the downside while picking up a lot of new relationships that can benefit you in your future. In my next post I’ll discuss some of the techniques I’ve used to also make sure I was getting back from the VCs with whom I was speaking.
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