I recently got an email from a founder / CEO I know who is thinking about raising substantial growth capital to accelerate his company. I’m not formally involved with the company in any way, nor are they local.
He was looking for some help in evaluating potential financial partners and trying to refine his decision-making criteria to include some of the less obvious.
I love that he led with what he didn’t know and used his “ask the audience” at a moment when it really mattered. I have seen so many people not do this, and waste the wisdom of the credible and experienced people who could help them get it right. Pride always has a cost. More on that another day.
Relating to the topic at hand, we never raised outside money with RevZilla. We bootstrapped because we could and the cost/benefit of raising never made sense. We were a happy independent anomaly that never made Tech Crunch and that’s totally cool. 🙂
I have, however, been close or arm’s length to a handful of companies that have raised over the last decade and I have been a voracious reader of many of the (good) early-stage beacons who proliferate in the blogosphere for as long as I can remember.
In my responses, I assume that the need-to-raise calculus has already been done, but if my interaction with this founder was via phone or in-person meeting, I’d be starting one level up with “What does this buy you that you can’t do already? Speed, talent, runway, etc. Essentially, are you sure you really need it?” Just an outside gut check, not a second guess, by any means.
The other question I’d ask is from founder to founder: “How does this round of financing impact the ability to have a meaningful financial outcome for you and your team? The goal posts move and your personal choices can narrow with each raise. ”
My email responses to “How do I ensure I get the right partner?” were as follows:
- How patient is the capital? Target IRR? Make sure your time horizons line up. If they don’t, you are misaligned out of the gates on what success looks like.
- If this is capital that is coming from a source that may be a future acquirer, make sure you think about limiting information rights or you have just potentially lost your future negotiating leverage (and exit likelihood) by bringing said potential acquirer behind the curtain.
- Board seat? No board seat? Observer? I’m always a fan of the fewest number of people in the boardroom. Non-voting seats can still get in the way of focused meetings. There can be a great value in focused board discussion with a group small enough to feel comfortable being candid while avoiding the weeds.
- What, if any, are the other ways in which their seat at the table will alter or block your ability to run the company in the way you do today? What else will they do that will create distractions and steal bandwidth? Every partner and deal is different. Think about the 2nd- and 3rd-order consequences.
- What’s the value of the money at the table beside runway? There is a lot of smart, connected and super value-add capital out there that can help you accelerate in ways you have not thought of, especially for first-time founders. Understand the strategic benefit to you and your company outside of the term sheet.
- What’s the rep of the firm and the person or people you will engage with? Obviously, both entities should be smart money and bring value to the ecosystem, but beyond that, what about fit, experience and “service level”? VCs are in the service business and there are a lot of experienced (or inexperienced) turkeys in the universe who may be optimizing for a number of things instead of the most efficient path to value creation and support. They may also never have operated or have little regard for people and culture. Front- and back-channel ref check the hell out of them via any avenue you can find. Don’t apologize or feel uncomfortable. Just like ref checking a hire, this is your last chance to verify they are who they say they are. Skip this step at your peril and be wary of people new to their firm or to their role. They have something to prove beyond helping you succeed.
>> end email <<
The complete list is most likely longer, but this was my 10-minute gut check. I’d also wager that founders who’ve raised 2-3+ rounds or at different startups would have even more nuanced texture to add.
If you are a founder thinking about raising capital at any stage, understand your cost/benefit and do as much diligence as you can muster. There is an inherent cost of outside money that affects so many things and an even greater cost of raising capital from the wrong avenue.
Much has been written about the topic by a pantheon of great VCs and a slew of founders who have landed on both sides of fate’s wheel. The education is out there. Spend the necessary cycles and time to get it. It’s free. You have no excuse.