Fundraising: From The First Meeting With A VC To A Term Sheet

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I managed to land a meeting with a VC; what should I expect? What do I have to do to land a term sheet?

Get to know more about the person you're meeting and their investment portoflio.

Get to know more about the person you’re meeting and their investment portoflio.

One of my new year’s resolutions (aside from every year’s attempts to stop eating chocolate) is to put together all my blog posts into a more coherent text, which will hopefully be published before this summer as a short book – the Central European Startup Guide. We plan to hand the Guide out to as many startups as we can for free, to aid them in navigating the murky waters of the startup world, predominantly in Central Europe.

In the process of preparing the guide, I noticed a few missing pieces in the puzzle – topics that I haven’t covered, thanks to which the text feels incomplete. And this topic is one of them. I have discussed how to search for investors and what mistakes to avoid when getting in touch with them. I have also covered the intricacies of negotiating a term sheet. But there is a piece missing that would bridge these topics together: how does a startup proceed from the first meeting to obtaining a term sheet?

Before The First Meeting

It is very important to know well the person (people) you are going to meet with beforehand. Ideally, there will be a partner at the meeting, in addition to an associate or analyst.

Typically, only a partner can become the “champion” of the investment, i.e. the person who will recommend investing in your startup to the rest of the partners / investment committee and eventually join your board of directors. If you “only” get a meeting with an associate or analyst, the associate will first have to convince a partner that it is worth meeting with you.

Once you know who will be present at the meeting, find out what companies these people have invested in (the partner who gets quoted in a press release regarding an investment is the “champion” of that deal) and what their sectors of expertise are. Try to find as many synergies as you can between your startup and the partner’s investments. Before these meetings, we typically discuss which partner is the best fit for each startup.

During The First Meeting

The basics are important: show up on time, ask how much time you have for the meeting, and be sure to finish your presentation in half of that time (reserve the second half for questions). You can use Guy Kawasaki’s 10/20/30 rule for guidance: 10 slides, 20 minutes, 30 point font. I think in reality you can have 12-15 slides with additional ones in appendix as a backup for follow on questions.

It is very important to establish a conversation with a VC; a dialogue is much more exciting and memorable for an investor than a lengthy presentation.

Start with your team’s bio, background and the path that led you to your idea. It helps in building a memorable story. The team and its ability to tackle the problem the startup is solving is the most important factor in an investment decision. Make sure that your core team has all the know-how necessary to execute the idea (e.g. if you are a a “business person”/consultant who hired an external firm to develop the product, I can guarantee you that I am not going to invest) and be sure to highlight this throughout the whole meeting.

You can find plenty of resources on what else to cover in the first meeting online. I had an hour-long presentation on the topic at WebExpo. It might be useful to cover some of these topics in greater detail; hopefully I will get to that in latter posts. You can always use the pitch template from One Match Ventures for guidance.

After The First Meeting

The two possible conclusions of the first meeting are fairly obvious: the partner either liked you and your startup, or he didn’t. However, it might be less obvious to figure out what the conclusion of the meeting actually is. Unless your meeting went really badly, the investor rarely says a flat out “no”. Instead, he might say something like, “Sounds interesting, it might be a bit too early for us, but let us know once you have more traction”…which basically means, “No.  But just in case you do manage to get substantial revenue against all odds, please come back and see us since I didn’t tell you ‘no.’”

If the partner did like your startup, he will try to verify his opinion and tackle the main risk considerations with industry experts and internal analyses. If you have made any follow-up commitments, such as sending additional data, make sure to complete the tasks as soon as you can, i.e. within 24 hours of the meeting, along with a thank you note for the meeting.

Sometimes, there are follow-on meetings with these experts or with the team, which will confront you with the outcome of the analysis. This process can take a couple of weeks to a couple of months.

Once you handle all the follow-on questions and outstanding issues, you will be invited to a partners’ meeting or an investment committee meeting, both of which serve the same purpose – putting a final stamp of approval or disapproval on the investment. The structure is very similar to a first meeting: a startup typically goes through the whole investor deck, but there is less dialogue due to number of people involved – our meetings consist of six to eight individuals, not including the entrepreneurs.

The Terms

So when exactly does a VC open the valuation/terms discussion? This is quite individual. Some partners prefer to ask for a valuation at the end of the first meeting, but I have very rarely seen a negotiation on terms at this stage. It is more typical to see a VC react to the valuation only once he has covered the startup with fellow partners and industry experts. Typically, there is an agreement at least on valuation, if not the entire term sheet, before the startup presents at the partners’ meeting.

Sometimes a startup gets overconfident about the investment process and thinks that the investment is sealed before the partners’ meeting. Don’t forget that even if you already signed a term sheet (which is rarely the case before the partners’ meeting, even if you have agreed on most terms in it), it is a non-binding document.

The most important factor influencing the successful outcome of the investment process is the strength of the relationship you form with the “champion” partner of the VC fund and his conviction for your startup. Remember, you will spend a lot of time with this person, so make sure you do become friends in the process.

And if you don’t feel the chemistry, don’t be afraid to pass on that investor – you will save yourself a lot of trouble down the road.