As a first time entrepreneur, raising capital is difficult. With no reputation established investors are hesitant to trust your ability to navigate the pitfalls of a startup. In a down economy things get even harder. There have been fewer IPO’s in the past several years, meaning fewer exits, meaning less capital redistributed into the venture pool. Investors have to be more selective and as an entrepreneur, your job is harder.
Techstars is known to help entrepreneurs raise capital. But it’s not just about the raise; it’s about getting the right raise from the right person. Since not everyone has access to the TechStars network and the advice of it’s mentors, I thought it would be helpful to summarize what I have learned.
The first thing you have to do is get out there and get to know investors. More importantly, let them get to know you. I cannot stress this enough, you do not want to wait until you need money to start talking to VC’s. When you go to an investor asking for money, they have to make a snap decision on you and the value of your company. This lends them to err on the side of caution, decreasing your valuation and your odds of an investment. Alternatively, if you present an investor with an opportunity to get to know you without the pressure of making any assessments, then they don’t have a need to make any rash decisions.
As the investor gets to know you, it is important to do the same. Think about this process as dating. You are not a gold digger after only their money, you need to genuinely want to be in a committed long-term relationship together. For all intensive purposes, you will be wed together for quite a long time.
When looking for the perfect soul mate it is important not to settle. Do not expect that the first investor that shows interest in you is going to be the ideal connection. Get out there and talk to several VC’s. The more investors you meet, the better understanding you will have of their perspective and how they work. After all, they are seeing other entrepreneurs, no reason you should not do the same.
Once you have picked an investor, do not try to negotiate on your own. Term sheets are long, tedious, legal documents that can get very tricky. This is the point where it is important to read books (see Feld’s Venture Deals), talk to advisors, and most importantly hire a skilled startup attorney. Notice I said startup attorney. Do not skimp on this, it will come back to bite you later. You need to find an attorney who specializes in startup life.
For most, investments are necessary; dilution will happen. As an entrepreneur you try your best to avoid it as much as possible, and rightfully so. However, doing this at a micro scale is futile. Arguing over a single point in the long run will make very little impact to the bottom line. Instead, always take a step back and look at the big picture. If you understand what your entire investment lifecycle will look like, you will have a much better understanding of how you can wisely negotiate.
Parting thoughts: Some say the key to a good negotiation is both parties walking away unhappy. This is not the case. The most important thing I can leave you with is this, if either you or the investor are unhappy then you have just increased the likelihood of something going wrong in the future.
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