The Exploding Termsheet
Long thought to be a relic of the abberant dot-com era, it seems that the exploding term sheet might be back in style. I've noticed a general uptick in venture financings over the last two months, but seeing an exploding offer (same day!) delivered to a promising young startup was still a shock today. Yes, there is an old truism that goes "take the money," but it's unreasonable to expect that a few hours is sufficient time.
After all, consider that your investors are going to be on your Board of Directors from now until when the company is considered an obvious success or a total failure. They are going to recruit management, assist in company strategy, negotiate partnerships, and encourage you to make good business decisions. Yet, when it comes to one of the most critical decisions in the life of your young company, they want you to decide within hours before you can get any additional data points!
The best investors and partners stand on their own merits and will be able to convince you of their value even after you've seen what else is out there. One week is not an unreasonable time to consider one's options. Would you believe a car salesman who tells you that he's got the best deal on the block, but the price is only good right now? If not, dump this lemon, The Exploding Termsheet, and move on.
Cannot agree with you more on this topic. Having been both an entreprenuer and now a venture capitalist, I find the the tactic of "exploding termsheets" to be shortsighted. Raising venture capital is tantamount to getting married for an entreprenuer. Would you want to pick your spouse in a time-constrained manner?
Venky
I've been flirting around the edges of the VC universe for some time now (I'm the one with the next great idea...), and this touches on a subject near and dear to my circumstance.
I'm not particularly interested in the subject of exploding term sheets; I'm already quite sure I would run away. Quickly. But, Venky Ganesan has brought up the analogy of a spouse and the value of the relationship, and I'm going to run with it a bit...
My question is how to really get to know the potential spouses? The number of VC firms out there has exploded - it's very much beyond my resources to get to know them all. I can browse portfolios and read "investment focus" statements and narrow the field considerably. I can talk to some of the people from companies that have had some success with a given VC, and narrow it a bit further. If I really do some digging, I might be able to track down companies that have had unsuccessful relationships with the VC - but it still seems very much like picking a mail-order bride.
What I'd like to do is understand, maybe even meet the VC team before tossing a business plan over the transom and crossing my fingers - is that even possible? Can we dance a little before I give you the ring? Is it too arrogant to presume that the business concept is Just That Good? So good that I can afford the luxury to be picky about my VC/bride?
Roger,
Most VCs are too busy to "dance," but if you're serious and picky, ask for references and be thorough. After all, it's how the VCs check you out...
I am opinionated and arrogant (after all, I think I've got the greatest idea since sliced bread...), and I rarely offer disclaimers. Since this blog is a bit of an experiment, I'm going to take some liberties in the spirit of "discussing the venture process" and promoting this dialogue. I will say up-front that I do not mean to offend. With that in mind...
I'm too busy to dance too - but that misses the point. I don't want to waste your (or their) time any more than I want to waste mine, but since we're (at least potentially) going to be "in bed together" for the life of a venture (until acquisition or IPO do we part?), shouldn't we both be making time?
I'm coming to the VC. That puts me in the position of doing at least some cursory homework on potential investors. It's my responsibility to make sure there's at least some fit between the investment criteria and the venture I'm proposing. There's something more than 400 VC firms that are NVCA members, so that's a lot of homework to do before I even think about checking references. Once I've narrowed the field, that could leave dozens of candidate VCs, a hundred individual partners, and a thousand references. That's a lot of references to check, and takes a lot of time to be thorough.
After all that, I may find the perfect fit on paper, but we've all experienced the difference between "looking good on paper" and the first meeting. If it's a non-starter, we'll both know it very quickly, and I think I deserve to know as soon as possible, before I waste more of my time. I can't afford the burden of due diligence up-front only to find out that I can't stand being in the same room as my new potential partners. The VC has the luxury of doing their homework after we've met, and only if we "get along."
My time IS valuable. I've got a problem to solve and an industry to revolutionize. That's why I'm doing what I'm doing. There's always a chance that I can find more money, but I can't make more time. Perhaps I'll solve that problem next... Until then, I'm looking for investors that appreciate my time. That is, after all, one of the assets I'm bringing to the table.
Unfortunately, that concept just doesn't scale. Given the option between meeting with someone who is presenting a business versus someone who just wants to get to know you, I'll choose the business plan every time. And for most good venture capitalists, there are more good businesses than time to meet with them all.
I would suggest using secondary sources (people you trust who know the VCs) and perhaps preliminary meetings while you're still working on your plan to help you narrow down your choices.
In for a penny... I might as well run with this...
You're right. It doesn't "scale." But neither does finding and checking a thousand references on a hundred people.
Secondary sources only run so deep. To extend the analogy just a bit further, that is pretty much like proposing to every blind date anyone ever sets you up with, before the date. Sure, they're all good friends and have only the best intentions, but do you really trust them that much?
For the entrepreneur (with a relatively "cold" network), finding a VC "spouse" is (to spin up the lingo) a highly front-loaded, labor-intensive exercise with a very high burn rate. If I treated my finances the way this suggests I have to treat my time, I'd never be able to buy groceries. I certainly wouldn't expect anyone to trust me with their money.
That might work in an earlier environment where there are relatively few VC firms out there, and the networks are less entangled. It might still work for those VC firms with long, established track records. But today, with everyone who still has money calling themselves a VC or an angel, I see no feasible way to evaluate the field. Ultimately, the entrepreneur has to find a balance between doing "the work" and checking references for people that might offer nothing more than "not interested."
With all that said, you may have given me a clue to the solution. I'm certainly not suggesting random meetings with random VC's while the entrepreneur-wannabe cooks up some new scheme. I'm talking about someone who has a plan, will eventually need a VC (or other investor), and wants to spend their time productively. So that begs the question: What's the difference between "preliminary meetings while you're still working on your plan" and "meet the VC team before tossing a business plan over the transom and crossing my fingers"? How do you get a "preliminary meeting"? I might even be happy with a "preliminary conversation." That seems to be precisely the kind of "dancing" I was talking about...