Venture Capital firms can be adored and reviled. They are behind some of the companies that have become a fabric of our daily lives. If it weren’t for Uber and Spotify, we would still be listening to the same iTunes playlist in a regular taxi that doesn’t accept credit cards. You can thank First Round and Northzone for the latter. (Free shout out to Newfund Capital for believing in Rosa at its very beginning and contributing to the advancement of neurosurgery).
But for some entrepreneurs, the road to success took a detour, and while the execution is key, some frictions with the VC investors exacerbated the downfall. Here are reasons you should never accept VC money, even if you’re desperate:
1. The VC is not asking the right questions! 🙋
The VC should be a sounding and guiding board for the years to come. It needs to understand your vision to properly accompany.
SaaS — Show me your cohorts? The cohorts answer many questions at once (churn, ARPU, LTV, implied actual CAC)
Product — What is your production pre-series and series strategy?
Marketplace — How do you keep the buyer and seller from transacting on your platform?
Tech — Is your code proprietary? How scalable?
For all industries— What’s your CAC, and your unit economics?
While it may seem obvious, many investors will fail to ask the questions you would expect. They know these questions but they see a different future for your company, and you will probably clash on the management strategy!
2. The VC’s DNA doesn’t fit yours! 🧬
As a former entrepreneur, I made a costly mistake when it comes down to VC. While raising money for my last startup, we accepted money from two VCs, which separated, added tremendous value. But we refused to admit they held vastly different views. One looked for profitability, while the other one looked for growth. Recipe for success if you can manage their time expectations. Recipe for disaster, when things start to become challenging.
Make sure the VC you are about to accept money from believes in your business plan (the excel you will show them. Show them the gross and net cash burn, and talk about it! Manage expectations!).
Also talk to entrepreneurs the VC is already funding. You can ask for referrals from the VC partner you are working with!
3. You are not connecting with the VC on a social or intellectual basis 🤯
Once you accept money from a VC, you are tied with that fund for the foreseeable future. You should accept the fact that you may have to see the VC once monthly (I have heard some funds ask for weekly meetings— ouch). If you cannot fathom the latter, or do not want to report to someone else than yourself, as soon as you will have problems, you could put the company in peril.
Find a VC you could see yourself spending time with, be challenged by, and who will not freak out when things get tough. Quickly identify the fun but overreaching personalities because you can be sure they will try to teach you lessons about entrepreneurship the day you are having cash issues, rather than help you.
4. The VC advice sounds like orders
When I was fundraising for my startup, I disliked when a VC told me what I should do, or that what I was doing was flat out wrong. To put things in perspective, many VC partners have never been entrepreneurs and therefore do not know what it is like to be an entrepreneur.
But I always listened, and tried to understand their point of view. The VC partners are not idiots, and if you are sitting in their office, they must have had some success along the way. Maybe they’ve seen some of the operational challenges that you will go through and their advice is valuable. But if they go into petty details and start quoting their daughter’s smartphone usage habits to drive their investment thesis, you better go.
Absorb as much as you can to refine your speech, your strategy, and better pitch the next VC!
5. Finally, maybe it’s you who is not ready! And that’s totally fine 🤷
Everyday I meet two to three entrepreneurs. For most of them the fundraise is their first rodeo and they have been well advised. They are familiar with the terms such as: Seed, Series A, ESOP, MRR, churn, CAC, LTV, unit economics, dilution, cap table…
They have read from Seed funds’ expectations on Jason M. Lemkin’s blog, or they are reading Polina Marinova’s daily Term Sheet newsletter. It’s also best if they have not given % of capital to freelancers who have helped them at the beginning (WWSJD — What would Steve Jobs do? Would he give 5% of his company to the freelance developer who is going to build your website).
If any of these terms above sounded foreign to you, I encourage you to read more about them. Especially if your first meeting is tomorrow ;-)
Hope this helps! Feel free to hit me up with any additional questions. I’m reachable at firstname.lastname@example.orgemail@example.com or (917) 817–5867/+33 6 4931 3692. Also I am in our StationF offices every Friday. Doors are always open!
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