The Term Sheet Doesn’t Matter -- 13 Things You Should Know Before Accepting Venture Funding
Venture funding isn’t for everyone. If you are building a lifestyle business, a business that will get bought by someone else for a few millions or tens of millions of dollars, or a platform for anything that isn’t primarily about creating a big very valuable business, VC money isn’t for you. Venture investors are seeking a return – a big return, and with that comes a whole set of implied assumptions and obligations. Obligations you may not want or need.
If you do decide to pursue VC money, there are a number of implicit obligations not stated in the term sheet. Obligations that are more important at the end of the day than any actual written term. These extend to both the entrepreneur AND the investors.
1. Respect the money. Implicit in giving you money is the expectation that you are going to do what you said you were going to do. In the event you don’t meet your goals, don’t expect that another check will be automatically written. Part of your responsibility is to make the money last to hit your milestones. Implicit in being a successful entrepreneur is figuring out how to build a business with limited resources and capital.
2. Establish and agree on clear goals. You should have a clear understanding with your investors about what you are supposed to accomplish with the money. Have a clear, direct and unambiguous discussion about it. If you aren’t clear on this, don’t take the money. This is for your protection and the investor’s protection. If your investors haven’t made their expectations clear, make them tell you, and then regularly touch base on those expectations. I’ve seen situations where investors, as they learn about the business, change their minds about what they think needs to get done, and don’t always communicate that to the entrepreneur. Changing expectations happen, so test your alignment with your investors often. Nothing creates more bad blood than rule changes in the middle of the game, especially if both parties haven’t come to agreement on them, or are even aware of them.
3. Build a big business or die trying. You should not be taking venture money to build a $10 million revenue business and sell it for $30-$100M (which may be a perfectly fine outcome for you – perhaps even better than if you had taken VC money.) It’s not what VCs get paid to do, or why they gave you the money in the first place, and the preference stack will swallow any real chance you have for creating wealth. Be committed to driving a big outcome. You and the VC investors are in it together. If you drive a big outcome for them, you get a big outcome for yourself. That is what venture money is all about.
4. Clearly and frequently communicate with investors. You have an obligation to regularly and clearly communicate with investors about what’s going on in the business. Be brutally honest with them and yourself. The more honest you are about how the business is going, the better able investors are to help you — especially when their help can make a difference. Too often, entrepreneurs show up at the last minute and say they need help with something. They’ve known it for a while, but by the time they tell the investor, it’s too late.
The other reason is that doing so helps accelerate and build trust. When the moments come that you need your investors to trust you, this helps tremendously. Investors will give you way more slack if they feel confident that you communicate early, openly and often.
5. There is no commitment to give you more money. Unless, of course, it’s something built into the term sheet. You should never assume that you’re going to automatically get more money. Assume you have to perform and prove that you deserve more money.
6. Be open to coaching and feedback. This DOES NOT MEAN that you will do what investors tell you to do. Ultimately, as the CEO, you are responsible for making the decisions and running the business. It does mean that you should at least give your investors’ suggestions open and fair consideration. Then make your decision and take any appropriate actions.
7. Be on top of your business. Investors expect you to know what’s going on in your business and to be present. Know where the gaps are in the team, the product, and know what your customers and the ecosystem are really saying.
8. Be straight with me and I’ll be straight with you. Actually, I’ll always be straight with you (wish I could say that about all investors), but, just like in a marriage, not being straight with your partner usually results in bad things happening.
9. If it’s not going to work, tell your investors. If you ever think that the business plan or technology is not working or not going to work – tell your investors right away and together, you can figure out the best path for all constituencies. The term sheet aligns everyone’s economic goals and outcomes – you are in it together. It’s also where the collective fiduciary responsibility lies.
10. Figure out the plan and build the best team to execute it. Sometimes this means changing your own role. It is better for everyone – you, shareholders, employees and customers – if you do that gracefully, if and when it’s necessary.
11. Understand the importance of liquidity. This is part of the necessary ecosystem for venture capitalists and entrepreneurs. At some point the capital (and your blood, sweat and tears) needs to create tangible value. Make it one of your priorities from day one, understand what it really means, and plan for it.
12. Build Value, Not Hype. Look at the lessons from the last bubble, as well as all the ones that came before it. Hype does not outlast execution. A little hype and a lot of execution is the winning combination.
13. Respect and maximize the time and value of your board members. Organize board meetings to get the best out of your board. Do not simply report. Set aside time to discuss strategic issues, team issues, and your next round of capital well ahead of a crisis, a deadline or cash-out.