Best practices for raising a VC round

Having raised a number of VC rounds personally and observed many more as an investor or friend, I’ve come to think there are a set of dominant best practices that entrepreneurs should follow.

1. Valuation: Come up with what minimum valuation you’d be happy with but never share that number with any investor. If the number is too low, you’ve set a low ceiling. If your number is too high, you scare people off. Just like on eBay, you only get to your desired price by starting lower and getting a competitive process going. When people ask about price, simply tell them your last round post-money valuation and talk about the progress you’ve made since then.

2. Never tell VCs the names of other VCs that are interested. Reasons: 1) if you are overplaying your hand that could send a negative signal. Most VCs know each other and talk all the time. 2) it is possible they’ll get together and offer a two-handed deal in which case you have less competition.

3. I think the optimal number of VCs to talk to seriously is about 5. That is usually enough to get a sense of market but not so much that you get overwhelmed. You should pick these VCs carefully – this is where trusted, experienced advisors are critical.

4. If there is a VC you really like, have a “buy it now price” and if they hit that valuation (and other terms are clean) do the deal. Otherwise, say you’d like to “run a process” and include them in it.

5. Try to set timelines that are definite enough that investors feel some pressure to move but not so definite that you look dumb if you don’t have a term sheet by then. (Investors have an incentive to wait – “to flip another card over” as they say – whereas entrepreneurs want to get the financing over with asap). Depending on where you are in the process, say things like “we’d like to wrap this up in the next few weeks.”

6. Once you start pitching, the clock starts ticking on your deal looking “tired.” I’d say from your first VC meeting you have about a month before this risk kicks in. You could have a great company but if investors get a sense that other investors have passed, they assume something is wrong with your company and/or they can wait around and invest later at their leisure.

7. The earlier stage your company is the more you should weight quality of investors vs valuation. For a Series A, you are truly partnering with the VCs. You should consider taking a lower valuation from a top tier firm over a non top tier firm (but probably any discount over 20% is too much). If you are doing a post-profitable “momentum round” I’d just optimize for valuation and deal terms.

8. Term sheets: talk about terms in detail over the phone. Only accept a term sheet once you have decided that if it matches what was described you are prepared to sign it. After sending a term sheet VCs get worried you’ll shop it and usually want it signed in 24 hours.

9. Get to know the VCs. Talk to their other portfolio companies, read their blogs, call references, etc. You will be in business with this person for (hopefully) a long time.

10. Timing. While it’s ideal to raise money once you hit the milestones you set out initially, you also need to be opportunistic. Right now, for example, seems to be a really good time to raise a VC round. You could make a ton of progress over the next 6 months but the market could tank and end up in a worse place than you would be today.

http://informationarbitrage.com/ infoarbitrage

Chris, I think this is a very helpful set of guidelines. I’d just make a few comments.

Relating to #6, the amount of time you are pitching, I think reality is a lot more textured. I generally advise companies to meet with a targeted set of VCs over an extended period of time, building trust, credibility and knowledge of the business. The early interactions aren’t “pitches” but “get to know yous,” and are very powerful tools for seeding interest in a venture round when the time is right. Sometimes the process works especially well and one of these firms with whom you’ve been relationship-building pre-emptively offers you a deal, requiring you to figure out what your “buy it now” amount is. Other times you just get great advice and connections that help both you and the business, regardless of whether they invest. Bottom line, I’m not sure one month is an accurate depiction of the “tired” period. I think a lot depends upon how meetings are positioned in order to reduce the intensity and drama of the “pitch” and forcing a decision too quickly.

As it relates to #9, rock on. I totally agree. VC due diligence HAS to be a critical part of decision-making process, and relates back to #7. I have on many occasions counseled companies NOT to take the highest offer, but to take a fair offer from the best partner and firm for their particular business. This has almost always been a good decision in retrospect.

Thanks for putting this out there.

http://www.cdixon.org chris dixon

Thanks, Roger. Agree with you completely. I should have made #6 clearer. I always advise people to meet as many (good) VCs as possible. It’s just when you are pitching (or perceived to be) that the clock starts…
http://www.charliecrystle.com Charlie Crystle

that’s what i do–lots of conversations until the time is right. Which is pretty soon

Anonymous

What’s your take on meeting with VCs to gain initial feedback on a company that is growing but just not ready for a round of financing in order to keep them posted on progress in the hopes of having them invest at a future date? Pros / cons?
Anonymous

What’s your take on meeting with VCs to gain initial feedback on a company that is growing but just not ready for a round of financing in order to keep them posted on progress in the hopes of having them invest at a future date? Pros / cons?

http://www.cdixon.org chris dixon

I think it’s a good idea – see Roger Ehernberg’s comment and my reply.

http://www.aaronkharris.com akharris

One thing I might add: study up ahead of time. There’s a lot of terms that are completely unfamiliar, especially to first time entrepreneurs, and understanding them quickly is critical. If you don’t understand all the particulars and ramifications of a set of terms, you’ll end up under a lot more stress than you’d otherwise have.

I’d also say that you should get someone more experienced to act as an advisor. This doesn’t have to be a formal thing, but having someone to ping questions off of is hugely useful, especially if you run into a situation where you don’t understand something.

http://www.cdixon.org chris dixon

Good points.

Anonymous

Thanks for the great post. You always offer pertinent and valuable advice to entrepreneurs.

I’d also add to your list that that all other things being equal, terms of the deal are more more important than valuation (as long as the valuations are close to market). This is especially true in your Series A which will often serve as a template for the terms of future rounds. Things like liquidation preferences, board make up, and protective provisions can have a long-term effect on the company (and potential exits), and its more important to have company friendly terms than to prevent getting diluted by that extra 1 or 2%

http://www.cdixon.org chris dixon

Totally agree. I didn’t get into other terms here to keep the length of the post reasonable but have blogged terms extensively: http://cdixon.org/contents/

http://usemighty.com Aaron Crayford

Chris,

Really starting to like your blog thanks. We haven’t actively started raising but are about to start. I’ve raised before and was looking at AngelList… my gut feel is if there aren’t investors on board to add social value to the deal putting it on AngelList diminishes value i.e. shops it instantly. Is that incorrect? What do you think? Thanks!

http://www.cdixon.org chris dixon

I haven’t had direct experiences using Angel List but generally like their mission and think it’s good for founders.

Anonymous

I have never raised money, but I have friends who have successfully from among the usual suspects, and the biggest takeaway I’ve gotten is: “don’t pitch until they start pitching you; the minute you’re asking for something, you’re already in a worse off position; if VCs aren’t using/seeing your product and going after you, then you don’t have a product with traction yet.”

I only hear this regarding consumer stuff, so maybe it’s different with b2b, enterprise, etc. Or maybe it’s just cause they’re really good/savvy, might not be true for everyone. I’ve never raised money and I don’t really plan on it, but that could change down the road, so I’m just curious on this general “mental take” from people outside my limited scope. It def resonates with how I operate (I mostly work on mobile apps with no funding, so I like not having to go look for it), but I dunno if it practically makes sense, esp if you’re going after something big and the avg. consumer won’t get it off the bat.
http://florianfeder.org Florian Feder

Chris – Regarding term sheets (#8): It is my experience that founders are quite intimidated when it comes to deal terms and the term sheet discussion. Have a look at http://standardforms.org/index.php/Series_A_Term_Sheet. The goal of this legal wiki is to make deal terms as transparent as possible for everybody involved, and to have a standard out there that everybody can rely on. It would be great to have your input!

http://www.cdixon.org chris dixon

I’d love to see a broadly embraced standard. But it seems hard to agree on. I do blog about specific deal terms here: http://cdixon.org/contents/
Anonymous

In addition to providing standard forms, you should create a page that breaks down the key terms of the Term Sheet (i.e., what the terms mean and how they affect the co in practice). Then provide examples of pro-company language, neutral language and pro-investor language for every term.

This will be a lot more helpful for entrepreneurs than just providing them with form agreements (since the terms will still be Greek to most entrepreneurs even after having looked at your form). Providing explanations and examples will help educate entrepreneurs on the subject, will allow them to know which VCs are giving them better terms, and will give them specific language that they can ask for when negotiating terms.

I’m a former big firm emerging company/VC attorney turned entrepreneur. It was amazing to see in my practice how many entrepreneurs didn’t understand the terms of the deals they were negotiating — even after they had already gone through a few rounds of financing. So I think detailed explanations of the terms, along with examples of language as described above, would be a great asset to entrepreneurs everywhere.

http://www.cdixon.org chris dixon

Sounds like a great project…
http://florianfeder.org Florian Feder

Thanks, SCrockett, that’s a great idea. I disagree though that it is what would be most helpful to entrepreneurs. Here’s why:

What you end up doing is make “mini-lawyers” out of entrepreneurs for the purpose of negotiating their deals. That is very inefficient. The entrepreneur is good at building companies, not at negotiating deals. That’s why people outsource that work to people who are good at that stuff, i.e. lawyers.

So what you don’t want to do is provide entrepreneurs with pro-company language, neutral language and pro-investor language. Instead, you let “the crowd” (which includes investors, entrepreneurs, and their respective lawyers) decide these issues in abstracto, i.e. you let the crowd decide which language a “market deal” should contain.

The result of the wiki is therefore a document that reflects language that is neither investor-friendly nor entrepreneur-friendly. It is the agreed middle-ground. Agreed, not by two parties, but by the crowd.
http://www.facebook.com/kamatajith Ajith Kamath

Hi Scrockett,
I wish to get in touch with you.my email id is kamat.ajith@gmail.com You can add me on http://www.facebook.com/kamatajith

http://technbiz.blogspot.com paramendra

The advice comes across as thorough.

http://pulse.yahoo.com/_UZ2G6OGEUHDNWVDQ45P77KTS7I Max Star

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http://technbiz.blogspot.com paramendra

There is a RSS symbol in the left column of the blog. Just click on it.
http://technbiz.blogspot.com paramendra

Wait. Are you talking to Fred or me?

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http://twitter.com/gfreishtat Gregg Freishtat

And most importantly, don’t invite anyone to be your partner that you don’t actually like and want to work with…..

http://www.cdixon.org chris dixon

Absolutely.

http://thesis911.com/ thesis

right. agree – it is very important, though not all the people really think about it..

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Facebook User

Your points are dead on.
Anonymous

Looks like good advice for an angel round too, with a few changes (probably need to pitch more angels, maybe need to drop some names of interested investors, pitch clock is longer).

http://www.cdixon.org chris dixon

Yeah, for angel rounds it depends. If there is a lead angel, much of this applies. What is happening a lot now though is the company “leads” (draws up term sheet etc) and then gets a bunch of smaller investors. So #3 & #4 probably don’t apply, and #2 much less so as there might be 5-10 investors out of a pool of hundreds so “collusion” is basically impossible.

http://www.facebook.com/rbriancrews Brian Crews

Concise and to the point – well done Chris
http://twitter.com/CavaCapital Cava Capital

Chris, solid post. Consider asking us (VC) what we can do for the growth of the business besides capital. Have us sign up to nail 2 deals this year for example. That will separate the interested from the partner.

http://www.cdixon.org chris dixon

Yes, like the idea of giving investors specific goals. Setting expectations is critical. E.g. when I invest I make it really clear my main value-add will be in raising money, not helping with product etc and they should look for other investors in the angel syndicate for that.

http://twitter.com/thinkbigKC Herb Sih

What a great post. Can’t stress enough that everything you do is always about the people & who you partner with. Whether it is your employees, vendors or investors, the company you keep often times becomes the company you become. Choose your (investment) partners accordingly!

http://www.cdixon.org chris dixon

thanks, and totally agree about who you partner with.

Anonymous

Great tips and “inside baseball”. Chris I assume most of these tips actually benefit Ents and VCs, but would you get any flack from VCs for writing a post like this?

http://www.cdixon.org chris dixon

I tried to make it balanced, as I do think that the best VCs and entrepreneurs have incentives that are more aligned with each other than most people think.

http://twitter.com/andyidsinga andyidsinga

thanks chris – very helpful post.
http://twitter.com/statspotting StatSpotting.com

Can you share some details on how much to raise as well

http://www.cdixon.org chris dixon

As much as you need to hit the next milestone – profitability, raising more VC money at a higher valuation etc. And then add 50% buffer. But in reality the amount raised is often dictated more by desire for VC’s to own 15%/20% than it is by company’s operational needs.

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http://twitter.com/RoyalDynamite Royal Dynamite

This is really good and perfect timing. We are about to start raising funds to take my company to the next level. Thanks for the information.

http://www.cdixon.org chris dixon

Sure!

http://twitter.com/mattmuns Matt Munson

Thanks Chris for all the content you put out in the community. Great insight here.
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http://anyessays.com/ Essay help

It is very important things! I’ll use it! Thank you very much for sharing!
http://www.charliecrystle.com Charlie Crystle

So what are the top tier firms? USV, FRC, Kleiner…who else? I’m just starting the raise, launching beta within 2 weeks–stoked!

Chris–Would love you to take a look at Jawaya on Angelist, and then take you through it. Was in NY this week for some great meetings, headed back up (likely moving back).
http://www.charliecrystle.com Charlie Crystle

It’s interesting how things have changed since I started in 96. From then through 2000, the process was pretty much a 6-month deal. Develop relationships, early pitch, show traction over time, long decision cycles.

Now things are funded pretty quickly–the competition is so high. No participation, 1x liq prefs, tons of capital, etc. Really comes down to the partner. I’ve had good and bad venture partners, and you really don’t learn about that until there’s a conflict.

The way people handle themselves–their integrity–only comes through in times of difficulty, which almost every startup has (name one that hasn’t!)

http://www.cdixon.org chris dixon

I agree. The best you can do are reference checks & have experienced
connected advisors etc who know who the good VCs are and who the bad
ones are.

http://www.charliecrystle.com Charlie Crystle

posted this about the process after a talk w Fred.

http://www.charliecrystle.com

Anonymous

I understand all this, but how does one know the true valuation , if there are no industry PE’s in the MENA region. 7 future years net addition of cash, discounted to net present value today, should be a good value I’d presume ?

http://www.cdixon.org chris dixon

Early stage valuations are generally just set by the market of
startups and VCs – spreadsheets are rarely involved.

Anonymous

Hi Chris, yes I agree that the valuation spread sheets may not mean a lot but they still form a basis of comfort and therefore how does one calulate the valuation. I have a projected 6 years business plan for becoming a pay tv platform, from being just a set top box manufacturer and distributor. a HD mpeg 4 dvb s2 box with a conax smart card inside for security and addressibility and then getting the rights for the HD boquet for the largest free to air broadcaster who will encrypt their hd channels and will only be available on out Technosat boxes, there by creating a pay tv platform.
50 us X 12 X 1 million set top boxes with a 30 % revenue share for the platform will yield 180 M usd per year , after selling 1 million set top boxes !

how do we value this project ?

Thanasis Iatrou

Great advice – thank you!!
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Anonymous

Great list Chris. I wholeheartedly agree with #1 in particular. Revealing your valuation only sets the ceiling. Its like telling your ex wife what you think is reasonable alimony. You know what direction that can only go! I am working with a start up in the Social Business space called Purus Technologies as they seek their next round of financing and that is something I have been trying to drive home.
Anonymous

Great list Chris. I wholeheartedly agree with #1 in particular. Revealing your valuation only sets the ceiling. Its like telling your ex wife what you think is reasonable alimony. You know what direction that can only go! I am working with a start up in the Social Business space called Purus Technologies as they seek their next round of financing and that is something I have been trying to drive home.
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http://www.facebook.com/laurens.laudowicz Laurens Laudowicz

this is very helpful. thanks.
http://webbroi.com Casey

Awesome article. Very glad I came across this.
http://twitter.com/NocPlace_jack Jack, NocPlace

Thanks for this. Timely question for you relating to timing: NocPlace is waiting for the much-vaunted “traction”. While we’re in early stages, we do have hundreds of users and incredible market validation from all those Bay Area companies you know.

So should we start to take the plunge for a Series A? Or wait until there’s more buzz about NocPlace and/or thousands of users?

Thanks…Jack
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http://twitter.com/klassCapital Daniel klass

a lot of these points are right on the money. unfortunately this process is a little more of an art than a science!!!
BuyGiftsItems

I am working with a start up in the Social Business space called Purus
Technologies as they seek their next round of financing and that is
something I have been trying to drive home.
Anonymous

Hi Chris,

Learning a ton about setting up your business for success from this post and many of your other ones! It’s super helpful in the stage we’re in with our startup (2 founders, cool idea, no full product yet)! One thing though, we’re stuck at #1 of your best practices…

Just wondering how you would advise non US based companies to move forward on raising a VC round, preferably in the US. For instance in my country The Netherlands we don’t have a real VC culture for startups pre-product and/or pre-revenue. Can you name a decent startup that we’ve produced that is doing it big internationally? Me neither.

And certainly don’t expect to raise an angel round at a 1MM – 2MM valuation; people would just laugh at you. It’s kinda understandable considering our country only has 15MM inhabitants (tiny market) and very few succesful internet entrepreneurs. We’ve tried to send our deck to VC’s in the US without much success – ’cause 2.500 other startups came up with the same idea and we have no connections, no product, no traction etc. – so we started talking to a Dutch investor/ex-banker instead. He’s interested, but doesn’t like the proposed percentage (too low) or the valuation (too high, again he’s an ex-banker), but sees a lot of potential in our idea, the business model and the very, very, very basic demo we’ve showed him on my iPhone. We on the other hand think the valuation is already superlow (we brought it down to match our Dutch culture) and the investment would only enable us to develop the first iteration of our product and book a couple flights to the US to pitch to VC’s with experience in the internet and mobile space + connections. Yes, we’re even keeping our day jobs!

Again, great advice! In particular for US based startups, but what would you do if you were in our Dutch shoes? The US market for mobile and internet is super, super hot right now and we (an employed senior developer and a freelance UX designer & developer) would love to set up our business for succes. Should we a) take the investment (and get a couple extra hands and smart people to develop version 1 in a couple months) and books our flights or b) jam on our product with our 4 hands (slow, less feedback etc.) and save up for a couple tix and keep our fingers crossed?

Love to hear your 2 cents!

Best,
Gavin
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Chris Dixon