Dharmesh Shah posted some great fundraising tips over on OnStartups last week. He should know a thing or two as well having raised $33m over three rounds for his latest company and as an angel investor in a number of other startups that have themselves raised venture capital.
All nine tips are great. As usual I’m going to pick out a couple that I like the best and embellish them a little.
1. Get the first round right: Dharmesh’s point is that any harsh terms you agree in the first round are likely to be a feature of subsequent rounds as well, so you will have to live with them a long time and shouldn’t accept them too readily. This is spot on – any VC coming into the Series B will look at the Series A terms and want the same benefits for their investment. Anything less feels unfair and also makes it look like the other VC is a better negotiator than you are.
I would add something else to the notion of getting the first round right – and that is the benefit of keeping it simple. Having simple and easy to understand documents is a huge timesaver. It makes it easy (or at least easier) for everyone to keep in their heads how things work, and saves time in debating nuances, resolving grey areas, going back to read documents and negotiation in the first place. And saving time usually means saving lawyer costs as well.
Worse, subsequent rounds will compound the problem as new investors want the same rights and privileges as earlier investors and the earlier ones don’t want to give up what they have.
Sometimes this moves beyond the time and money hassle of dealing with complexity to differing understanding of what was agreed and has been documented. This can stymie decision making. Fatal.
4. Know what market is: Dharmesh’s point is knowing what terms are standard in the market will protect you from unscrupulous VCs sneaking something past you – again this is a good one.
But be careful to make sure your view of ‘market’ is accurate. Unfortunately, there are a lot of people who readily give advice to startups that is not up to date. On one occasion I remember very clearly I found myself negotiating with a founder who on the basis of bad advice believed I was pushing for non-standard terms, which undermined the trust we had built in each other and put the deal at risk. Happily we got through it (although at the expense of some additional complexity) and the investment turned out to be a big success. Apologies for not being able to name names.
The best sources of advice are advisors who have successfully helped lots of startups raise rounds, entrepreneurs who have raised multiple rounds themselves, and friendly VCs.
8. Partner personalities matter: this is another big one for me – once the money is in three things about your VC fund will really count and one of those is how the individual partner will help you on a day to day basis. Will they be straightforward? do they really understand your business? share your vision? do you trust them? The other two are how the VC as a firm (i.e. all the partners) will be able to help you with the strength of their network and via association with their brand, and whether their fund has the capacity to support your company with sufficient further investment going forward.