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50 Questions: To what extent should I encourage competition between VCs?

Fiftieth in a series of weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital. We expect the series to run for a year after which we will collate the posts into a book. You can find the rationale behind the series here, and the list of questions here. We welcome your comments on any and every aspect of what we are doing.

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If you are an entrepreneur who is raising money you should talk with multiple VCs, simple as that. To do otherwise would be crazy. No individual VC can be guaranteed to invest and having some competition in the deal will cause most investors to move faster, and it may make them offer better terms. Talking to multiple VCs will also help hone the pitch and may generate feedback and contacts that are useful for your business.

I don’t think we have made an investment recently where the company hasn’t talked with other VCs, and if we were to find ourselves doing so I think we would want to know there was a good reason why not.

So creating some level of competition between VCs is a good idea. The more interesting question is ‘how much?’.

The following advice is for the average company that is successful in raising venture. Super hot companies can keep more funds in competition with less work, and should maybe do so, and companies that find it hard to raise venture will probably need to talk with many more VCs, and may struggle to get any competition going.

The first decision to make is how many VCs you should talk with. I would say at least four or five, and more if you don’t feel sure that at least one of the top four or five on your list is likely to want to invest.

Once you get past the second or third meeting I would narrow down the field to three or four. More than that will leave you no time to run your business. Then when discussions get serious I would narrow down to a preferred partner and keep a second investor warm. There is no need to turn anybody off at this stage, simply progress investors at different speeds.

The next, and more difficult decision, is how much you make each VC feel the heat from their competitors. The high level answer to this is that the more competition they feel the better it is likely to be for you. You should however follow these guidelines:

  • Don’t over-play the competitive card until the VC is emotionally bought into the deal. It is never too early to let it drop in conversation that you are talking with other investors, but going too far too early will cause people to prioritise other deals.
  • Maintain your integrity – taking an investment is the start of a long relationship and if you undermine trust by over-stating the competition or sharing information you shouldn’t then you risk losing the deal altogether.

The final, and most difficult question, is how much information about a conversation with one VC you should share with other VCs. At the early stages of your conversations it is OK to talk in generalities about the level of interest you have and the sort of deal you are hoping to get, but if you share specifics about individual funds and especially the terms they might offer you will come across as loose tongued. As you build trust with a potential investor and they start to show a real desire for the deal it is common to give more explicit guidance about the terms that they will need to offer to win the deal, particularly to your preferred investor. At this stage some entrepreneurs share the names of the funds they are talking with, particularly if they have had conversations with any of the top firms. I think that can be OK if it is done in the right way, although you then risk the parties talking with each other. Sharing specifics about the deal that a VC is offering you is almost certainly going too far. Offers are made in confidence and that should be respected.

Lastly, once you have signed a termsheet with a VC you have made an in-principle decision to go with your chosen partner and the right thing to do from a moral and most likely legal perspective is to end all your other conversations.

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  • Céd

    Good post. Maybe you could in another give entrepreneurs your views on how they should manage syndication among several VCs ie: who they should choose, who should lead and why, who could be a could co-investor, when is the right time to share names, how many people they should try to bring together (depending on how much they want to raise and how late stage they are), etc

  • http://www.theequitykicker.com brisbourne

    Good idea. We are still the end of the series now, but I will try to weave that in.