Three things you should never tell a VC when fundraising
isclosure is a good thing. Early disclosure of thorny issues is a very good thing (such as, “I am embroiled in a legal dispute with my co-founder over ownership of the company and here is why”). That does NOT mean, however, that you should be totally transparent during fundraising.
In particular, there are three things you should be extremely selective in disclosing:
- How much cash you have and when you are running out of money. The answer should ALWAYS be along the lines of: “we are well funded for now and our investors are supportive” no matter how desperate for cash you are. Or “we have a very low burn rate and can sustain ourselves for the time being”. Not: “we are out of money on two months and getting desperate”. There are other ways to create a forcing function and admitting you are going bust or telling investors when you will be is no way to optimise your outcome. ADD: You should clearly talk about your financial profile and how much you are burning per month, I just do no think it is wise to provide the VC with the exact date from which any lowball offer will become hard for you to turn down…
- Other investors you are talking to. I always ask, and I always get a very detailed response: well, Index has done two meetings and Atomico is close to term-sheet etc etc. Why ??? I don’t exploit that information except to pace myself but how many stories have you heard of VC’s ganging up to avoid competing with each other ? The management of KDS agreed to collapse us into the Accel Partners term-sheet when we invested there, but it was their decision. The other issue you face is that VC’s may say “if you get Investor X to lead I will join them” or you get top tier VCs (say the mysterious Investor X) thinking “well investor Y and Z are really crap and if they are interested it cannot be that good”. Sounds stupid, but I have seen this happen.
- Your detailed cap table and your last round valuation. You are telling me now (a) which investors I should be influencing to win the deal and (b) how much upside I should give them, and that may not be in your best interest. Management ownership matters but be coy and don’t reveal more than you need to.
You should keep your cards close to your chest, maintain information asymmetry. The key is to do this without seeming to be secretive or pretentious, but with confidence: “we are talking to a few select investors, strong brands, and are currently making good progress towards a close”.
Some VCs spend their entire time talking to others and asking them forcefully “whether they are looking at company Y and what they think of it and should we not do this together”.
The question to ask yourself is: “is this information relevant to the VC’s assesment of whether they do or do not want to invest in my business and at what price”. If it’s not and it helps the other party’s negotiation leverage, you do not have an obligation to answer.
Trust me on this, and always keep your options open.
UPDATE: to be clearer, I am suggesting that this information is valuable and important and that you should be “selective” in disclosing it. Yes, it gets subtle. For example, a VC should be able to put the outline of an offer together without knowing your detailed cap table. However, he won’t be able to write you a detailed term-sheet without the full details (voting thresholds and board composition, to take two examples, depend on it). I thought I would clarify after noting this comment by pg on Hacker News. In any event, 100% transparency all the time is not the way to go. This post should have been entitled “Information you should be careful with when talking to VCs”. Not catchy, me no like.
UPDATE II: I think we should drop my last point on cap table. I had a specific instance in mind where this was important when writing this, but it’s far from universal. I would not necessarily comment early on last round price when it was very LOW, as this can set the bar too low for the current round of negotiation. If your last round was overpriced, well this is something you need to address preferably before you are talking to new investors to get existing shareholders aligned. I invite you to read Eileen for the counter and Reid Curley for a balanced view.