AGILEVC My idle thoughts on tech startups

February 28, 2012

Startups in NextView’s portfolio frequently receive inbound interest from other VC investors who are intrigued about what they’re doing, and I often talk with other early-stage entrepreneurs how to approach similar situations.

It’s obviously a nice thing to attract the interest of smart folks you might want to get involved in your startup as investors at some point in the company’s lifecycle. And fundraising is rarely easy so it feels good when the “top of the funnel” essentially starts to fill itself. Each situation is unique of course, but there are a handful of suggestions which I think are common across most startups for how to think about this type of preemtive interest from VCs.

1) Timing Matters – Sometimes startups garner the attention of VCs shortly after they’ve made a big press announcement, which often is closing a round of funding. If you start receiving inbound interest from VCs within the first couple months (or even weeks!) after you close a round, decide up front whether you want to engage with them.

If you and all the people around your startup (co-founders, advisors, existing investors) feel strongly that the company A) could benefit from additional equity capital at this time and B) you’ve accomplished value accretive milestones since your last round of funding, then it might make sense to talk with potential new investors. You might raise your next round of capital sooner than anticipated, but as long as it’s from folks you’re excited to work with on terms you and your constituents find acceptable that’s a great outcome.

The difficulty I’ve seen some startups encounter is when they’re uncertain about A or B above and they do engage new inbound investors. Entrepreneurs can sink a lot of time into fundraising discussions that go nowhere or end with actual term sheets but ones they’re not prepared to accept (firms you don’t want to work with, terms you don’t like, etc).

2) You’re Entitled to Say No – Some entrepreneurs I’ve discussed this topic with feel compelled to speak with VCs, whether partners or junior staff, that reach out to them.  At the end of the day it’s your company and your time… be intentional about what you do.  One needn’t be a jerk about it, but if you don’t want to talk with a particular VC that contacts you or if you don’t want to talk with any VCs at present you should feel free to say no.  Even if it’s someone you want to talk with in the future, good investors respect entrepreneurs who say “we’re not talking with new investors right now, but I’ll be in touch with you if we do start raising additional capital.”

3) Smoke vs Fire – You also need to parse the nature of the interest you’re getting. A GP you respect from a firm you like asking to meet in person with you is different than a cold call from an associate or other non-partner level investment professional.

Different VC firms take different approaches to proactive “prospecting” of this sort.  Some are highly targeted… they have a clear investment thesis and approach a small number of companies they learn about that clearly fit that model.  Other firms basically take a shotgun approach, and have associates call virtually every company that’s raised a seed or Series A round.  There’s unfortunately no easy way to determine whether a lobbed in call or email represents smoke or fire.  This is one area where a good set of advisors or existing investors can often provide useful input based on their dealings with a broad set of individuals and firms in the VC ecosystem.

Also there’s different schools of thought on whether to talk with associates or other junior staff.  Some folks feel you always should, some feel it’s a waste of time and you never should.  Larry Cheng had a good post which detailed how VC firms handle these kinds of calls… Volition is a later/growth stage firm but conceptually this is similar to early-stage investors that do outbound calling too.  My perspective is basically to make an informed decision on a case-by-case basis.  If you’re contacted by an associate at a firm you’ve wanted on your own radar (based on their knowledge of your market, the firm’s reputation, whatever), then by all means speak to them.  This is sometimes a good path to getting the attention of partners in the firm if you don’t have other avenues.

But be honest with yourself too.  Getting a bunch of cold calls from associates from firms you respect may feel good, but it’s the very beginning of a process.  For every 100 calls these folks make perhaps 1% or less result in an actual investment.  Don’t mistake smoke for fire, and make your own independent judgement whether you want to raise capital or not.

4) Know Your Reservation Price - If you do engage with inbound VCs, know your reservation price before you start these conversations.  And when I say reservation price I don’t just mean valuation… I mean the broad contours of a round that you’d be willing to do which includes not just valuation but size of the raise, syndicate, etc.  If you’re in a preemptive conversation or set of conversations before you’d normally be raising additional capital, know what it would take for you to accept a potential offer so that if you do get it you’re prepared to deal with it.

5) Mix It Up - As I often say, either be fundraising or not… there is no “try”.  If you do decide you would consider raising a preemptive round and you choose to engage with inbound VCs, there’s nothing that says you can’t also approach other firms you want in the mix even if they didn’t contact you inbound.  Again, be intentional.  We sometimes see startups engage in a process just with the VCs that contacted them inbound and regardless of what the outcome is, they’d usually be better off if they spoke with all of the potential firms on their target list simultaneously.