After completing a long process identifying the right venture firms to pitch, running an exhaustive fundraising process, finding a mutual fit, and successfully negotiating terms… at last, the term sheet is signed. So at this point it’s OK to just hand the process over to your lawyers, sit back, and let them work out the details, right? Wrong.
The two- to six- week time between the signing of the term sheet and closing is “venture limbo.” At this point, entrepreneurs know who they’re going to be working with and along what structure, but the deal isn’t done yet… including wiring of the funds! Most of this time-period is taken up by lawyers drafting and then negotiating the finer legalese points of the full set of legal documents. But it also includes legal due diligence, rounding out the round with additional syndicate investors (often angels in seed rounds), figuring out allocations, as well as sometimes even (but hopefully not) additional business diligence for the institutional venture investors.
The problem is that time kills all deals. The longer this limbo period extends, the more risk is introduced that the process will veer off course or even fall apart entirely. It should feel like things are accelerating towards a close, as opposed to marching along at a steady pace; and it certainly should not feel like deceleration towards the end.
The possibility of negative scenarios adversely affecting the outcome range all the way from some uncontrollable exogenous disastrous macro event (of which there have been a few major ones in the last dozen years) to the possibility of a venture firm simply getting cold feet and backing out. Obviously, only the latter is within the locus of control of everyone involved. It doesn’t matter the reason – a competitive funding announcement, a customer loss, a bad month of results – with more time, the increased chances of more emerging mitigating factors to getting the deal completely finalized. And even if the relationship with the VC partner leading the investment seems solid, entrepreneurs have little window into his partnership political dynamics during that time which could force him to lose his hold on pushing the commitment over the line.
What can extend the month of limbo? Lawyers going back and forth on minute/inconsequential details, of course. But frequently, there is time spent negotiating business terms which weren’t specified in the tern sheet itself. Founder vesting is the most common example. Or sometimes VCs renegotiate terms or introduce new concepts – nefarious, but I’ve seen other firms exerting their negotiating leverage in a relationship given this situation. And I’ve seen weird unpredictable situations crop up that delay things, too. As an extreme but real example, once a standard background check which was run on the startup’s CEO reported that someone with his exact name from his exact town was a felon convicted of embezzlement. It turns out it was literally the wrong guy, yet same name / different person, and the entrepreneur was asked to sign an affidavit maintaining it wasn’t him. But the whole cycle delayed the closing and almost derailed things because of the uncertainty.
The good news is that these scenarios don’t happen often. At the end of the day, a VC signs a term sheet for a reason: they’re making an agreement under the circumstances which they’re eager to do. The job of the entrepreneur is to ensure those circumstances don’t change too much in the interim. And most VCs (including all of us at NextView) pride themselves on their reputation about keeping their word, not backing out of term sheets or renegotiating after they’ve been signed. But the takeaway here is that the fundraising process isn’t complete until the money is in the bank.
Like a lot of students, I went into business school a decade ago with a set plan to start a company coming straight after graduation in co-founding an internet startup (… again). During the following two years I did a number of things which prepared me for that endeavor, but then also in retrospect, I completely missed out on a number of opportunities and valuable resources immediately in front of me which I didn’t recognize at the time. My alternative working title for this post was: “Eight things I kind of knew and only mostly followed as an entrepreneur during b-school.” My own circuitous path graduating a couple years later intentionally without a job (see bullet #1) eventually led me onto the venture capital investing side of startups, but I still regret not fully taking advantage of the two years that only a business school environment (and calling card) can provide. Recognizing the academic year is starting now for MBAs (as well as all other entrepreneurial-minded students, for that matter), I wanted to articulate a set of recommendations for b-school students looking to start a company immediately after graduation:
- Commit to graduating without a job. It’s a challenging leap of faith to take, but entrepreneurship requires a full all-in effort. If it’s there’s an irresistible urge to hedge a bit in exploring alternative paths or engage “just a bit” in on-campus recruiting for traditional roles, then it’s better to fully pursue one of those routes (at least for now) than be distracted by an entrepreneurial pursuit which won’t materialize.
- Master the coursework basics, but then develop soft-skills rather than specialized ones. Part of the benefit of a generalized MBA program is developing a broad fundamental skillset across many areas of functional expertise, from finance to marketing, and everything in between. After those core skills are developed, however, it’s more advantageous to spend additional classtime developing higher-level softer skillsets which will be used throughout the entrepreneurial process rather than deeper point-solution “hard” expertise which can be hired or learned on-the-job as needed (e.g. take Interpersonal Dynamics not Global Financial Reporting.)
- Take classes from the best “star” professors. You’re paying quite a bit of money for this education, and the different between star instructors and the solid overflow ones is step-function not incremental. For example, Irv Grousbeck and Mark Leslie at the Stanford GSB fundamentally changed my thinking about life and business, and unsurprisingly Felda Hardymon has the reputation for doing the same at HBS. Regardless of school, there are always the premier professors. Use your entrepreneurial drive to go around “the system” to get into those specific classes – beg, borrow, and steal to do so. Camp out at their offices. Or just show up for the classes and literally take the course twice, once with the star (unofficially) and the “standard other” instructor officially. It’s worth it. Really.
- Go outside the business school to meet co-founders. Business schools are very insular islands, but they’re surrounded by an ocean of students in all disciplines. Your developed skillset won’t be much different from your immediate classmates’, but it certainly will be from someone in engineering or computer science. “Recruit” your co-founders there; it’s more difficult, but that’s the point. Diverse thinking will create better thinking.
- Go off-campus with your student ID. Your “student” calling card immediately disarms and can open all sorts of doors which won’t be as inviting the second you have a diploma in hand. Proactively and persistently reaching out to people directly who could add insight and credibility, as well as potentially initiate a process for company-making deals, for your startup. In our NextView Ventures portfolio, Eliot Buchanan (Founder CEO of Plastiq) was the master of this approach and was able to bring on high-profile partners (think: Mastercard) to his business before even graduating from undergrad!
- Immerse yourself in domain to develop authentic idea. Rather than whiteboarding different potential business ideas, think about your own previous work experiences to solve problems for constituents in that business which you know first-hand. If nothing comes out of that exercise, spend time truly immersing yourself in a specific industry or domain.
- Do what you’re classmates are not. MBAs are notorious for sheep-herding towards a particular category of startups (recently, daily deals and online new e-retailing). Aim for the upper right quadrant on the the consensus/non-consensus vs. right/wrong 2×2 matrix and develop a (hopefully correct) thesis that’s not following a common assumption.
- Take a summer internship to hone expertise or a functional skillset, NOT for resume padding. Once you start a company, nobody will care what you did for ten weeks one summer. Really. But the chance to just drop into a company and industry for a couple months, without any strings attached, can help develop real knowledge and facilitate connections. For example, in the NextView Ventures portfolio, Fred Shilmover worked at Salesforce.com before starting SaaS-based InsightSquared straight out of school… and now Salesforce.com is an investor in the company, too.
- Find yourself. Taking two years out of the workforce before fully pursuing an entrepreneurial endeavor grants a luxurious amount of time for self-reflection. Utilizing this time to better recognize and appreciate not just your strengths and weaknesses, but also your underlying motivations and intentions, will help prepare you for the many challenges of starting a company.
You’ve just closed your seed round. Other than starting to build, hire, and take over the world, there are a bunch of mundane things to do right away. The following is a first pass at a checklist of items for Founder CEOs to take care of in the first couple weeks after they’ve closed their initial round of seed funding.
- Figure out your PR strategy for announcing the round to get your plan in order.
- Remember that a number of reporters scan Form D filings for fundings which include notable venture firms in order to preempt funding “scoops”; talk to your legal counsel about the timing of your own filing.
Communications with New Board & Investors
- Ensure all of your investors have all legal documentation of the round, including an electronic version of the final cap table.
- Figure out a Board of Directors meeting schedule & cadence acceptable to everyone joining in person. Publish dates & times in advance for the next nine months so it’s set in everyone’s calendar in order to avoid the hassle of coordinating scheduling multiple parties every month or two.
- Proactively solicit input to create a board deck template and metrics dashboard to present at the first Board Meeting, so that you’re able to set a strong in-control tone.
Foundation for New Employee Hires
- Formulate and socialize with the Board acceptable compensation bands (both salary and equity options) for new employees. This best-practice will help set expectations all around about the compensation-level for hiring, so that there will be less need to consult the Board on standard hires, only for executives which are exceptions.
- Hire a firm to conduct a 409A valuation to set a strike price for your employee stock options, which needs to be at or above “fair market” value.
- Explore HR/healthcare/payroll options… as it’s entirely likely you’ve held off formalizing to-date but now will need these in place for attracting and hiring employees.
- Obtain Directors & Officers insurance; you and your fellow Directors want it, and your docs may necessitate it.
- Switch to more than just a bookeeping firm (or upgrade from merely Quickbooks); instead engage an accounting firm so that you don’t have to think/worry about it down the line. But a full time CFO and even a CFO-for-hire may overkill at this point.
- Send a personalized thank you note to the half-dozen people outside the company who helped you during the fundraising process.
- Take the whole company (presumably pretty small at this point) out for a Thursday night drink – you have a lot of work ahead of you but it’s worth it to celebrate together in achieving this first fundraising milestone of many to come.
Please leave additional suggestions in the comments, and if there’s a critical mass of content, I’ll likely repost the blog in the future.
I’ve always wondered why funding begins with fun. Those three letters. F. U. N. Fun. For entrepreneurs, seeking seed capital means meeting with numerous VC firms and sometimes dozens of angels… fun? Telling the same pitch over and over again… taking time away from more immediately impactful endeavors like recruiting and customer development… the endless follow-ups and inevitable radio silence… fun? And then there’s hearing “no” constantly – perhaps that’s why funding ends in “ding,” as it’s the repetitious sound of hearing reasons for why not, instead of why.
Maybe fundraising isn’t supposed to be fun, after all. But that doesn’t mean it can’t be productive beyond obtaining the capital itself:
- Running a great fundraising process involves crafting real story and not just a pitch. This end-result can take additional time to develop, but having completed it, it can be beneficial in more than dealing with just potential investors. Having a crisp story about the vision behind a business can be leveraged multiple times with other constituents to effectively reach customers, partners, press, and even potential acquirers with the right communications message.
- Fundraising encompasses trial-by-fire circumstances which almost always necessitates professional development. Unless Sales just runs in the blood, running a fundraising process will naturally hone those skills. These soft-skills of persuasiveness undoubtedly make one a better leader.
- A process which is inherently about meeting people… provides an excuse to meet people. Fundraising is about evangelizing a vision. Along the way there will be encounters where the story resonates in conjunction with a real personal connection. Sometimes these people don’t become investors, but rather than quickly moving on, these people can be co-opted into useful allies to help in other ways. Introductions to customers, long-term advisors, business development partners can result from the fundraising process, as those early conversations turn into real relationships.
Yes, often the best part of fundraising is the end of it. That’s the fun part – getting back to spending 100% the time building a company. But there can real benefits that come out of a fundraising process if you’re proactively seeking them as a by-product beyond just adding cash to the bank account.
One Jackson is a new online children’s clothing retailer which is surprisingly fresh – all of its designs were created by independent designers and then curated with love from its community of parents. The results are high-quality fashionable creations at an affordable pricepoint – which look great and are uniquely different from mass clothing brands. Today the company announced that it has raised $2M from a number of investors including us at NextView Ventures. We’re of course are very excited about working with the team and what’s ahead for this company. For us, the investment is certainly fresh and newest in our portfolio, but it also feels familiar.
The company’s familiarity is along what we consider to be the three most important criteria for an investment in a seed-stage startup – team, market, and product:
- Team – Two of the co-founders were well-known to the NextView partnership years before a line of code was even written. CEO Anne Raimondi and my partner Rob were colleagues together at eBay in the early 2000’s before she went on the lead product and/or marketing at many household internet names like Zazzle, InsiderPages, and SurveyMonkey. Her co-founder and CTO Yee Lee worked with both my partner Lee Hower and myself (at PayPal and Venrock, respectively). And Board Member James Reinhart is already part of the NextView family, as CEO of portfolio company, thredUP.
- Market – Through our existing investment in the largest online consignment store for kids clothing, thredUP, which has begun to scale, we were already familiar with the children’s clothing market. Including how large it is – there is $15B spent on U.S. children’s apparel annually, and online retail sales overall are growing 10% year over year. And as a new parent myself, I have first-hand experienced the consumer opportunity for great clothes with fresh designs.
- Product – Lastly, what makes One Jackson unique is the source of the original clothing designs – a community of independent artisans. And while this design sourcing strategy is a unique approach to this category, at NextView we’re very familiar with, and have been actively pursuing investments that fit into a theme of a distributed creative workforce. At our portfolio company CustomMade, we’ve seen the power of a skilled artists community making everything from jewelry to furniture which delight the consumer. Similarly at GrabCAD, where CAD engineers collaborate and create in a community, the collective output has been remarkable. So given our experiences with these businesses which very much rhyme with One Jackson, the familiarity lead us to excitement about another company taking this social-enabled model to a different vertical.
Many of the inputs going into this investment were known to us at NextView. But the end result is something extraordinary, and beyond our expectations. The company has already quietly run a handful of design contests with spectacular results – one-of-a-kind clothing creations, some of which you can purchase right now as part of their initial back-to-school launch line. Through harnessing an intimate community of designers, and a broader one of parents to providing input on their favorite designs, One Jackson has already begun to create a crowd of loyal followers to their brand and unique children’s clothing. Including us here at NextView.