Only 0.7% of startup businesses are able to raise venture capital.
A lot of times, founders that do raise venture capital end up making these 3 common mistakes:
1/ Founders optimize for the highest valuation but end up losing control
2/ Founders don’t do enough diligence and sign up with an asshole investor who ruins board meetings
3/ Founders damage their relationships with investors by not sending meaningful regular updates
Let’s dig deeper into these mistakes and how to avoid them.
(FYI – If you’re wondering whether to raise VC or not, I wrote another article on 5 things to consider before raising venture capital).
Optimize for valuation and control when raising venture capital
Don’t fall for term sheets with high valuations. Optimize for valuation AND control. High Valuations come with lots of gotchas. Once you give away too much control, you’re probably never getting it back. Make sure you have a good lawyer to review the paperwork.
Here are 3 key gotchas that you must be careful about when working with a VC:
- Liquidation Preference: Don’t sign term sheets that ask for participating preferred until you get to Series B or later
- Anti-dilution rights: In case your valuation goes down, will the founders be diluted excessively to compensate the investor?
- Blocking rights: What decisions can this investor block you from taking?
If you don’t like the terms of the deal, you can always negotiate for more control at a smaller valuation. In my experience, founders always regretted trading control for a higher valuation. A higher-than-market valuation can often set you up for failure as the stakes are now higher and you have more to prove.
Conduct due diligence on the venture capital firm and partner before taking the money
Talk to at least 3 founders who have been funded by the firm and this partner. At least 1 reference founder should be someone who did not raise follow on funding from this firm or had to close down their startup.
How the VC dealt with the founders and the board during a stressful shutdown will teach you a lot. A VC may not always connect you with a problem company in their portfolio, just dig up their investments on Crunchbase and you’ll know which ones failed. Then reach out to the founder on LinkedIn independently.
Ask about the partner’s behavior during stressful board meetings. Find out how the firm/partner supported the founder through a rough patch.
Keep investors in the loop with regular updates (manage their anxiety)
Keep your VCs updated with regular monthly and quarterly updates. You may also send a quick 3-5 sentence weekly update. If the business is not going to plan, increase the frequency of updates (weekly is a must, daily when in crisis mode).
—Here’s my battle-tested template for an effective monthly/quarterly investor update email—
Here’s an update for <Insert month or quarter>.
What we do: <Insert 1-sentence value prop>
Last funding date:
Last funding amount raised:
Trailing 3 Months Average Burn Rate:
Zero Cash date: (When will we run out of money)
1. Standard Case – Divide cash on hand with the trailing 3 month average burn rate, that’s how many months left
2. Aggressive Case: – Divide cash on hand with the maximum of the last 3 months’ burn rate, that’s how many months left
Cash on hand: (see attached bank screenshot)
P&L: See attached excel
1/ Highlight 1
2/ Highlight 2
3/ Highlight 3
Lowlights: 1/ Lowlight 1
2/ Lowlight 2
3/ Lowlight 3
1/ Pipeline stands at $X M ARR
2/ We have Y potential deals expected to close in the next 3-6 months
3/ We are on/not on track to meet revenue goals for FY20XX
1/ Update 1
2/ Update 2
3/ Update 3
1/ Update 1
2/ Update 2
3/ Update 3
Where I need help: (ask for help on ONE topic)
I need help to solve X (find new investors, hire a VP, etc.).
Please let me know if you have any questions.
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