Founders seem to have excessive focus on entry valuations with little consideration of anything else. In my experience, the quality of investor and terms on offer can significantly enhance probability of success. Hence, other than valuations, it is important to evaluate terms, gauge chemistry, and what else the investor brings to the table before you make a choice.
Entry valuations don’t mean anything unless evaluated alongside the terms they come attached with. I have recently encountered term sheets which would have made Shylock envious – Angel investors who want an exit guarantee in 5 years with 15% guaranteed IRRs, and the right to sell founder shares (“drag along”) if they have not been provided this exit. From a founder’s perspective, these are crazy term to accept. What was on offer was not high risk Venture Financing but high yield debt financing with an Equity kicker… and practically no time to build a robust business model.
Take the time to probe deeper on the following questions
- What kind of Rights would they want? Ask to see a sample term sheet before you narrow down on your partner
- Ask to speak to other founders they have funded. Especially, where the investment is not doing well.
- Have they had conflicts with founders in the past and how were these resolved
- What is the VC firm’s edge over other firms
- How will they contribute to building the business
Some other general guidelines.
- Fewer investors the better. If investors are coming in as a group, ensure there is only one nominee you are dealing with – else you will be wasting time managing multiple investors. Very often, they have diverse views which is the quickest path to disaster.
- As a sweeping generalization, VC firms who are run by ex-entrepreneurs are better than those run by “finance guys” – you are likely to find more empathy and humility as they have fought in the trenches before.
- A fund will have far less flexibility than an individual investor … but ideally “should” be able to offer more support.
Finally, people are investing in your company to make a return. A hard negotiation is to be expected. But look for “heart”. If for the investor it’s only about the money, and there is no desire to create something, walk away. Entrepreneurship is a difficult journey… you want an understanding partner and not a mercenary to share the ride