The VC Perspective: 25 Tips for Entrepreneurs
1. Tranche investing, i.e., milestone-based investing, is now the norm.
2. Preferred investors are now putting ceilings on burn rates; expect companies to do a better job of managing cash flows, being capital efficient.
3. Min of 12-18 months of cash in financings or VCs will not invest. Must have reasonable runway.
4. Compromising on a lower quality CEO than one would like is always a big problem.
5. Building of management teams is the biggest risk after financing risk.
6. Customer revenue is key to financing. Without it, forget it!
7. Advisory Boards add little value. They usually don't add to the company building product or acquiring customers.
8. Angel investors in prior rounds are okay, but radical angel capital structures that don't scale are a big problem and inhibit future funding.
9. VCs won't typically invest in anything related to the political process, i.e., selling solely to govt.
10. Most VCs look for a $5 million or less pre-money valuation in Series A deals. Most entrepreneurs are not realistic when it comes to their valuation.
11. Most companies shooting for IPO will require $20-$40 million to get there.
12. Few VCs are doing "gang plank" bridge loans. Most are now structured as secured debt with option to convert to next round.
13. VCs want to build, not fix, companies. Too many need fixing.
14. Due diligence takes 2-4 months. Entrepreneurs should set expectations accordingly.
15. Syndication is critical. Entrepreneurs should assume no more investors beyond those in the current syndicate.
16. Big funds will do early stage financing if they can place a proven CEO. There is not enough time to develop a CEO. VCs prefer to hire one. What do VCs look for in a CEO?
- Must be passionate about winning.
- Must be a great recruiter.
- Must take situations over the goal line, not just close to the line (people, customers, alliances).
17. Few VCs will do deals with anti-dilution terms as it demoralizes the management team.
18. "Restarts" typically produce lower returns than new businesses, which is why most VCs avoid them.
19. Most VCs now more cautious about investing in "hot" areas and focus more on building large sustainable companies, with high gross margins and low capital requirements (less than $20-$30 million).
20. The best VCs help in customer acquisition and use it as a key advantage in getting the best deals.
21. Most VCs boil their decision on whether to invest down to one question: "What do we have to believe to make this investment?"
- Is the value proposition and business model clear?
- Is there a true pain point and a sellable cure?
- Is there a real team or just a collection of individuals?
22. Entrepreneurs need to come to grips with the fact that down rounds and flat rounds are more common than up rounds and that dilution is not as important as getting the cash.
23. Messy cap tables are a red flag and most VCs won't invest unless it is cleaned up.
24. VCs don't invest in entrepreneurs that are running several companies or not engaged full-time. They also prefer to invest in entrepreneurs that are risking their own capital.
25. Companies that wait until they only have 3 months of cash left have little room for negotiation. Take it or leave it.
Complied from the early-stage venture conference.