Going Up and Down the VC Roller Coaster

David Frankel, Managing Partner

To an entrepreneur, pitching a VC seems like a series of discrete events:

• Send a deck
• Pitch
• Have a second meeting
• Pitch the partnership
• Negotiate the term sheet
• Close the deal

While those are important milestones which seem like orderly steps in a process, I don’t think founders fully appreciate the amount of volatility that goes into most investment decisions. I liken the approach to going up and down a roller coaster.

When I meet an entrepreneur with an impressive background, who has built a product with traction, and assembled a team of all-stars to transform the idea into a business, the level of excitement is like the ascent of a thrill ride. Invariably, with enough time spent on a deal, the elation turns to concern as the investor descends into troublesome realities:

References: Flaws that aren’t apparent in a one hour face to face can be revealed by off-list references.

Industry Diligence: The opportunity turns out to seem small, heavily contested, or capital intensive.

A New Shiny Object: In the process of prosecuting a deal, something new (with seemingly more potential and fewer risks) comes along. This tendency is often as much a reason deals fail to close as any intrinsic failing of the particular startup.

Every deal has warts. Even the deals I’m proudest of gave me some pause when I first considered them. What separates those startups from the ones I didn’t invest in is that the founders of the former group created enough momentum to get me back up the incline.

Great founders have a knack for helping the investor ride the roller coaster.

Sometimes this comes down to the charisma and chutzpah of the founders and that ultimately closes the deal. At other times, I’m convinced by a less compelling team that is continuously closing deals and making visible progress in the market. No matter what the instigating force is, momentum matters when it comes to raising venture capital.

So how can you manage this process?

Line up news to break through the process: Don’t over-engineer this, but if possible, line your fundraising up with a period of time where you’ll be landing new customers, seeing major upticks in sales, and be ready to package those data points in a way that’ll pique the interest of your potential investor in the form of strategically timed email updates.

As a corollary, if your business is seasonal, try avoid fundraising during lulls. VCs are smart enough to appreciate macro factors, but there is something in the lizard brain that makes closing a deal against the backdrop of a couple of months of flat revenue (even if following an explosive quarter), that seems to turn investors off.

Time the process to create FOMO: Nothing motivates a VC like the prospect of a deal that might be snatched away from them. Run a tight fundraising process to increase the likelihood that you’ll receive simultaneous term sheets that can be used as forcing functions.

Be responsive: As I mentioned previously, investors see a stream of good opportunities. A founder who is unresponsive, or seems to be obfuscating through the process can be enough to kill the precious momentum that closing a round requires. If an investor asks to dig into your product roadmap or wants to talk to a customer, provide the level of customer service you’d give to your most important client.