Friday, October 23, 2015

What sucks about fundraising

Last week I wrote a post titled “What makes fundraising so stressful?” and asked founders to tell me which parts of the fundraising process suck. As of this writing, about 110 founders have completed the Typeform survey. The results are very interesting, and in some cases shocking. More on that below, but let’s start with the responses to the first question:

“Your optionality is an illusion”

More than 60 founders took the time to answer the additional free-form question (“What else has stressed you out?”). In their comments, many people emphasized and provided additional detail on some of the topics shown above, but several founders also pointed out additional issues. Reading through all of the comments has been very enlightening (and in a few cases humbling). Here’s a small selection of the answers:
"The big egos"
"Everything takes 4x more time than initially thought"
"Associates who constantly want calls without involving a partner who can actually get the deal done (or not)." 
“It's venture capital but I have the feeling no VC will take risks. There is always a reason not to invest.”
"Rejection from seed investors saying 'come back once you have X' (where X is in essence enough to raise Series A)." 
"Some investors haven't mentioned at all that they invested in similar company. I found that after the meeting."
"Startup/investor fit. Finding people who understand the business and can support / advise us going forward, vs. wasting time talking to people who don't understand the venture potential of the business." 
"Investors using their lawyers as bad cops."
"Radio silence and/or stringing me along, in service of ‘maintaining optionality’. Hint: if you do this, I won't come back to you next time I'm raising. Your optionality is an illusion."

"Had an investor back out after a long negotiation that culminated in a SIGNED term sheet. This is outright destructive, and all but killed the company."

The next question was “Which of the following things have happened to you already?”. Here are the results:

The final question was: “Anything else you want to point out? Any other input on what VCs can do to make fundraising less stressful for founders?”. More than 45 people answered this question. The comments included:

"If you are not interested, say it right away (I had some of the best meetings with VCs that said it out early in the conversation)."
"Don't waste our time or yours. Be very upfront about interest or not. Give succinct feedback, and don't sugar-coat why you're reacting the way you are." 
"Had an investor back out after a long negotiation that culminated in a SIGNED (but obviously non-binding) term sheet. This is outright destructive, and all but killed the company. Never, ever, ever do this to a young company. I literally hate this firm now. They are the worst!" 
"If you're transparent, direct, clear and fair, I will respect you and come back to you in the future. If you're weaselly, arrogant, or try to manipulate me, I won't."

What are the take-aways?

1) Founders understand that fundraising takes time and they can deal with rejections. But they hate being left in the dark.

The top issues, that is the issues which founders said suck the most, are:

  • "Not knowing where I am in the process, i.e. no ‘yes’ but also no clear ‘no’"
  • "Not understanding why VCs have passed"
  • "Having to answer dumb questions by VCs who didn’t understand our business"

Interestingly these issues are precisely the ones that could be avoided if VCs did a better job. In contrast, things that cost time and energy but are a natural part of the fundraising process – creating a deck, preparing numbers, having many meetings, getting rejections – suck significantly less.

This theme – founders can deal with rejections, but they need clarity – is also what has been mentioned the most in the free-form questions and is the clearest take-away of the survey.

To my fellow VCs’ defense, if you get 300 or more inbound requests per month it’s very hard to give each founder a timely response, so unless an investor intentionally strings founders along in order to keep optionality (or the illusion thereof) I don’t want to blame him or her. But knowing that this is the #1 issue which stresses founders in the fundraising process, VCs should try very hard to become as responsive and transparent as possible. For us at Point Nine, these results served as a good reminder that we have to further improve our internal processes to make sure that each and every entrepreneur gets a swift answer from us.

2) Fundraising sucks across all stages

We also asked founders to tell us what stage they’re in. 59% said that the last round they’ve raised (or tried to raise) was a seed round. 30% said Series A, 11% said Series B.

The only question which showed a statistically significant correlation with the stage was the question about “Getting initial meetings”. For earlier-stage founders, getting initial meetings has been significantly harder than for later-stage founders. That doesn’t come as a surprise, and maybe it shows that there’s at least one thing which VCs are good at: Getting their portfolio founders meetings with other VCs. :-)

3) Backing out after a term sheet has been signed is much more common than we thought

In the world of private equity and M&A, signing a term sheet may have a different meaning but I’ve always thought that if a VC signs a term sheet it means they are fully committed to making the investment. And they ought to be. The purpose of the final due diligence that takes place after a term sheet is signed is to rule out “skeletons in the closet”. By the time you sign a term sheet, you should have made up your mind and should be done with your “commercial due diligence”.

Apparently that’s not the case. 14 people, a shocking 14% of the respondents, said they’ve already experienced an investor backing out after a term sheet has been signed. Unless these 14 founders had skeletons in their closets, that’s 14 too many. As one founder said in the comments, if this happens it can kill a company.

Based on these findings, founders are well advised to do more due diligence on their part before they sign a term sheet with a VC. One of the things you should do is ask the VC what kind of due diligence they’re still planning to do after the term sheet is signed.

Huge thanks to all founders who took the time to participate in the survey! If you want to dive in even deeper into the survey results, please drop me a line and I’ll send you the Excel sheet with the complete data set.

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