August 12, 2014
Last week, Tech Cocktail headed to DC for a Sessions event called Learn How to Get Funded by DC’s Biggest Startup Investors. The panel talked about some of the harsh realities of raising funding, including Paul Singh’s 7 dirty secrets of venture capital.
Raising funding is a hard game, particularly because both sides are keeping things from each other. Here are some common lies VCs tell you and what they actually mean:
You’re too early
As a rule, VCs won’t invest in super-early companies, but they make exceptions. If you hear “you’re too early,” that just means you’re not good enough to be an exception. “If we turn you down, we will likely say, ‘Oh, you’re too early for us because of x, y, and z. That is a lie because . . . all of us will invest in incredibly early companies if we deeply believe in it – if we deeply believe in the team and we deeply believe in the market,” said Dan Mindus, investment director at CIT Gap Funds and founder of NextGen Angels.
You’re too far away
The same goes for location – while some VCs prefer to invest closer to home, most will make exceptions for exceptional companies. If you’re told that “you’re too far away,” that might just mean you’re not good enough. “The more successful the company gets, the bigger it gets and the bigger the round of financing, I think capital is much more agnostic,” said John Backus, cofounder and managing partner of New Atlantic Ventures. “VCs don’t like to admit this, but historically the best investments we as an industry have made in our portfolio are farther away from our office. The reason for that (I believe) is that you set a higher bar.”
We’re interested but we don’t want to lead the round
This means different things depending on if you’re talking to a VC or an angel. “When a venture capitalist says, ‘I’m interested but I don’t want to lead,’ they’re basically saying, ‘No, but I’d like an option in case someone else six months from now sees something and maybe you evolve and it turns out okay,’” explains Mindus. “For an angel, what they’re often saying is ‘Maybe, but I don’t want to have to do the work'” (that goes into being a lead investor).
This is how much you’re worth
You should go ask a lawyer for a fair valuation of your company, because VCs don’t know – the same way you don’t know how to make accurate business projections. “We’re making it up. You give us made-up numbers, we give you a made-up valuation. That’s the trade,” said Don Rainey, general partner at Grotech Ventures.
If investors aren’t handing over money, that’s a no. “Don’t pay attention to what people tell you is happening; pay attention to what’s actually happening. Watch the behaviors,” said Paul Singh, founder of Disruption Corporation and general partner of the Crystal Tech Fund. “You will never hear an investor say, ‘I think that’s a horrible idea.’ You will never hear an investor say no. Just follow the dollars.”
It was “love at first sight”
The story in the funding announcement press release isn’t always true. “There’s a public story to every funding and a private one. The public story is that we’ve funded people in the back of taxi cabs after a one-hour ride. The private story is that there were like seven introductions, we met them for three weeks, and we decided to do the deal,” said Singh.
Editor’s note: Tech Cocktail CEO Frank Gruber is a venture partner with Crystal Tech Fund, COO Jen Consalvo is an investor in Disruption Corporation, and VP of marketing and community development Justin Thorp is an advisor to Disruption Corporation. Gruber and Consalvo are both members of NextGen Angels.
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