The venture capital industry is very competitive. There's more cash out there chasing good deals than the majority imagines. It's also true that there are good deals and good entrepreneurs that can’t find anyone to take a position in them & that's a failure of the system. But this post is about how venture capitalists can compete and win a deal that several others want.
Here are the tips:
1) Be at ease with the entrepreneur. If you don’t have an excellent personal connection, you won’t win the deal. Don’t even bother to undertake to win a deal where you don’t have good personal chemistry with the founder/CEO.
2) Entrepreneurs are wise and they know how to make a deal with a firm as well as an individual. Allow them to see the total picture early. Make it easy on the entrepreneur to satisfy the complete partnership. Don’t make the entrepreneur do all the work.
3) Encourage the entrepreneur to induce feedback on you and your firm rather than references. I prefer to list out each entrepreneur I’ve ever worked with along with their email address. I tell them “throw a dart at that list and check with four or five of them randomly & you’ll hear the same thing from everyone.”
4) Don’t pressure the entrepreneur to form a choice. Don’t issue exploding term sheets. Don’t put “no shops” into your term sheets. Those sorts of things are signs of insecurity. Its better to tell them that we’ll have an exclusive relationship when the deal closes and not before then. If someone wants to go away from me at the altar, better it happens then than after we are married.
5) Make your offer head to head and don’t screw via a term sheet. Tell the entrepreneur you wish to be their business partner. Tell them what quantity you may invest and how much ownership you would like. Leave it at that. Tell them that if they're interested, you'll send them a term sheet. Leading with a term sheet focuses the discussion on the incorrect things. The method should be all about personal fit and really high level deal terms. Once the choice is formed to undertake to figure together, you'll be able to get into the specifics of the deal.
6) Add value during the method by discussing the strategy issues facing the corporate, discuss the hiring challenges the corporate faces, attempt to help with these issues even before you're an investor & show what you'll be able to do straight away.
7) Use the merchandise or service. Ideally you must be using it well before you begin chasing the deal. But use the product/service actively and smartly. The entrepreneurs are going to be watching. I assure you of that.
8) Don’t feel the necessity to pay the best price. They're going to be wondering why you're so aggressive. Offering a good price that's within the range is what you would like to try and do. And communicate that if the entrepreneur chooses to figure with you, you may be flexible on your offer. That way you set yourself within the position to win and you'll work the specifics to shut the deal when the chance presents itself.
9) Don’t group with another firm. We’ve made this error some times recently. Entrepreneurs want to decide on their syndicate partners. By pairing up with another firm, you signal to the entrepreneur that you simply want to settle on the syndicate which may be a mistake during a highly competitive deal.
10) Be prepared to lose the deal and if you are doing, lose gracefully. There are lots of good deals out there. You don’t need to win all. Lose gracefully and maintain your good relationship with the entrepreneur in the least bit costs, they may come to you in the following round.
Many of these tips are counter intuitive but work well for the VCs I know. You would possibly say they'll only work for you if you're a top tier investor which will otherwise be true, but you have got to act sort of a top tier investor to become one. So you would possibly furthermore play the sport that way from the beginning.
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