A startup I advise was facing challenges with the VC intros they were getting. They were disrupting the Brazilian fishing industry with a VR/AR app that expedited the phase of finding where fishing boats should drop their nets - but when it came to fundraising, the fish weren't biting. Once in Silicon Valley, they were introduced to four venture Bay Area firms. As a response to the intro, the founders attached a NDA for the investor to sign in preparation of their meeting.
Obviously, 4 out of 4 didn’t respond.
In our conversation — we didn’t just expand upon do's and don’ts, but also on how to bond with investors as they turn into business partners. Two months into fundraising and couple lessons learned later, they raised their round.
As a startup founder, you either have a tendency to give away too much information with investors, or you belong to those founders that are overly cautious and don’t tell investors enough. Before you head into your first meeting with investors, it’s important to know what you are going to divulge and what you are going to hold back. But how do you know what information you should share with VC’s?
1. The First Meeting
Being transparent helps earn the trust of others, and it can help you avoid having to keep track of any partial truths you’ve told. However, before you reach the due diligence phase with investors, you do want to hold some things back in your first meetings. Similar to dating, you want to take things one step at a time. You don’t want to spill all of your secrets on the first date, but rather create some excitement.
Whether you are prone to sharing every secret or keeping most things locked up, it’s important to find a balance between the two extremes. The balance between the two extremes is delicate. For first meetings, it’s wise to keep discussions limited until you understand if this VC invests in your space and that your startup sounds interesting, and then open up more in those meetings.
Rather than schedule countless first meetings with VCs, limit the number you see when you are beginning your fund raising process. For one, word gets around in the investor circles, and if investors hear that your startup has been passed on multiple times, people will hear, and your startup will look over-shopped and lacking momentum.
Second, information about your startup can leak in conversations. In fact, once VCs have picked a startup to fund, they often share what they’ve learned about the competition to the one they choose. It is something to think about when you consider what to disclose in meetings with VCs. Be thoughtful of what information you will be comfortable with one of your competitors having.
Don’t let the thought of your competitors receiving information about your startup make you overly guarded. It will be an immediate turn off to VCs, and they may even wonder why you met with them in the first place. You are looking for someone to partner with your startup, so by denying answers to any straightforward business questions, you won’t be able to build trust with potential investors.
Not sure what business information to share? Use your past performance as a talking point. You can keep the discussion serious and financial projections high-level without divulging any of your sensitive plans. There shouldn’t be anything in your past performance that would impact your ability to move forward, so don’t keep that area private.
Guard Your Future Strategy
The information is likely proprietary, and the competition will want to know where you are headed, so don’t completely let on to what your future strategy is. That’s not to say you shouldn’t share any strategy with VCs. That would make you seem unplanned and not give them anything of interest to focus on. Instead, guard the parts of your future strategy you feel are sensitive. Additionally, don’t hint towards any strategies or plans that you won’t fully talk about. This makes you look and sound cagey and is a turnoff to VCs. Leave them completely out of the conversation, and don’t even allude to them.
Your potential investors will likely want to know about your current customers. If you show them a list of your key customers or partners, and if you don’t want them to be contacted, be sure to make that clear. Let them know that, if things move forward, you will organize calls with your customers. If you are very serious about protecting your customers, you could even casually state that if they are contacted, it could affect which VC you decide to work with. Be careful with any ultimatums, though, if you are raising funds early on, as you won’t have much traction to make demands.
2. Future Meetings
As VCs start to show more interest and has taken two or more meetings, they may start to ask you for more information. Be ready to share your past 12-month financial performance and your future forecasts. It is an appropriate time for VCs to ask for this information, and if you are not ready to share that information, you may not be ready for funding.
If you are becoming more comfortable with a potential investor and could imagine working with them, you can start to slowly reveal more of your future strategy. Ask VCs to debate your strategy with you, as that will give you an excellent idea if you would work well together. Your VC will be your “partner”, so it is important to know how they debate your strategy.
Give potential investors confidence with the information you provide. For example, if they request a certain type of analysis, use it as an opportunity to show them how thorough and efficient you can be by answering their question with a professionally produced material.
At this point, if your potential investor looks like they will be a good partner, it is probably a good time to allow some customer calls. Carefully choose which business partners or customers you allow them to call. You will essentially be arming them with ammunition to use with their partners before and after your meeting.
As you get further along in the process, expect the questions to become more intrusive. More customer calls will be made, future strategy will be discussed, and the financial model will be dissected and potentially redone. At this point, you should disclose any major issues that would seem deceptive to share after the term sheet. Major issues can include:
- Founder issues or departures
- Issues with previous companies or employers
For the most part, major disclosures can be overcome if they are shared in the right way and at the right time. Anything that would make you look shady or distrustful if revealed after your potential investor asks for final approval should be disclosed. If you hold something back that comes out later, your potential investor could drop you rather than go back to their partners and tell them what you disclosed.
3. What to Protect
Before you reach final due diligence and submit a term sheet, there are certain areas of information that would be wise to protect for your startup. You should be completely honest with your answers, but you don’t want to reveal certain sensitive areas until funding seems imminent.
Full financial model
Early on, a high-level profit and loss summary is enough for potential investors. You may need something more detailed if you are involved in a merge or acquisition, but you shouldn’t have to share exactly how operations work. Be practical in the metrics you give. Using excessive metrics can lead to unnecessary discussions that don’t matter at an early stage.
Don’t write sensitive information
Anything you don’t want given to your competitors should not be written down. You may have to share some sensitive information, but only do it orally, not in writing. VCs can’t remember anything and can’t note everything down, so it’s best to keep it verbal.
When you reach the due diligence stage and are turning in a term sheet, then you should divulge this information. But, early on, as you are just trying to raise interest, keep issues with operations, personnel, platform, etc. quiet.
Detailed customer list
If they do request a customer list early on, you could keep it anonymous by naming customers by letter, like Customer A and Customer B.
As a startup, you should avoid discussing valuation when you are first meeting with potential investors. If you are asked, don’t be specific so you can avoid either over or under valuing your startup. Investors may take advantage of you if you undervalue your startup and fund you at that valuation or lower.
VCs aren’t trying to cheat you, but they are trying to maximize their own return.
If you overvalue your startup, VCs may not bother with you at all, and you could miss out on funding by being overly optimistic with your valuation. A valuation that is too high or too low can be a red flag to potential investors. They may think that you don’t fully understand or are not ready for fund raising or the value of your startup. Since word gets around, it could be detrimental to your reputation as a startup founder and negatively impact your fund raising goals.
4. Knowing How Much to Share
As you meet with VCs and try to raise funds for your startup, the question becomes less of how much information you share and more a question of when you share certain information. Very few of the potential investors you talk to will partner with you, and once it is apparent they will champion for your cause, you need to be fully transparent with them.
If an investor doesn’t fund you, they may become competition and share your information, either directly or indirectly. They aren’t actively trying to sabotage you; it is just their job to get information from you, whether or not they invest.
There are two main factors to consider when deciding how much information to include in your answers to potential investors:
- If there is a lot of competition to invest in you, reveal less
- If you are getting close to a deal with a particular investor, you should reveal more.
As a startup, raising funds is an essential part of the job. However, don’t go into meetings with potential investors until you are ready to be funded and answer the questions they may have about your startup. Be prepared to be open, but know that there are areas where you can draw the line. Generally, however, you will want to be an open book to VCs.
The trust relationship between startups and investors is essential to the partnership. Unless your startup is dealing with a never-before-seen, patentable technology and showing the technology will require you to file a patent right away, you should answer nearly all of your potential investor’s questions to some capacity. By doing so, it will be easier for you to get invaluable advice, find the investors that fit with your startup, and meet your funding goals.
If you are honest with VCs, the time consuming and stressful process of raising funds can help you gain new relationships beneficial to the future of your startup, whether or not they fund you.