Thoughts on best ways to manage a VC round

We spent too much time raising money at Invite.  Raising money when running a startup is extremely distracting, because every minute you’re fundraising you’re not working on your product.  Sometimes I like to think about what else we could have done at Invite if we didn’t spend probably a third of our company’s lifespan fundraising, either full-time or part-time.

However, the flip-side is that if you’re building a startup there’s a pretty damn good chance that you’re going to need to raise money.  So, this post is dedicated to how you as the entrepreneur can best manage the fundraising process in order to accomplish two things: (1) get what you want, and (2) get it as quickly as possible.  Here’s what I learned:

1. Know what you want before you start the process.  This requires preparation, which often isn’t something entrepreneurs make time for when running a startup.  You have to force yourself to prepare for the fundraising process.  This includes a few things.  First, know how much money you want to raise before you start raising.  Don’t be put in a position where the VC is telling you how much you should raise and why.  This will require that you have done the necessary financial planning to know what the next big milestone/inflection point is, how many new people/resources it will take to get there, how much money those things cost, etc… There are all sorts of posts written on this preparation, including the golden rule of “take how much you think you need to raise and double it”, all of which should be taken seriously.  Second, and for example, you will want to know going in what kind of board structure you want after a fundraising process (since it will likely change).  For instance, do you want to keep the size of your board the same?  Do you want to add someone representative of your customer to your board?  Do you want one of your existing investors to leave the board for whatever reason?  Planning for what you want to get out the process makes things so much easier and less stressful.
2. Set goals/milestones, and track them.  This simply means that you want to set some sort of goal for key aspects of the process, and measure them, as you can’t improve anything you don’t measure.  For instance, talk with your board and management team (if applicable) around valuation expectations.  Setting negotiation tactics aside, this will help set context for various meetings you’ll have and what you’re expecting.  It’s well-known that negotiators who have goals ahead of time generally have higher and more favorable outcomes.  Also set goals and milestones around how long this whole process will take.  My goal at Invite near the end was one month of intro/get-to-know-you meetings, one month of (hopefully) pre-term sheet diligence, partner meetings, etc…, and then two months of post-term sheet diligence and closing (for a total of four months).  It may be different depending on what stage your company is at.
3. Manage the process using Excel.  I learned this one from Josh Kopelman of First Round Capital.  You’re most likely going to be talking to a lot of VC’s in this process, so you’re going to need to stay organized.  Start with an Excel sheet that has a column for the VC name.  Add all the VC’s you’ve talked to, one per row, and then add in the ones that you haven’t talked to but most likely will or want to.  This list probably shouldn’t be more than 25-30 to start.  The next few columns should include basic stuff, such as their location, who you know there, what stage they’re in (ex. seed-stage, late-stage, etc…) since you don’t want to waste your time with someone from the wrong stage, and then other logical columns such as who introduced you so you can keep it all together.  Then, also have a column for current status, such as “intro phone call setup” or “partner meeting setup”, as well as an “other notes” column.  Then, the most important column, have a “Bucket” column that assigns an A, B, or C rating to each row/VC, whereby A represents a VC who you are highly confident in seeing things progress positively, has a high likelihood (more so than others) of doing a deal with you, you liked the fit with the firm, etc…  B represents those who you haven’t written off yet but also aren’t highly confident that you could ultimately expect a term sheet from them either because you either don’t yet know enough or haven’t spent enough time with them.  C represents everyone else, which would include those who have said no, those that aren’t a fit due to stage or other reasons, etc… Generally speaking, you don’t want more than 5 in the A bucket and 10-15 in the B bucket (and the rest in the C bucket).  The point of this process is to be able to focus your time on the A and B group, and most definitely the A group, and as you learn more from a VC move them into the appropriate bucket.  This will help you manage your time and learn to say no.
4. Be upfront with your process and timeline.  This one can backfire if you’re an asshole, so don’t be an asshole.  Instead, be polite and upfront that you’re trying to minimize the amount of time you spend fundraising, which anyone can appreciate, and that you hope to complete this process on a timeline of X.  See #2 for my example of a timeline, which you can choose to make shorter or longer.  You may also consider telling them upfront exactly how much you’re looking to raise, which is generally a great idea and why you prepare (see #2).  This will allow you to not only keep them on their toes and organized (which they’ll appreciate), but you’ll also learn things faster.  For instance, when you tell them that you need to raise money by X date, you may learn that they can’t move that quickly.  Or, when you tell them how much you need to raise, they may tell you that’s out of their range or too small.  All of these are good things to know as early as possible.
5. Get the first term sheet.  This a well-known one.  VC’s generally act like high-school girls, whereby if one likes you they all do.  As such, you’ll be amazed at how much more and quickly other VC’s will start to like you once they learn someone else gave you a term sheet.  It’s literally a tipping point.  So, you want to put a heavy emphasis on getting that first VC to cross the line.
6. Make sure you manage each VC to be at similar points at similar times.  What I mean by this is, make sure you are giving VC’s a similar amount of information and access at similar phases and on similar timelines, so that when that first term sheet comes across you can call the other VC’s (again, setting aside negotiation tactics), hopefully all the ones in bucket A (see #3) and reasonably expect them to be able to act.  Term sheets are temporal things, so if the other VC’s you’re talking to aren’t “up to speed” and able to act (and believe me, they’ll always use the “we don’t have info info/data” excuse) then you may be stuck with just your one term sheet.  The same goes eventually for managing the M&A process.   This may involve slowing some VC’s down and speeding others up, which is fine and why you are managing this in a spreadsheet so you can keep track of it all.  Cross-track all of this against #4 (your intended timeline).
7. Don’t cross the streams.  A golden rule of fundraising.  Simply, don’t tell other VC’s which other VC’s you’re talking to.  Again, don’t be an asshole about it, but say very politily that “you’re having conversations with others” and feel free to (per #6) share what phase of the process you are with others.  Keep them on their toes and tell them if they’re too slow.  They’ll ask who else you’re talking to so that they may “compare notes” or whatever else, but at the end of the day you only stand to hurt yourself (read: collusion).  It also makes things more complicated, as VC’s have this funny tendency to want to “team up” and make complicated syndicates.  There’s a time and a place for those (and plenty written about it), so know if that’s something you want upfront and manage for it. 
8. Be upfront with the potential investors.  Taking money from a VC is a lot like getting married.  You’ll be going through good time and bad times together, and also spending a ton in a combustible room (board meetings, etc.).  Part of the fundraising process should be that you mutually get to know each other.  Not only do you need to raise money from them, but you need to be able to work with them if you do end up taking your money.  As such, be upfront with your concerns and ask them to do the same.  Are you concerned that they’re west coast and you’re east coast?  Are you concerned that the partner leading the leading the deal doesn’t have operating experience and that’s something you’re looking for?  Again, feedback delivered constructively is almost always a good thing.
9. Learn to say no.  You’ll need to do this more than you think.  This may include saying no to a crappy term sheet.  Or could include saying no to a meeting request from a VC who either isn’t a fit or is too late.  It’s hard to say no, but you’re going to need to in this process more than a few times.
10. Don’t over-optimize.  It’s very hard as an entrepreneur to leave money on the table.  But, on the flip-side, it’s very easy to blow up a deal over something that in reality is very marginal.  Look objectively at things you’re negotiating for or thinking about doing.  Is it really worth potentially burning a bridge with a VC who has given you a good but maybe not perfect term sheet?  Think about all of the costs involved, most importantly of which is your time. 
11. Get an adviser who’s done this before.  For better or worse, fundraising is very much an art and not something that can fully be taught/learned without doing it yourself.  As such, I think it’s very important that you get someone around you who has done it before.  They’ll be able to help you think through things correctly, recognize traps, help you maximize value and keep timing moving, and simple things like how to word an email reply to a curious question.  We used to joke that the fundraising process is hard for a reason, which is that if you as an entrepreneur can’t navigate the murky waters and get what you want, then how the hell are you going to do that in the open marketplace with competitors?  I’ve come to think that’s true and that it may be a good thing that raising money isn’t simple, but either way you should get an adviser who’s done it before.

I hope this helps.  I’m sure I’ve left very important things out, as this is one topic that can be approached in many different ways, and like any form of art is hard to exactly define.  Feel free to expand upon it in the comments.