Straight Talk for Startups by Randy Komisar

Author:Randy Komisar
Language: eng
Format: epub
Publisher: HarperCollins
Published: 2018-06-04T16:00:00+00:00

Rule 51

Venture capital moves in cycles.

The time to take the hors d’oeuvres is when they are being passed. There may not be another chance, and dinner might not be in the cards. We know that venture capital moves in cycles, yet many entrepreneurs and investors seem to ignore that and stick to their own internal schedules. If the environment is right for funding, go for it, even if you don’t need the money yet. If investors are willing to forward-price your round, meaning value you as if you have already achieved your objectives or forecast without regard for the inherent risk in accomplishing them, by all means hear them out.

This does not mean you should gorge on capital with the wrong terms from the wrong investors. It does mean making sure you always have a buffer and obtain capital when it is most readily available. Understanding the fundraising environment means understanding the preferences and approaches of your target investors, as well as their sentiment and strategy in the current cycle.

Don’t wait until your plan suggests that it is time to raise money. Rather, have a vetted list of potential candidates at the ready. What kinds of investments do they prefer? Which markets or industries? Which stage of business? Do they add substantive value to the management team, and are they poised under pressure? Do they have a reputation for following through on their promises and closing on their term sheets? Whom do they like to syndicate with? Who will be the lead partner, and how does she or he fit with your venture? Where are they in the life of their fund? Is there follow-on money reserved, or are they near the end of the fund and ready for another raise from their limited partners? Are they bullish, coming off a successful fund, or anxious, coming off a failing one? If you put in the effort, when conditions dictate you will know whom to talk to.

The time is always right for raising money on good terms from the best investors. And, just as cycles start, they also stop, sometimes very abruptly. Investors are motivated by either fear or greed. Fear of missing out—FOMO—can make smart people do dumb things. And a greedy exuberance for the market potential may drive competition. But fear of an impending downturn or greed for aggressive terms may herald the end of an investment cycle. Macro conditions like elections, wars, disasters, and even public market gyrations can suddenly close the door on private capital for pre-revenue companies. So be a bit paranoid and eat up when the trays come by.

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