I meet a lot of young entrepreneurs through our Chicago incubator, 1871, and elsewhere throughout the country. Recently, a number of our discussions have been about funding. I've noticed many entrepreneurs are getting miles ahead of themselves (and the actual results and progress of their businesses). They talk feverishly about raising big chunks of venture capital at hefty valuations when they should be thinking about grabbing more angel money, generating some real revenue from actual customers, and figuring out how to get their businesses to break-even before their bankroll disappears. Many entrepreneurs are in such a hurry to nab funding that they're losing sight of the need to make real connections with investors before you try to hit them over the head with your proposals.
I keep hearing about more and more expensive and time-wasting pilgrimages to the West Coast, where these same people are meeting and pitching a dozen or more different VC firms and basically getting their hats handed to them at every meeting because they're wasting everyone's time. There's plenty of capital available these days (no need to drag yourself across the country in either direction), but there's no more money for half-baked businesses than there ever was. Your story and your numbers (including your valuation) need to make sense. Investors expect more than pipe dreams and wild projections that grow to the sky.
What concerns me most is that I'm seeing an epidemic of "egola." Some entrepreneurs are just so far out there with their demands and expectations that they're becoming their own worst enemies. They seem incapable of compromise, of thinking about alternative paths, of taking less money for the moment, of cutting their burn rate to extend their runway. And, not surprisingly, when your "asks" are off the charts compared to the real picture, it makes it ultra easy to say a quick "no" and send you on your way. And this is exactly what is happening right now to companies that are full of good ideas and good people, but whose founders are too full of themselves to remember the three most basic rules of negotiating good deals:
1. What goes around comes around. Hopefully, if you're good and smart, this won't be your last rodeo--or the last time you'll be in front of these very same investors (all of whom talk to each other regularly about the deals they're seeing). It's really important for you to play the long game. Pushing too hard and burning your bridges when you get turned down (or over-reacting in any way) is simply stupid. And coming to see VCs too early with too little is also a reflection on your judgment and your credibility. It will be hard to walk back and rebuild if you take your shot too soon, and you're not prepared for the hard questions with concrete facts and good answers.
2. The best deals are those in which everyone leaves a little bit on the table. I call this a "nibble for next time." It lets everyone feel like a winner who got some of the things (but not everything) that were important to them. Everyone also feels a little pain, but they can go back to their teams with a few scalps on their belts to show how well they did. And, most importantly, they know that the other players are reasonable and that there will be opportunities to work together again down the line. That little nibble you left is a modest investment in the next deal.
3. How you made the deal matters more than the deal itself. At the end of the day, people care much more about the way the deal was negotiated and completed than they do about every little detail or talking point or even the final outcome. If all you care about is winning and getting "your way or the highway," your deal's in trouble from the get-go. Remember, implementing any deal is at least as challenging and tough as getting the deal signed in the first place. Successful implementation will be a hundred times harder if the guys sitting across the table from you can't stand the sight of your face because you were an asshole during the negotiations.
It's OK to stick to your guns and ask for all you're entitled to, but if you go past that hard-to-read line, the only thing likely to bring you back is the good will that you've accumulated by acting like a mensch from the beginning.