The Three Most Common White Lies I’ve Heard Told to VC’s

 

This is part of my Series on Venture Capital.

I see a lot of amazing things happen when investors and entrepreneurs interact. I’ve witnessed and been a part of many Venus-Mars moments, the rare love-fest and then of course, what I call the annual train wreck. Today I’ve chosen three questions that may come your way that you ought to understand when you’re out raising capital. I chose these specific questions from the multitude only because I’ve cringed at the responses I’ve heard so many times.

Q: So, how much money have you raised or invested in this company?

This question is actually the least loaded of the three I’ve chosen. It’s very straightforward. On three separate occasions this year, however, I’ve heard the entrepreneur, (who in each case had raised zero money), throw out a number in response that roughly corresponded to the non-dilutive grant money the company had received in the past, prior to his involvement. At least once this number was in excess of one million dollars and gave the impression of a large seed round of some kind. Whereas these responses were technically not outright falsehoods, I knew in each case that there was an intent to ‘slip this one by’.

One thing to keep in mind here is that the investor really wanted to know two things: 1: Have you put any of your own money into this company? And 2: Has anyone else put actual money into this company as an equity investment? If the company, (or the lab technology pre-company for that matter), received grant money in the past that is wonderful- but be specific about it. You are building a relationship with a potential partner after all. First of all it’s the right thing to do. Also, the investor will certainly find out eventually when he or she sees the cap table. So be clear and honest in all your answers. An example of an acceptable answer might be: “The company received some non-dilutive grant money from Gov’t Program Z one year ago, but no, we have no equity investors as of yet”.

Q: I see, so who else in the investment community are you speaking with?

Ok, so this is a rather loaded question. Some entrepreneurs greatly resent it and perhaps with good reason. They know full well that the VC will be calling any fund they volunteered by name soon after they depart the building. Georges van Hoegaerden of the Venture Company (www.venturecompany.com)  is particularly critical of this question and others like it and feels that it is an indicator of what he colorfully terms a “sub-prime VC” and the lemming mentality he so detests. http://venturecompany.com/opinions/files/detect_subprime_vc.html

But let’s put these macro issues aside for the moment. Let’s face it- when you ask someone to invest in your company, you have implicitly submitted yourself to entertaining questions of all kinds, (no matter how inappropriate). So how should one answer such a question? Well, here’s some practical advice. Don’t hem and haw and don’t start out on some long-winded, rambling and evasive story. Be prepared for how you want to answer this question. If you decide ahead of time that you won’t answer this, prepare an elegant response. For example, you could say something like “I’m talking to a number of funds but am really looking for the right partner who believes in this team and this vision”. If you’re willing to answer, do so and mention the funds with whom you’ve spoken. How you choose to respond is largely a matter of taste and personality I think, but the key is to have conviction, prepare and be forthright. Never hem and haw and never equivocate.

Q: Got it, so this is really interesting. What’s the valuation of the company?

Wow. This is the one question I’ve seen people botch from the most real-deal traditional conference-room pitch to the most academic ivory-tower business school venture competitions I’ve moderated or judged. I’ve seen the deer-in-the-headlight look take hold. I’ve seen presenters repeat the question in a near catatonic state…. “the valuation, the valuation…. well….”. I’ve seen the most confident and polished presenters suddenly look over helplessly to their partner for help.  Most often, however, people dissemble, equivocate, punt, smile nervously or giggle out loud in a strange and guilty manner as if their bluff has been called and the unforeseen moment of truth has arrived. I’ll leave the “Why” in all this to trained shrinks although I personally believe it is because presenters simply are not prepared for this stark, direct question.

So what to do? Again, my advice is simple. Prepare for this question! If you are confident in the business, in yourself and the plan you have put forth be ready to calmly state your pre-money valuation.  For example. “I’m glad you’ve asked. We’re at a pre-money of $X million and look forward to any other questions you have.”  If you’re not confident enough to set a pre-money valuation, maybe it’s best to ask yourself why before going out to raise capital.

What I’m trying to convey is this: Be prepared, be yourself, be honest. You win no matter what this way.

Comments

[Alain Raynaud]

Q: Valuation

A: I'll let the market decide. It would presumptous of me to give you a hard number.

[Michelle Murcia]

Great questions and sage advice, David. Your right about that last one. Entrepreneurs stumble over that one everytime - particularly the technical folks and always the ones who have never raised money before. Worst answer is a pre-money that someone pulls out of thin air. You really have to do your homework on this one. Too high and VCs lose interest, too low and they wonder if you know your market at all.

[Dave Lerner]

Alain,

I like this answer but it may be a tad coy for some. Curious what some other investors think of this response?

David

[Dave Lerner]

Thanks Michelle. Yes- it's all about being prepared and confident about what you're going to present.
david