The First VC I Ever Pitched Gave Me a Term Sheet. And I Blew It.

Q: Could you tell about the very first time you approached investors and how you proceeded in detail?

The first time I approached investors it went well — until I blew it.

I did start off with some privilege. While I hadn’t raise money before myself, my past bosses had. I asked them for intros, and then used their social capital to make some good ones. I also hustled to everyone I knew for other intros to top VCs. I also did some cold outreach.

The first firm I met with gave us a soft offer! To invest $5m at a mediocre but not ridiculous valuation. I hadn’t really heard of the firm before unlike the others, but I didn’t care that much. The partner was a believer, did fast diligence in a tough space, and seemed to have conviction.

I was ready to accept it as is. But, I hadn’t done it before.

So I went to one of my angels who was a VC himself and he told me to ask for more. A lot more. $8m+ in the round, and a much valuation.

So I did exactly what he told me.

And that VC just walked.

Why? Well, I know better know:

  • The fund was too small to write an $8m check. Generally speaking, much more than 2%, maybe 3%, of the total fund size into a first check is risky. $5m was in their sweet spot. $8m was just too much — for them. For others it might have been OK. But I didn’t know the difference, or how it worked.
  • My counter/ask was too aggressive. I didn’t know what I was doing. But based on the advice I got, I asked for a lot more money and at a materially higher valuation. Taken together, it was a different deal. VCs will walk when the ask gets out of their comfort zone. So keep some wiggle-room in, or a range, if you don’t want someone to walk just over round size in particular.
  • I pushed the envelope too hard and changed the proposed deal without knowing it. VCs expect some back-and-forth. But if you push a VC outside of their comfort zone, AND make them feel fungible … they’ll often walk. Especially if a deal isn’t that hot. VCs really don’t have that much time to judge a potential investment. If you make folks uncomfortable, they’ll back off.

My learning is two-fold:

First, be wary of all VC-type advice you get. It is all biased. That angel had his reasons to want a much better deal. But it left us in a really tough spot when I followed in blindly — and lost the offer.

Second, be careful how hard you push a VC, especially if you aren’t hot. Know their sweet spot. Ask them what their sweet spot is, most importantly. Asking for a 10% higher price is probably fine. They will be comfortable saying No or Yes. Totally changing the deal though can be taking it too far. Make sure you know how hard you want to push it — before you push it.

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Published on December 3, 2019

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