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This started as a comment to Fred’s very refreshing post Three things you should never tell a VC when fundraising but I realized that it was turning into one very long comment, so thought it better to write it up as a full length post.

As Fred knows (despite and also because of his energetic comments on an earlier post of mine), I have the utmost respect for him and his years’ of investment experience which far exceeds mine.  However, while I credit his intention to tell entrepreneurs what they don’t need to succumb to if they’re simply being interrogated for the sake of it (or as part of a VC power play/meeting), I must respectfully disagree with his advice of generally not providing the information.

Perhaps I misinterpret his advice — and I see Fred has clarified following Hacker News’ remarks that he meant entrepreneurs should simply be selective in disclosing the information (and not *never* disclose it as the title actually states), but frankly I still think the advice isn’t practical for several reasons.

Regarding the first point about cash position and when you’re running out of money, this is indeed a tough and potentially awkward issue, and I’d agree that in the very first meeting it’s probably not going to score you many points nor leverage if you’re already in debt and out of cash for payroll.  However, if that is indeed the situation then I’m only one meeting or phone call away from finding it out anyway, so why spin it or misrepresent the facts?  I think an entrepreneur really needs to be very upfront about this.  If I were to be told in a first meeting the cash position was fine, but then learned through the course of further dialog that in fact this had been misrepresented, I would be forced to call into question anything else the entpreneur ever said !  Not a great sign.  It’s basically lying.  Call it spin if you want, but then why are you spinning this very crucial matter?

In turn, what I can offer on my part is that I won’t rule out investing in something that is out of cash (I’ve done it before and will do it again).  Much more important (and far more impressive) to me would be to tell me the truth of the situation and also the circumstances behind it.  For example, are you out of cash because you were too obsessive about your product and literally couldn’t or didn’t manage your cash responsibly?  Or is it because you underestimated the cost of your development and freelancers?  Or because your user acquisition plan was overly-optimistic?  Or maybe because when you got your last round you had an investor who said they’d be supportive and bridge if needed, but when the markets collapsed they pulled out?  There’s a reason for the current state of affairs and I’m more interested in that rather than some spin that’s going to start us off with untruths.

Regarding Fred’s second point about what other investors you’re talking to, firstly, as naive as it may sound, I truly believe that the VC community should work more closely together anyway.  I don’t think its efficient or ideal that VCs operate in silos and may be effectively offering deals/terms in absence of talking to other prospective co-investors, competitors, partners and/or people who may also be looking to value the same deal.

Because of my first point, I personally always try to “compare notes” with other investors about a deal or opportunity that is “going around”.  I’m not proferring any confidential information nor am I leaking anything, but I simply like to know what other smart people think of a specific opportunity, team, or executional plan.  In the course of doing that, I’m hopefully going to find out who else is interested (which is a good testament or reflective of other factors) and who’s in discussions with the same team or not.  So if I ask an entrepreneur who else they’re talking to (which as other commenters have noted I and others almost always do), I’m asking because I’m curious and that will outline who I might do some “comparing of notes” with, who I might be able to partner and syndicate with, but also because frankly I want to see how upfront the entrepreneur is.

Honestly, if an entrepreneur were to respond back with Fred’s suggested “We are talking to a selected number of investors who we feel understand this space and are getting good engagement right now”… I would seriously struggle not to furrow my brow with a “wtf” expression and wonder what exactly they’re trying to hide, for example, Does this mean they’re not talking to anyone?  Are they afraid to admit that no one else is interested? Are they thinking that’s how they can respond to a question directed with good intentions of fact-finding and I’ll move on?  Are they implying they have so many active discussions underway that they don’t need to tell me or be honest with me?  In that case, I’ll probably leave them to it.

And regarding the last point about cap table and last round valuation, I really don’t know why an entpreneur should hide this either.  Again, I’m only going to ask this if I’m genuinely interested and/or trying to consider what my possible position could be — and with whom else I’d be working and associated.  Trust me, if I’m not interested I won’t bother asking just for the hell of it, because at that point, I’m instead just trying to wrap up the meeting.  So if I’m asking, I’m genuinely curious.  And if I’m asking, interested and curious, I’m hoping for a follow-up meeting.  I’m going to find out eventually, so why are we drawing things out?  Why would an entpreneur want to hide this from me or give me an evasive answer?  I will be forced to wonder Is it because they don’t know?  Were they not paying attention?  Is this not important to them?  Do they have an investor who is now a convicted felon? Did they give away too much equity to their friends and family?  These things are all very crucial data points.  Much much better for me to know upfront than to have to dig/find it out in subsequent meetings and then call into question why the entrepreneur was not upfront when I asked in the first place.  And to be really honest, if an entrepreneur is not wanting to respond to very reasonable and direct questions like these, I’m probably not going to be inclined to sit through many more meetings of begging for the information.

Bottom line, as with any interpersonal/direct exchange, most of the discussion and question-and-answer dynamic is actually to gauge *how* one answers a question.  As in a lot of other cases, there is not any right or wrong answer to the questions, but if someone were to try to evade a question of mine with lines like “Management own XX% and we have carefully budgeted our options requirement and feel another YY% will take us through the next 24 months of company building”, I’d take serious note.  If they genuinely don’t want to share the straight answer, I’d prefer they just tell me why they don’t want to share it.  And also, if that’s the way they really try to talk in a meeting, it’s just not my style … It’s too sales-y, too evasive, and frankly too bullshitty (word?)

I understand Fred’s point that disclosing this information may affect your negotiation position and leverage, but frankly you’re already sitting in a meeting with a VC, so it’s already clear where the most leverage lies.  I want to talk to people who want to work with me, and I know it’s a sales pitch on both sides and a process to get to know each other, but evasive answers don’t help that along.


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13 thoughts on “Three things you should *always* tell a VC if asked

  1. I will completely agree with you that the cap table point is not a big deal in most cases, though it can be.

    I still think that it’s not wise to give too much away on cash. I have seen too many cases where entrepreneurs get screwed — investors just wait till the pressure gets too much to deal with and deliver a raw deal. You need to lie or misrepresent.

    I never felt comfortable sharing notes on a business. The entrepreneur has a hard time creating an auction mechanism in any event, but when VC’s start talking, it gets worse for them. In France where I have invested a fair bit, you get the following phenomenon: you end up with 3 investors instead of 2 because one guy calls everyone up and says “we are in, if you don’t want us to be pissed off make sure you keep a slug of the deal open”. Net result: more dilution to the entrepreneur. You also get disinformation (people casting a negative bias on a company that competes with one they stealth funded), groupthink, “I have seen this move before” think, “I once invested in the segment and it’s crap” think, and other such thinking processes. Not always, but sometimes. Sometimes is enough to be a bit paranoid.

  2. Fred is that last comment the truth? I’m confused. LOL.

    More seriously I’m probably more inclined to support Eileen on this, although obviously people can and do sometimes get burned for naivete (although I believe that the folks that do this will have the bad karma come back to bite them in the ass sometime in their life.)

    As for sharing notes, at the risk of being the annoying new guy who makes everyone’s eyes roll when I say ‘this is the way we did it at my old job, and you should too’, from what I’ve seen, the whole venture ecosystem could learn a hell of a lot from the City & Street’s fixed income syndicate managers. It’s a skill, a science & an art, working in co-opetition and one of the best risk management and pricing technologies ever invented. The venture community/ecosystem would do well to emulate this imho.

    Oh and in the spirit of more (not less) disclosure, I was a fixed income syndicate manager for many many years and pretty good at it too so obviously it is totally in my interest that the venture and private equity world move to this kind of paradigm… 😉

  3. Thanks Sean, good food for thought. To be balanced, there are some folks with whom I will sometimes share opinion, because I know they are careful in their consideration and use of info. Just ain’t the reality of most of the market. But as an ideal to aspire to, I can see that would be a good way to go, looping back towards agreeing with Eileen that this is a good objective for our ecosystem. WIP.

  4. I think Fred’s post was helpful because it explains the reality of the funding game. He’s basically saying hold off on some of these details, (ie.., play the game) just like one does in poker.

    However, I’m more inclined towards Eileen’s position on transparency. Let’s ask ourselves: is the Entrepreneur really in a position to be withholding? Is he really equipped to play this poker game? Should he be?

    The only point I disagree with Eileen is on the revealing which VCs you’re talking to. Unfortunately, VCs abuse this information and I have seen deals scuppered when the Silos get networking and working on counter-terms. It’s just too incestous an industry.

    I think a VC should expect that the Entrepreneur is speaking to multiple VCs. But I don’t think the Entrepreneur is not being transparent or honest. He’s just saying “look, I want to engage other VCs right now, but I don’t want you contacting them at this stage”.

    What do you guys think?

  5. Yes well said. “Talking to others but don’t want you to engage” is spot on.

    Still insist letting people know you are running out of cash is not a good idea !

    Less is more, and the question is: “is this relevant to your decision to invest in my business, and if so how ?”

  6. I think we’re nearly there!

    But let’s be honest about the balance sheet; How many startups seeking funding ARE NOT running out of cash? (very very few). And a VC looking at the balance sheet is going to know that in 1 minute.

    So in terms of explaining the inevitable balance sheet/burn rate question it’s not so much about not-disclosing the info, but rather more about how you disclose the info.

    Here’s a shot:
    “We have £20,000 capital out of an initial investment of £100,000 three months ago. Since then we’ve cut down our burn rate to conserve cash. We’ve been able to reduce some significant expenditures by taking on developers on an equity basis. Their desire to participate in this company on an equity basis gives us great confidence in our product and will enable us to sustain development for at least another 10 months if we had to. We anticipate this current funding round to be completed within 3-4 months”

    Aqain, I think it’s more about how you disclose it. Any VC is going to find out wihtin a few phone calls what your cash position is. Better they get it from the Entrepreneur but explained in the appropriate context than they discover it for themselves.

  7. This is where less is more. “we don’t have a gun to our head as we wanted to raise in good conditions and can fund ourselves through a longer fundraising process if required”. Raise early, I guess. I have seen/heard some horror stories.

  8. Pingback: What should you tell a VC? Fred Destin vs. Eileen Burbidge « Curley Contemplations

  9. Nice post, Eileen, but I am afraid that I think Fred is right about his first two points. You are right about the third.

    While it may be in your interest to “compare notes” with others looking at a deal, it is almost never in the interest of the entrepreneur. Back when I raised VC money for a living, I told my clients that they would get this question every time and that they should never answer it.

    A longer reaction is on my blog (http://bit.ly/4Ic4rK). Thanks for inspiring some interesting debate.

  10. I am looking for VCs to address some valuation metrics and other negotiating points at an event at Cass Business School on the evening of 10th June. Fred has politely declined due to a Board meeting he has to attend that evening. Eileen, could you please let me know if you are available? If you can email me your interest at arifa.khan@geniusincubator.com, I will send you the full agenda. Thanks

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