Nivi · April 16th, 2008
In 4 Things to Do After You Get Your First Term Sheet, Bill Burnham, a former partner at Mobius and Softbank Capital, writes,
“I’ve recently been involved in helping a couple companies with their first major round of VC financing. It’s actually been pretty interesting for me because I have historically been on the other side of the table. In addition to generating several stories worthy of “The Funded” and getting a better appreciation of the trials and tribulations that entrepreneurs must go through when trying to raise money, I also gained a better appreciation for just how important it is to properly manage the “end game” of a VC financing.
“What is the “end game”? The End Game generally takes place after you have gotten a term sheet, but before you actually sign it. How well you manage this process can make a big difference in the actual terms and pricing you ultimately get, so it pays to approach this process as thoughtfully and diligently as you do any other part of fundraising.”
“With that in mind I present 4 things that you should definitely do after getting your 1st term sheet:
“1. Get a second term sheet: It may sound flip, but this is the single most important thing you should do upon getting your 1st term sheet. Nothing loosens up a VC’s purse strings or makes them more flexible on a particular term than the threat of competition. Without competition (real or perceived) you have very little leverage against a VC. Now getting one term sheet, let alone two, is tough enough, but getting two must be your goal and you must not waiver in pursuit of that goal even you after you get the 1st one. The biggest problem most entrepreneurs have executing on this strategy is that they have mismanaged the sequencing of their fundraising. Many entrepreneurs make the mistake of pursuing an “in order” fundraising process whereby they take one meeting, run that process to its logical conclusion and if that doesn’t work out try to get a meeting with another VC. VC fundraising must be pursued concurrently! You must put as many irons in the fire in as short a time as possible so that all the firms start the process at roughly the same time. As firms progress through the process, you should do your best to try and “herd” them along by trying to slow down the ones pushing ahead and speed up the ones lagging behind. The ultimate goal is to ensure that when you receive your first term sheet you have several other firms that are very close (within a week or so) to potentially issuing their own term sheets. Proper sequencing ensures that you are not forced to take an inferior “bird in hand”.”
Read Bill’s great post for the rest of his suggestions. He agrees with everything we’ve been writing about, so he is obviously quite brilliant.