Don't Be Fooled Again

I get these calls a lot: "I just had a meeting with a VC, who expressed real interest in a deal at the valuation I want. Get ready to do the deal." In the vast majority of cases, this leads to weeks of back and forth, puttering out to nothing other than a lot of wasted time.

Meetings with potential financial partners are important, and often lead to finding a good investor for your company. That being said, it is important to remember that VC's are trained to always relay an interest in a deal up until the point they either actually invest or pass. They will make you feel like a deal is imminent; until its not. You have to ignore the noise and focus on getting a deal done.

This has to do with playing off of human nature. We all want to believe that all our problems are about to be solved. Having an investor come in at a favorable valuation is of immense help to most small companies; and VCs know this. They therefore want you to feel like there is a great likelihood of a deal for as long as possible. It's no skin off of their nose.

Humans are funny. They will ignore all kinds of red flags if they think they are going to get something in the end; and someone that knows how to play off these traits can be tremendously effective (think of the Nigerian Prince scam, where people think they will get to keep 10% of a huge fortune if then simply let the Prince use their bank account. They intellectually know it makes no sense, but pursue the deal because of the windfall.)

The harm of buying into the positive statements of a VC occurs when the VC actually completes its due diligence; and either passes on the opportunity or proposes a much lower valuation. In this instance, clients have often taken their eyes off the ball of fundraising, thinking they have it in the bag. The delay in pursuing other financing solutions can create real problems for a company; all of which could have been avoided if executives had continued moving down all avenues.

What should the client do? Once a VC expresses interest, develop a schedule for keeping due diligence and deal making moving forward. Make sure that the VC has all current information, and press to keep moving forward. Resist an exclusivity period until the VC has done enough due diligence to set its valuation. And if the VC tries to lower the valuation without a legitimate reason; simply say "no".

Your goal is to get to closing; not feel good after each call with the VC. Always be professional, but avoid a series of calls and meetings where the VC tells you how great your company is, but doesn't move the ball forward on getting to funding.

Having an experienced lawyer advise on an ongoing basis has real value. Lawyers don't need to bill a lot of time to provide substantial benefit. A good lawyer will help you keep things moving forward. They will make enough in fees once the deal is being papered.