What Not To Look For In A Venture Capitalist – Advice from a Series B Startup

What Not To Look For In A Venture Capitalist – Advice from a Series B Startup

www.tangocard.com

In April, the team at Tango Card closed and announced a $4.1M Series B financing.

We considered our round a success for a number of reasons, but first and foremost because of the quality of investors in our round.  More broadly, our investors can help us with the critical triumvirate of startup needs: capital, recruiting, and sales – (and what’s important here is for investors to put you in front of customers that change the trajectory of your growth, customers you could not have gotten in front of by yourself in a reasonable timeframe.)

When you raise capital, you are essentially trying to solve the simple “financing success equation” (FSE) which is this:

FSE: Sufficient capital + Good firm & partner + acceptable time to close = success

Going through this process (which I have now done a few times) also places a very clear spotlight on 4 characteristics of the venture capitalist you want to avoid.

Avoid a Venture Capitalist who does not know your space well.

The above situation does not match the “Financial Success Equation” because it will take you much longer to close your round than you plan if you ever close it.  Why?  If your VC likes your business, but does not know the space, you will enter the ballooning mission creep of diligence hell.  Your VC will ask you to talk to one expert after another – this one knows area A really well, that one knows area B really well, this one could be a potential customer down the road, and that one can help both of us understand any regulatory issues.  Yes, you may actually be better off after this process – crisper on your message, adjusting your mobile app a bit, adding a few things to a job description – but you will also be closer to the end of your business.  In addition to diligence hell, early warning signs are introduction a VC suggests he or she makes and these introductions are way off the mark.  Or, after your 2nd (maybe 3rd) meeting, your VC cannot very accurately summarize your business and value proposition. In addition to all of the facts and data, a VC needs to have a positive visceral gut reaction to your business.  This is really hard for them to do if they are not students of your space.

Exit a process if your VC does not show value immediately

You should expect your VC to ask around about you – any VC will want to talk with customers, to dig into technology, and to subject you to the review of their experts.  You will immediately see the quality of your VC in this process.  The experts on the VC’s side will be serious, experienced, and well-respected folks.  They will dig in and ask you questions, of course, but they will also want to help you if they like what they hear.  The reference process reflects on your VC and it can lead to some very good BD follow-up when the round is closed (even if it’s not closed with that VC!) VCs that talk to customers will be professional.  They will schedule on time, they will call on time, and they will thank your customer for their time.  You will not get an email from your customer saying “Hey, your potential investor never called.” In that case, not only would the investor have wasted your customer’s time, but you would have lost points with your biggest asset –the customer. NOT a good early sign.  If you continue to play through with this type of investor, you will fail to achieve the “Financing Success Equation” because you have the wrong person (and maybe the wrong firm) on your side.

Recognize if you are not a priority

If you’re not your VC’s priority, you need to find someone else. Uncommitted VCs

-Miss more than 2 appointments they set with you. This could be conference calls, office meetings, term sheet due dates, or feedback on key issues. (VCs have packed schedules, but like the rest of us, they prioritize what is important.)

-Talk a lot about the fundraising they are doing.  If they are fundraising, that is a huge time commitment and they may have a hard time focusing on you.  It may also be a sign that they do not have capital available for new investments in their current fund!

-Arrive late to meetings, then leave immediately or early.  Hmmm

-Talk too much (and maybe at all) about all of the other boards they are on.  Hey, I thought we were trying to evaluate my company in the small amount of valuable time we have together.

-Establish timelines that keep changing.  We’ll complete our due diligence by April 10th.  On April 11th, hey we’re moving very fast on our diligence as you can see, and we need about another 7-10 days.

If these things start to happen, you are in deep doo doo.

Finally, beware the simply bizarre

Let’s get the obvious stuff out of the way.  If you do not trust the person you are meeting, if you have observed inappropriate behavior; if you observe lying, cheating, stealing, etc… just run to the door.  But there are other things to think about.  I met several times with VCs that had offices in one place for our first meeting, a new office for our second meeting, and then another office for our third meeting.  I have met with others that could not explain our business back to me after 4 meetings.  And I’ve met with others that are so focused on remodeling and repainting their new office  that they just were not ready to seriously engage.  The point is this – if you see this – even if you are very excited about who you are meeting with, you will fail to match the Financial Success Equation.

For those of you raising capital – good luck! And, if anything, I hope this helps save you a ton of time in your process!

David Leeds

Founder & CEO, Tango Card

David Leeds

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