This week’s Friday Fun-ism goes hand-in-hand with a previous, “It moves slow until it moves fast.” The venture fundraising process for founders has a certain rhythm to it, and so a lot can be read into the timing and pacing of the conversations. How quickly & intensely the communications & responses are moving between parties signals a lot about the interest-level and commitment towards progressing towards a finalized agreement. So as it’s often heard around the NextView office, “Time kills all deals.”
There are two distinct chapters to venture fundraising – the first is entrepreneurs pitching their startup to multiple firms to generate interest and ultimately secure a term sheet; then, the period after a term sheet has been signed progressing to close. In both time-periods, it should feel like things are accelerating towards a deal instead of marching along at a steady pace. And any slow-down in pacing or momentum, even for seemingly innocuous reasons, can sow the early beginnings of trouble. With more time elapsed, the increased chances of additional emerging mitigating factors to getting an agreement completely finalized.
Before a term sheet is signed, a loss of momentum could signal negative developments on the VC’s end: a mixed diligence call, a challenging assessment of the competitive landscape, or political resistance within the partnership about an investment. Or even an ill-timed VC vacation resulting in additional time-out can derail a process… upon returning, there’s always the potential for a new & shinier startup that grabs the excitement of an investor in lieu of what they were working on before departing.
After a term sheet is signed, but before closing, I call the “venture limbo” period. The possibility of negative scenarios adversely affecting the outcome here (despite best intentions of both partners and the outline of an agreement set) range all the way from some uncontrollable exogenous disastrous macro event to the possibility of a venture firm simply getting cold feet & backing out. Obviously, only the latter is within the locus of control of everyone involved. But it doesn’t matter the reason – a competitive funding announcement, a customer loss, a bad month of results – with more time, the increased chances of more emerging mitigating factors to getting the deal completely finalized.
The good news is that these scenarios don’t happen often. At the end of the day, a VC signs a term sheet for a reason: they’re making an agreement under the circumstances which they’re eager to do. The job of the entrepreneur is to ensure those circumstances don’t change too much in the interim. And most VCs (including all of us at NextView) pride themselves on their reputation about keeping their word, not backing out of term sheets or renegotiating after they’ve been signed.
The takeaway here is that the fundraising process isn’t complete until the money is in the bank, as time kills all deals.