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Reading the Tea Leaves: Where Am I in My Seed Fundraise, Really?
One of the things we frequently discuss with founders is how to interpret and manage their dialogue with VCs when raising capital. We’ve written before on how to research partners, how to pitch the right investor at a given firm, and how to raise seed capital, generally speaking. But it’s also useful to try and understand where exactly you are in the process with a particular investor. Once all the aforementioned advice is put to action, how can you determine your current reality?
Much digital ink has been spilled around landing an initial meeting, but as my partner David recently wrote and illustrated, it’s crucial to know how the remaining process might unfold, generally speaking. Here’s a quick look at the graphic as published in David’s article (click to view a larger version):
In some cases, these steps are blurred or shuffled slightly in terms of sequence, but broadly speaking, most VC firm processes look basically like this. Theoretically, a firm can pass on a startup anywhere prior to closing (term sheets truly are non-binding from a contractual standpoint). But in practice, the vast majority of passes come after #1 or #2 above and a smaller minority after #3, 4, or 5. Good VCs try to pass as quickly as possible once they decide on that outcome, in order to be respectful of an entrepreneur’s time. At NextView, we also do our best to provide feedback on why we’re passing, where possible.
Most VC firms have an iterative process for making collective decisions. What I mean is that after a first meeting with a single partner, that partner might say “Great discussion. I’m going to discuss with our team here and then get back to you.” This doesn’t mean they’ll come back after a first meeting with a term sheet or verbal commitment to invest, but instead, they’ll typically respond with either a pass or an indication that they want to dig in further with additional meetings and/or business due diligence. A commitment typically only comes after a full partnership pitch and meaningful business diligence completed. So you should be looking for this level signal and, if you’re getting it, know that it’s in the early stages but progressing in the right way.
However, if you feel the need to ask about where you’re at or you’re getting radio silence, know that the adage “time kills all deals” still mostly holds true. Other than an explicit pass in the early meeting stages, the clearest indicator that your dialogue with a VC isn’t progressing as you’d hoped is the amount of time between phases. VCs are legitimately busy with partner meetings, portfolio board meetings, travel, and other stuff, but if a first meeting doesn’t proceed to a second or some initial diligence within about a week or so, odds are you won’t ultimately end up with a commitment from that firm. (Again, this is painting in broad strokes, but that one week period is somewhat accurate in my experience.)
Similarly if more than 2-3 weeks goes by after an initial meeting/diligence and you haven’t yet pitched a full partnership, you most likely won’t end up with a deal with that firm.
So what can you do if the signal is negative? A few things jump to mind:
- If you’ve been running your process in parallel across lots of VCs (the best possible approach), focus more on finding those true believers than convincing the skeptics. This is particularly true at the seed stage where NextView invests. And that parallel process helps mitigate any investors who seemed interested but then go dark.
- As you meet with other investors, pay closer attention to verbal cues and what they might mean.
- Back-channel through mutual connections and talk to quality references in the firm’s network. The ultimate reference is through a portfolio founder.
- Work on securing a lead investor who can then help in forming a syndicate.
These are just a few suggestions, and again, each firm is different — there can be further nuances in a given VC’s process, even between different partners. I’d also add that less senior partners may need to do incremental consultation and diligence to get an investment done, for instance. But overall, understanding the steps in the typical process, as well as becoming adept at reading verbal and non-verbal cues, can help you get a clearer sense of where you really stand in your discussions with VCs.
Note: The process for interacting with non-partners (analysts, associates, principals, etc.) can be slightly different. Don’t ignore non-partner level folks — in some firms, particularly for later stage rounds, nearly all investments will involve non-partner level staff on a particular investment who may have meaningful influence in how an opportunity is evaluated. But the phases outlined above assume a first meeting is with a partner who would ultimately lead the investment if it came to fruition.