VC Cliche of the Week
Another visual cliche this week.
I am not a hunter but I suspect this one comes from the hunting world. When I think of a Stalking Horse, I think of a hunter on a horse, concealed in some way by the horse, stalking they prey. Again, a pretty brutal image, but that’s what comes to mind for me.
In the venture business, A Stalking Horse, is something that is put forward as the real deal but in fact is just a smokescreen for something else. I have heard the term used in recruiting situations where someone is put up as A Stalking Horse candidate for a job, when in fact nobody has any intent of offering them the job. And often its an internal candidate that is used as A Stalking Horse. That is a terrible practice and I won’t have anything to do with stuff like that. People need to know where they stand, particularly key employees.
Where I tend to see Stalking Horses most, however, is in deal making. A very common trick that is used in venture deal making is to find an investor who you know will offer a very attractive financing deal to the company, get them to offer terms, and then use them as A Stalking Horse to find an investor who is more desired. It frankly stinks to be used as A Stalking Horse and its happened to me plenty. But it comes with the territory. The deal business can be pretty nasty at times.
The most common time that this trick is used is when the existing investors really want to put more money into a company but cannot figure out the right price and terms with the entrepreneur. So they "go to market", get A Stalking Horse, the terms are set, and the insiders do the deal by themselves. It happens all the time. Sometimes the Stalking Horse is given an opportunity to participate, but not always for the amount they really want to invest.
If you are an investor, you need to be able to smell when you are being used as A Stalking Horse. Most of the time no good will come of it for you so you need to avoid it. The best way I know is to look for the little things that tell you that a company is really considering you. Like reference checks on you. Anyone who is seriously considering getting into business with you will ask around. If they aren’t doing that, or stuff like that, you might be getting set up to be the Stalking Horse. Another approach is the "exploding term sheet" and the "no shop" which prevents the company from shopping the deal around. Those work fine to prevent being used as A Stalking Horse, but for reasons explained in detail in the term sheet series on Brad Feld’s blog, they aren’t very attractive to entrepreneurs.
The bottom line is nothing is easy. If it feels too easy, maybe it’s a fake out. Don’t let yourself become A Stalking Horse.