Competing To Win Deals
The venture capital business is highly competitive. There is more money out there chasing good deals than most people imagine. It is also true that there are good deals and good entrepreneurs that can't find anyone to invest in them. That is a failure of the system. But this post is not about that. It is about how a VC can compete and win a deal that many others want.
Here are my rules:
1) Do your very best to connect with the entrepreneur. If you don't have a great personal connection, you won't win the deal. Don't even bother to try to win a deal where you don't have good personal chemistry with the founder/CEO.
2) Bring your full partnership into the deal process early and consistently. Entrepreneurs are smart and they know they are doing a deal with a firm as well as an individual. Let them see the full picture early. Make it easy on the entrepreneur to meet the full partnership. Don't make the entrepreneur do all the work.
3) Encourage the entrepreneur to get feedback on you and your firm. Instead of references, I like to give a list of every entrepreneur I've ever worked with and an email address. I tell them "throw a dart at that list and talk to four or five of them randomly. you'll hear the same thing from everyone."
4) Don't pressure the entrepreneur to make a decision. Don't issue exploding term sheets. Don't put no shops into your term sheets. Those kinds of things are signs of insecurity. I prefer to tell people that we'll have an exclusive relationship when the deal closes and not before then. If someone wants to leave me at the altar, better it happens then than after we are married.
5) Make your offer in person and don't do it via a term sheet. Tell the entrepreneur you want to be their business partner. Tell them how much you will invest and how much ownership you want. Leave it at that. Tell them that if they are interested, you will send them a term sheet. Leading with a term sheet focuses the discussion on the wrong things. The process should be all about personal fit and very high level deal terms. Once the decision is made to try to work together, you can get into the specifics of the deal.
6) Add value during the process. Talk about the strategy issues facing the company. Talk about the hiring challenges the company faces. Try to help with these issues even before you are an investor. Show what you can do right away.
7) Use the product or service. Ideally you should be using it well before you start chasing the deal. But use the product/service actively and smartly. The entreprener will be watching. I assure you of that.
8) Don't feel the need to pay the highest price. Offering a crazy price to win the deal scares off most smart entrepreneurs. They will be wondering why you are so aggressive. Offering a fair price that is in the range is what you need to do. And communicate that if the entrepreneur chooses to work with you, you will be flexible on your offer. That way you put yourself in the position to win and you can work the specifics to close the deal when the opportunity presents itself.
9) Don't team up with another firm. We've made this mistake a few times recently. Entrepreneurs want to choose their syndicate partners. By pairing up with another firm, you signal to the entrepreneur that you want to choose the syndicate and that is a mistake in a highly competitive deal.
10) Be prepared to lose the deal and if you do, lose gracefully. There are plenty of good deals out there. You don't have to win them all. Lose gracefully and maintain your good relationship with the entrepreneur at all costs. They might come back to you on the next round.
Many of these rules are counter intuitive. But they work well for my partners and me. You might say they will only work for you if you are a top tier investor. That may well be true, but you have to act like a top tier investor to become one. So you might as well play the game that way from the start.
Giving away the source code, Fred? I love it.The idea is = 0, it’s the execution that counts. That’s what’s great about USV.Funny… I’ve been considering writing a post that gives advice to VC’s/investors from the entrepreneur’s perspective. There are lots of VC bloggers giving advice to entrepreneurs, but it’s not exactly reciprocal.To be clear, I’m not talking about ripping into VC’s a la TheFunded.com, I just mean some simple tips on how to engage an entrepreneur.Maybe I’ll poll some fellow entreps and see what I get…
that would be greattrick is doing it in a way that doesn’t come off as high handed
Brilliant post! There aren’t enough “how to” articles out there targeted at investors/VCs. And when you consider how many VCs are (or how much money is) chasing the few good deals, its a mystery. This post definitely needs a follow up from an entrepreneur.#6 resonates loudly. So few investors engage in strategy sessions with entrepreneurs. What makes a deal “good” from an entrepreneur’s end are the add-ons, so yeah, “show what you can do right away” because “..the entreprener will be watching”[email protected], this is most definitely “Giving away the source code”.
The last thing I want to do is sound like some bitter entrepreneur.I have tons of respect for most VC’s who make an effort to be responsive,supportive and genuinely helpful for entrepreneurs.But, as in every bunch, there are a few bad apples that are worth mentioning(in this case, bad apples = bad habits).So… if anyone in the AVC.com community wants to email me [reecepacheco atgmail dot com] with your ‘Investor Pet Peeves’ [let me know if you wantcredit for your tip, or if you’d prefer to be anonymous] and I’ll curate thebest ones into a list/blog post.Who knows? Maybe Fred will even reblog it here. 😉
Having the courtesy to reply to an email following a 2 hour meeting would be a good start….
Yes. That’s a start…
It comes down to the golden rule. You either believe:Do undo others as you’d have done to youorHe who has the gold makes the rulesI think its really hard to have a lot of money that entrepreneurs desperately want and not have it go to your head even a little bit.You can view yourself as an energetic supporter of the entrepreneurial community.Or as royalty that can do anything to its serfs the entrepreneur.I think every other behavior is derived from that core belief.
Totally agree with the golden rule and as I think about it, there are manytips for VC’s that are actually just life tips in general. ex: be on time.That being said, I think there are some that are specific to theentrepreneur/investor relationship that are worth mentioning, especially inlight of your second point.
It’s all in degrees, but it all comes down to that. For example.If you really think you were equals why would you not give an email back, why would you not be on time although some people don’t understand being late for a meeting is like saying “fuck you I don’t care about your time” I broke my wife of that habit by greeting everybody when we were late and made them wait for us with that greeting. When I was hit by a car I would make my Doctors say that when they were late. That is the only way you can get into a meeting if you are late with me.Seriously…I give Fred, Mark, and Brad props….but it has to be really hard if you’re them.Its like being Tiger Woods……sorry for the analogy, but I can’t imagine how that goes to your head.I’ve “met” each of them and I’m sure they couldn’t pick me out ever….and that’s not a dig….I’ve “met” tons of people where they say: “I talked to at so and so” I have a great memory for faces but not names and I have no clue…I can’t imagine adding a couples of powers to that..
What’s up with that profile picture?
me on my surfboard. why?
I saw water and asked.
Fred, given the bright future of both USV funds, and the well-known fact that VCs will always focus on their big winners (which doesn’t imply they’ll totally abandon their also-rans, but still… ) – is there a chance you could be victims of your own success?Would an entrepreneur think to him/her self, wow I don’t know if I want to compete with Zynga, Twitter, and 4square for USV’s attention.Apologies, if this question is a bit close to the bone, but I would be *really* curious to hear your reply.
yes, most definitelythat is why we have to go out and chase dealswe can’t rely on them to come to usof course, you never can
Even from an entrepreneur’s point of view, there is plenty to learn from this post. Thank once more Fred!
This feels and sounds like the “How to win ANY Competitive Deal” whether an Enterprise Software Deal or a VC funding.
true. remind me music A&R when you are signing bands. beware of the hype (if you dont want to overpay the deal), trust your ears and applying those 10 rules might be great help too.
It’s 9am Sunday morning, I’ve been working for the last hour; I find it heartening to see that you’re consistently working too.There are also less than 50 posts before I wake up . . . maybe Sunday is a good day to send a pitch 😉
I love it Fred. The consistent message I get from it is customer service. Treat the entrepreneur like a valued customer and you’ll get the deal and build a successful partnership and business. I’m a bit surprised to see you tipping your hand though! My guess is that it won’t matter, it’s easy to read the playbook, much harder to execute it.
Fine. Sold. I’ll let you invest.Will send wire details through on email.
You’re a tough sell! I hear Fred gives good massages too.. (the kind without happy endings).
Thank you for the post, Fred, as always.Minor edit if you’d like: Item three, last sentence, drop a letter “d” from “you’ll heard the same…”.In item 7 you say to “use the product or service” which is of course obvious, but should one take from that that you are only interested in publicly operational products/companies? (I think I know your answer, but would love clarification.) What if a company has a great product, but for specific reasons is holding launch until funding? Our company is in such a position because we have an unusual roll-out planned, which will be much more potent we feel because of our approach. Of course our product is very useable, though in alpha (near beta) stage.
Get your potential investors using it in the closed beta
good idea, just need your iPhone UDID…
i don’t use an iPhoneit’s a political statement
I understand the political position ! read your post on why you are getting more and more bullish about AndroidBut does that mean #7 only holds for web products and mobile ones which are already multi-platforms ? I hope there’s an iPhone or iPad somewhere at UVC for testing purposes !
a number of my colleagues have iphones and we have iPads too
Sure. Just attempting to measure your resistance to such circumstances. 😉 My assumption is that an astute investor is flexible regarding this, provided the model justifies it. One just reads or hears a lot about needing traction prior to funding meetings, which in our case is not the smartest move in our opinion, or that of others who know of the project.Thanks.
thanks for the editfixed it
hehe. Spell checker should know our intentions. Your word was spelled correctly so easy to miss. You produce a great blog, so just watching your back for the archives. Cheers.
Great post! I think these rules could well be applied to any number of business dealings. They treat the potential partner, customer or supplier, as someone you want to help win with, not take advantage of. Many businesses say they look for win-win situations, but in reality they do not know how to structure or even think about such situations. Your rules would be helpful for all of them.
Great insights and transparency into your thinking.What % of deals do you see that are of such a highly competitive nature? It’s time-consuming for the entrepreneur to be pursuing several VC’s as well.That said, it would be also great to read your views on this point: “It is also true that there are good deals and good entrepreneurs that can’t find anyone to invest in them. That is a failure of the system. But this post is not about that.”
Hard to say but maybe a quarter of the deals we try to do are highly competitive
And if you look at ROI numbers instead of absolute numbers of investments, how much of your profits come from thous 25% of highly competitive deals? can you tell us anything about that? ¨Thanks for a great blog and a great post!
haven’t run the numbers but we didn’t really compete to win twitter or zynga so they aren’t highly correlated in our first fund for sure
OK, thanks, do you have a gut feeling on this?
great post.i follow these rules almost to a tee.i especially like the last graph — you’ve got to ‘fake it til you make it.’and you inspired me yesterday — heading to jillian’s class at 2pm.
I realized after I wrote that about Jillian that Stephanie does the 2pm class on SaturdaysIt was a tough class yesterday but I was able to do a full back bend, something I haven’t been able to do since I got back into yoga this summer
nicely done.just came from jillian’s — love her.
Your last paragraph reminds me of something my childhood soccer coach used to say:If you strive to be excellent and you come up short, you’ll still be very good. But if you just set your goal on being good, and you don’t make it, you’re average… so always strive to be the very best at everything you do.”You might say they will only work for you if you are a top tier investor. That may well be true, but you have to act like a top tier investor to become one. So you might as well play the game that way from the start.”
Similar to “think big. even if you don’t make it all the way there, you’ve reached further than you would have otherwise”
i would say that list is just good business, and doesn’t just apply to VC investing.
I really like #3 (darts) and #4 (no exclusivity). This shows confidence in the VCs ability to add value and be helpful.I have often wondered if a VC would do a deal without anti-dilution protection. In our particular case we have some angel investors who don’t qualify for anti-dilution protection but each time we have offered them participation because they add a lot of value – in effect they get anti-dilution protection without it being legally required. I wonder if VCs would ever agree to this and have confidence in their ability to add value that management would always help protect their interest when a new investor comes in. Thoughts?
I don’t like the idea of anti dilution on an optional basisI think it will lead to a host of issues
Fred,I heard Howard Lindzon talk last week in Toronto about deals he passed on (Twitter, Zynga, 4sq) and lessons learned. He was very clear that he passed on these deals (even at relatively low valuations) because he didn’t “get” the investment at the time. While, in retrospect, he may have financial regrets not getting involved in these deals, he seems genuinely at ease with his investment decision as he stood by his investment principles.I wonder how many “hot” deals you see these days where the VC invests due to market momentum or competitive pressures even though they may not “get” the deal.
Way too many
I’m one of the dart objects on Fred’s list and I would definitely give him a big thumbs up. One point I disagree with in Fred’s post is #8. I wouldn’t have minded at all if he had upped his original valuation offer for his investment in comScore 🙂
Thanks for the plug GianI think we invested five or six times in comscore between 1999 and 2005Not sure we ever got valuation right but the ends justified the means!
Yes, indeed! You were with us every step of the way and your unwavering support and willingness to continue investing was crucial to our eventual successful IPO.
wow, you get mega-points for opening the kimono this far 😉
It would be great for me if every VC operated this way
Where do I sign?Great post. A lot of these tips seem to take a more genuine and honest approach I certainly can appreciate.And from the other side of the table, these can double as a list of things to watch for when talking with VCs .
Fred–A great post and another illustration of why you and your team are so highly regarded. As a former lawyer and now exec at a company, I’ve seen a lot of financings and the highest price does not always win. It is a great relationship and great references that often win the day.I’d also add one item: “Keep the terms simple”. VCs that over-engineer protective provisions, anti-dilution carve-outs, etc. all send a message that the VC is going to be hard to work with and try to take control of a company if it hits hard times, even if that is not what they mean. No entrepreneur believes that they can equal or beat a professional investor at game theory in tinkering with various alternatives.If an investor does need to propose a complex alternative which affects economics, I’d suggest explaining a high level view in person or by phone as you suggest then also including a spreadsheet model of the impact of it so the founders know what was intended. Sometimes complexity is needed for a whole host of reasons–to address prior round concerns, founder issues, or whatever–but I’ve seen it be taken wrong so often it is amazing when just put into words.Dave
great pointterms are a window into an investor’s mind
“No entrepreneur believes that they can equal or beat a professional investor at game theory in tinkering with various alternatives.”Indeed. Who does an entrepreneur go to for advice before agreeing to terms?
I find hard it to rely on the advice of someone who writes …”me and my partners” instead of …”my partners and me”…
Then you don’t know jack about Fred.
There’s no insinuation of priority there.Me and my partners, vs. my partners and I (or me) are identical..Now, if Fred didn’t include his partners in his sentiment then you could have tapped on his shoulder to ask him “what about your partners??” (if you’d even notice…) 😛
….probably best not to, you might strain your brain if you read too many of Fred’s posts.
i’m an engineer not a lit majorbut thanks for the editi’ll fix it
Grammatically it’s not incorrect – so I assumed he was hating on you for mentioning yourself first — I guess I overanalyzed that one. 😛
A shameful waste of pixels.
Surprised and heartened to hear that you don’t do no-shops; I thought those were standard operating procedure. They always struck me as unfair, particularly for seed rounds.
not SOP in our shop
“Many of these rules are counter intuitive”I really don’t see why that would be so. They’re all perfectly intuitive to building a real relationship with a person, that both people want – not manipulated or forced in a direct or indirect way, and that feels secure for both parties.I don’t share many of AVC posts – but I’m tweeting this one.
“you have to act like a top tier investor to become one” – word….and applies to just about everything else in life too.
Great points Fred. Another one to add: Stress the value of your team, not just the firm’s name.Too many venture capitalists rely on the name of their firm, and the rub-off value that entrepreneurs might receive from it, rather than the real value that the partner can deliver. Firms’ names don’t mean very much when you’re trying to develop market-entry strategies or diagnose a sales pipeline problem or re-engineer your platform architecture.
great point dave. i was going in that direction with #2 but did not make the exact point you didthanks for pointing it out
In venture capital, as with any service business, the differentiator is relationships. The majority of the things you’ve listed have to do with relationships. If not for that, your money is no better than anyone else’s. Terrific post and one of the many reasons USV is top tier.Trekking from Ohio to NYC on Wednesday for the Boxee box launch. Hopefully I’ll get a chance to say hello (not raising any money it’s just hello).
To the extent they were applicable, I used many of these rules when I was an equity research analyst (which in the 90’s meant I could also be a banker). My partner, Kristin Allen, and I would do a lot of highly competitive pitches to take companies public or raise money in the debt markets. What we always did was say to the company – “no matter who you use, no matter which firm, you will get a good valuation/execution and you will get the financing your business needs. What you need to figure out is who you want to spend a lot of time with now, and continue to spend time with in the future. Ask anyone in the industry about us (this was the broadcasting industry, which was a tight knit community) and if they don’t agree with us – then don’t hire us. We won’t be offended.” Sometimes we lost the lead position, but we were usually on the cover – and we almost never lost completely. Telling people the truth, helping them when there is nothing in it for you that day, living up to your commitments will get you a reputation that allows you not to be the top bidder, and continue to win anyway.
that statement you would make basically says “we are confident in our abilities and don’t need to oversell”it’s a winning pitch
Good stuff. If I ever had a start up USV would be at the top of the list, and I’d pester you every week. As much for you as for Brad and Albert (and Jerry). What an awesome group. You’re lucky.The guys at Spark would be a close second and I’d imagine you could overlay these exact principles on them and they’d ring true.
#7 is quite true. I’ve raised money several times including recently. Literally more than 2/3rd of the people I met with had never used the product and one who claimed he had used it for “a couple of hours” had clearly never used the product before. A waste of everyones time and incredibly disrespectful.
seems like marathon rules rather than 100 m ones 😉
I pair this one with the Ben Horowitz post on why they raised another $650 million fund, http://bhorowitz.com/2010/1…A refreshing trend towards openness from investors…and enough with the grammar corrections guys, this is a blog! 😉
i don’t mind the grammar correctionsit helps me correct it and make it better
There are certain truths about being kind- these enunciate some of them, mainly the point that a true form of kindness is a willingness to work with the person and be interested in what they are doing.And it seems to be true in all kinds of relationships- not just investing.
“Don’t team up with another firm”. I don’t quite understand this one. You’re saying you never want to be doing a deal with multiple firms in a series A right? Not that you would never do a syndicate, maybe on a larger round?
“5) Make your offer in person and don’t do it via a term sheet. Tell the entrepreneur you want to be their business partner. Tell them how much you will invest and how much ownership you want. Leave it at that. Tell them that if they are interested, you will send them a term sheet.”This is HUGE in all parts of life. Younger people tend to miss on this in general business interactions ALL the time! “Hi I’m so-and-so (rushed). Blah blah blah… if you think about it…obviously…it’s pretty simple…you can see..this is the best idea ever.” Other party: “Sounds great.” (leaves thinking ‘wtf, who was that?!?’)A big part of selling is knowing where you are at in the process. How do they see you, your product, their needs, etc. Do they like you? What timing are they on? There is a time to close and a time to explore more. Knowing what time it is will dramatically up your closing ratio.
Fred:It’s great to hear a real perspective on a VC’s desire to win. From the company’s side, it often seems that the VCs hold all the power. Humanizing the interaction can only help both sides form the kind of partnership that is likely to succeed. Thanks.
These are good rules for a process that ends in no, too. Two Redfin investors were firms that passed on our deal the first time around, but conducted the process so well — and said no promptly, with a truthful rationale — that we wanted to come back, and we had a reasonable basis for believing we’d addressed the firm’s original concern.
The best salesmen in any business follow a version of the rules you list here. Thanks for a great post.
Interesting topic and a good post. But I have to say that many people on both sides those seeking capital and those wanting to invest if they every take a moment and reflect to what is on offer.Does USV ever think that the deal they are making is a a great deal for them or for the entrepreneur or do they truly wish for and hope that it is a fair deal.I ask this Mr.Wilson cuz in my view in life there are truly no great deals at best I always hope to have a fair deal, fair to both sides. When someone states the deal is a great one I immediately clam up and know that there is something amiss. What is the USV mantra when it comes to making a deal happen, cuz what you have written about is true for any partnership we encounter in our daily lives. As some have stated these rules are hopefully general rules to follow, but there is something else USV brings to the table, it is more than these best practices as one may state, I would hope you can share that certain je ne sais quoi
Fred,A fantastic list (and super useful for those of us still the padawan phase of this business). A couple of others that I have tried to lift out of 15 years on the other side of this game:1. Say no quickly: it burns a relationship to keep the entrepreneur on warm standby when you are almost sure you won’t do the deal.2. On diligence, do your own work: don’t send the entrepreneur to do the first part of your diligence for you— that is what you get paid for. This applies also to talking to other shops looking at the deal for their “intelligence.”3. If you can, always take as many meetings in places/times that are least disruptive to the company, especially if they are with team members who are not spending 100% of their time fundraising.4. Use the product, but be measured in your feedback. Skip the micro edits and always always remember that startups are resource constrained and not Apple. And signing up for it doesn’t count as “using it.”
these are great additionsnumber two in particular is fantasticwe got a ten page diligence form to fill out the other day from one ofour investorsi said to my partner albert “can you imagine if we sent this to foursquare?”sheese!
in the nonprofit arts world, the artists aka creative entrepreneurs, could take away some valuable lessons from tech entrepreneurs in being confident, in pitching well, in constant building of community. I wonder about how to rewire the prevalent mindset from funders thinking “hello poor starving artist, here’s some free space and a few bucks. now create some cache and be prepared to get evicted” to artists saying “i am a creative citizen and my canvas is our cultural landscape. the arts is big business. can we talk?”love the access to projects a site like kickstarter provides to people.love the mentorship petri dish that techstars is.both serve to connect the elusive dots among us, artists, entrepreneurs, funders, investors, the world.the common sense rules and challenges about nurturing the social capital of your deal have influenced the greatest works of art, the most profitable tourism industries, the unmistakeable stamp of artful living.global deals of which we are all winners.www.hoongyee.com
great convo at coffee shop the other day
The top tier investor comment in the final paragraph is key.
Sir, you are a gentleman among thieves…
Fred’s right,Money isn’t adequate bait. What we really want is chemistry and trust so we have the freedom to create. I’ll walk away from any potential investor that shows signs of relying on coercion to get things done.Alice
Really straight forward… and really impressive
Great Post. I know you tend to invest mostly close to home. Is there another VC who shares your worldview and principles out west – say in Utah?
Bryce Robertsbut he just moved from Utah to SF
Very good post Fred, I think the key is “Trust”… if you are able to gain the trust of the entrepreneur you are almost there. What I mean by Trust is that the entrepreneur feels you are putting the interest of the company first and you really want to be part of the journey and bring “True” value to the company.I have found in the small number of deals that I am working with that Money is not the only thing that entrepreneurs look for they want someone who can bring them more things than money.I cannot stress enough Point 6, I have had entrepreneurs come back to me even when there was a better offer on the table to talk to me because I provided them with value in every discussion we have.Couple of points that I would add to this:1. Always think Win-Win, it is easier said than done… you need a lot of courage and humility to put the entrepreneurs interest before yours to understand the real reason they are spending the time to talk to you.2. I always talk about my philosophy on investing which is I don’t have a set timetable on exit or valuation. I am in this for the long run, I understand that long run is very subjective to the business. I don’t start a partnership discussion with the timetable to terminate it… it just does not jive with my way of thinking.3. Truly try to understand the value you bring to the business and the entrepreneur, without that value proposition you loose the competitive edge in the deal.4. Fear is not an option. Everyone can feel it if you are not sure of what you bring to the table5. Fairness, loyalty and humility, be fair, humble and loyal to what you say and do. God knows what the universe has in plan so stay humble and work on your constrains and weakness.
Love the idea of verbally making the offer before the term sheet. I will do that going forward
prohibitive?how do you measure that cost?how do you know what your ROI is on that?*puzzled*
I figure it’s a many year long process building relationships with investors, and hopefully a lifetime if we become friends.My strategy: If I want to start a company X years from now start talking to as many sharp investors as I can find now. When my company is at a stage that is attractive to outside investors, request a face to face meeting for a serious pitch. That’s how I think about financial partnerships. The first startup I build may not be a great fit for VC, and I accept that possibility.
43 is not old- you are in the prime of life
VCs are dying to get the best deals. I think that’s their standard.
This reminds me of dating
You invest? I did not realize.
Here is to five years. …. I knew you were joking.