Yesterday I was on a startup panel with other VC and I heard so much bad advice, I feel compelled to call it out. Below are some of the things VC do and say that is just wrong.
“Don’t take the first offer you get.” While true, this is a very misleading statement to make to a crowd of early stage founders. 19 out of 20 early stage founders will receive no offer at all. 4 out of 20 will figure out how to build a business in spite of not receiving any investor support. The other 15 out of 20 will toil away at a business that ultimately exhausts them and fails.
“You need a warm intro to talk to me.” I hate when VC make this arrogant statement. You have better things to do with your time than scour LinkedIn and beg your network to make an intro to a VC they barely know. Rather than spending time networking, put together a very concise paragraph about your business and reach out to VC cold. If your paragraph is concise – explains the business, highlights 5 wonderful metrics, includes your ask and valuation, and where you can be reached – you will get a response. There aren’t enough good deals out there so if your paragraph is truly compelling, you won’t need a warm intro because VC will be all over you. By the way, my email address is firstname.lastname@example.org. It’s also on our website. Email me cold any time.
“You need to fund the early stages of the business with a credit card or 2nd mortgage.” VC love spewing comments like this because they think it shows commitment. It does show commitment, but it’s also reckless. Remember that comment above where I mentioned 15 out of 20 early stage founders will toil away at a business that ultimately fails? That’s a fact and probably understates the failure rate, so don’t compound the failure by ruining yourself financially. VC that make comments like this should be ashamed – this advice is going to place a great financial burden on many founders that fail just so a VC can see you’re committed. Terrible advice.
“Look online at where other companies are valued to give you valuation guidance.” The information online is often wrong, grossly exaggerated, doesn’t include enough information about structural considerations, and subject to all kinds of bias including selection bias. If you’re an early stage founder, get a good local venture attorney who can tell you the structures and valuations he’s closed for similar early stage companies. Generally speaking when your business is nothing more than a business plan, you can probably value yourself somewhere between $200k and $500k. At the friends and family round you can probably land somewhere between $500k and $2mm, and at the seed stage you can expect $2mm to $5mm. Again this is a general rule of thumb for deals not on the coasts.
Fundraising is hard. Since the chances of fundraising success are so small at the early stage, try to build a real, self-sustaining business and don’t do anything that could impair you personally (debt) should the business fail.
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