Over the last year, it’s been a ferocious capital market for startups, with great valuations and good access to capital. But now, the market’s changing, with the stock market down and private valuations are getting lower. In this tougher market, it may be difficult for founders to go to existing investors and get them to make a second commitment. So this is a good time to consider what you should look for when choosing venture capitalists.
If you’ve taken money from hedge funds or nontraditional venture capitalists, you may be wondering how they will react in a down market, and they may be finding out a lot about you as a founder. You may be wonder what kind of terms you’ll get if you ask for more capital, and the nontraditional VCs may think you were given a high valuation on the last funding round and may be looking to recapture some of the economics.
Pick your VC partners wisely
The best way to avoid a difficult negotiation is to make sure you don’t run low on funds in the first place. Pay attention to your burn rate and runway, and start looking for funding well in advance of your zero cash date.
That provides options. You’ll have time to get to know your venture capitalists. Remember, you’re entering into a long-term relationship, and you shouldn’t rush through the diligence process. Make sure your VCs share your values, and that they’ll be strong partners who will help you protect and build your company.
Make sure you know who your investors are. You can do your own diligence and check for references on a VC firm that you’re considering. Reputation is very important in the VC ecosystem, and you probably already know people who can provide insights on VC investment firms.
Be prepared for negotiations
A venture capital investment is a business deal, and you’ll be working with your VC firm for a long time. You should be ready to review your startup’s financial position:
- Research your company’s valuation and be ready to defend it using your financial projections. This will be more effective with the assistance of a startup accounting firm like Kruze Consulting.
- Be careful about provisions and covenants. VCs will often try to protect their investments by asking for protective covenants that might be related to performance, antidilution, or other points. Review the term sheet carefully and enlist the help of your CFO or accounting firm to make sure you’re getting the best deal possible.
Most importantly, you should know what matters to both your VC and you. You should be clear about your goals and your business plan, and you should know what motivates your VC investor. If you want to know more about venture capital, or need help with financials or reviewing a term sheet, contact us.