Jay Jung shares a case study that explains how his company helped a client with their fundraising process, and increased their valuation by 80% and doubled the capital raise.
One of our clients received a term sheet from a well-known VC in the industry. Our client was very excited as getting an investment from this firm was a strong sense of validation in the industry. However, the valuation was significantly lower than what they were hoping for.
The client only had one term sheet from this specific investor and was in dire need of a cash infusion to maintain its fast growth trajectory. Discussions with other investors were lagging and unclear if they were seriously interested.
This is a weak hand. In traditional negotiation terminology – what is your BATNA (Best Alternative To a Negotiated Agreement)? Ours was perhaps none existent, at best weak. But as Adam Grant advocates, “The science of the deal reveals that great negotiators refuse to believe in a win-lose world. They care about both results and relationships. They don’t declare victory until all parties win”
If you focus just on valuation, you are not going to gain much in this situation. We refuted their approach to valuation and explained why it was too low (unreasonable). The VC did not push back on our logic, but that doesn’t mean they accepted our higher valuation.
The key to gaining something in this type of discussion is identifying other issues that the investor is solving for. For investors, it is very rarely just about valuation.
Read the full case study, Successfully Negotiating VC Termsheets, on the Embarc Advisors’ website.
Diane Mulcahy provides valuable questions to help discern the compatibility of an investor before accepting funds for your next project.
In the race to get the check in hand, most entrepreneurs don’t do in-depth due diligence — or any due diligence — on the venture capital (VC) firms they pitch. Founding teams eager to raise capital to grow their companies enter into long-term partnerships with VC firms they don’t know well. It’s a risky strategy that can leave startup CEOs in mis-aligned partnerships with unrealistic expectations.
The four questions covered in depth are:
- What is the VC’s track record?
- How much money is the VC personally investing?
- How big is the VC fund?
- Do you have a list of portfolio company CEOs?
Read the full article, Don’t Take Money from VCs Until You’ve Asked 4 Questions, on the Harvard Business Review.