December 22, 2004
How to Negotiate a Term Sheet with a VC, Part II
The original posting (probably one of my top two or three in terms of comments and trackbacks) talked about HOW to negotiate a term sheet with a VC. I just received a question from a reader today about WHEN to start looking for VC money. The answer, of course, depends on your stage of business.
The general rule is that the best time to start looking for money is when you don’t need it — but not so early that a potential investor can watch your business closely for too long a period of time before the deal (since all startups have hiccups along the way).
If you’re looking for seed capital, you may not have too many options in terms of timing, but best to do everything you can to keep bootstrapping things along with consulting or one-off projects. Why? At the proof-of-concept stage, the value of your company increases sharply with every new customer or new release, so best not to take capital too early as long as you can live without it.
If you’ve got a business going (say $1-3mm run rate), with a cash balance and a predictable burn rate, and you’ve never taken in institutional capital before, you should probably start talking to VCs 4-6 months before you run out of cash. While you don’t want VCs to anchor a valuation in their mind too early, the reality is that it takes time to get these your first institutional deal done since it usually involves broader changes to corporate documents, and you definitely want to talk to several different firms, so a little more lead time is better. This is especially true if your window of time interferes with August or the holiday season, when not much new business gets done at VCs unless you have a super hot deal.
If you’re looking for expansion capital and are near or at profitability, deals will probably take less time to get done, and valuations are likely to fluctuate less. In these cases, I’d say less lead time is required, although if you’re in a volatile industry, you may need the capital sooner than you think!
But again, the best time to look for money is when you don’t need it. Investors (even the nicest ones) aren’t afraid to "market price" a deal lower if they sense desperation or, more important, a lack of alternatives. To that end, of every piece of advice in the original posting, the most important one, which affects timing, is #3 — get more than one VC interested in your deal!