Most entrepreneurs will agree that there are a few consistent pain points in trying to navigate the fundraising process. While raising operating capital is often a necessary step in building and growing a business, the most common frustration amongst entrepreneurs’ stems from the time and resources they sacrifice engaging in conversations with VCs that ultimately don’t lead to investments. Here at OpenView, we hear from CEOs that they get cold calls from VCs all the time, but often the conversations don’t have clear objectives, which can be both frustrating and confusing for CEOs. On one hand, they see the value in networking, and recognize a relationship needs to start somewhere. On the other hand, many of these “feeler” conversations can often feel like a waste of time for both parties. As investors, how can we avoid being a needless distraction? And as an entrepreneur, how can you develop a better sense of which calls are actually worth taking and which ones aren’t? I think a good starting point is by addressing an interesting dynamic between VC’s and entrepreneurs I’m coining FOMAD (fear of missing a deal). Let me explain.
FOMAD: Why Fear of Missing a Deal Can Lead to Wasted Time (On Both Sides)
One of the issues with many initial calls between VCs and entrepreneurs is that they’re often proposed and accepted without a lot of scrutiny. Both sides recognize the importance in building a pipeline of potential investors/investments with the understanding that only a slim percentage will actually lead to a term sheet. That’s all well and good, but the problem is it can be very easy for both sides to also become so fixated on not missing out on an investment opportunity that they are willing to neglect clear indicators that a call doesn’t make sense — take stage, vertical, or geography misalignment, for example. While I do buy into the idea that a huge amount of value can be derived from speaking with investors even if it doesn’t lead to an investment, it would be naïve to think that CEOs are willing to repeatedly take valuable time out of their day solely for the purpose of “networking”.
What Can We Do to Counteract FOMAD?
For starters, I believe investors can accept responsibility for being more targeted with their outbound efforts, and to ensure entrepreneurs they value and respect their time by agreeing to the following — a short list we can think of as a fundraising entrepreneur’s “bill of rights”. If you are an entrepreneur currently seeking funding (or being approached by VCs), here are four common courtesies you should ask for and expect from investors:
1) Clearly state the intentions and goals for call
As with any outbound business development effort, it’s critical to be as forthcoming with intentions for a call/meeting and what both parties should expect to accomplish as possible. Be clear on messaging as it will lead to a more productive discussion and not leave entrepreneurs feeling deceived.
2) Be upfront if you don’t think there is a fit
Beating around the bush doesn’t do anyone any favors. If there are obvious red flags or signals that indicate there is not a mutual fit, it is better to address that immediately as opposed to carrying on a discussion. From my perspective, it’s refreshing to hear when an entrepreneur decides early on that it’s not a fit, so the same courtesy should be provided to those seeking capital.
3) Provide me with transparency on the evaluation process
If it’s established that it would make sense to take some next steps, provide a snapshot of what the evaluation process for an investment looks like. You are accountable for providing timely feedback in accordance with your diligence process. Here at OpenView, we buy into this idea so much so that we display it on our homepage http://openviewpartners.com/invest/.
4) Don’t make offers that you are not willing to follow through on
An easy out for VCs who are not going to invest in a business is often to offer introductions to sales prospects or other investors who could be a better fit. While the intention is often genuine, these follow-ups are not always prioritized, and a failure to follow through will eventually be exposed and not soon forgotten. Do you have a FOMAD story to share? Have anything to add to the “bill of rights” list? Let me know in the comments below.