Investors, Term Sheets and Win-Win Deals

I am going to talk to the Class of 300 students on Monday about the following items:
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  1. How to talk to investors?
  2. What do investors want to hear?
  3. do’s and dont’s
  4. What does a term sheet look like (Startup Reykjavik’s Term Sheet)
  5. What is fair for both startups and investors
  6. how much should you be willing to give away in your idea?

Resources that I would like to refer everyone to go read:

  1. Brad Feld’s series on Terms Sheets
  2. Fred Wilson’s post on Term Sheets
  3. Venture Deals – Be Smarter than your lawyer book by Brad Feld and Jason Mandelson
  4. Do More Faster

I am a big believer in Win-Win or No Deal Agreements. It helps me to keep things fair between everyone that I work with. I try to understand what a win is for the other party before I think about what my win is. This is another one of the teachings of Dr.Steven Covey. Like leadership, doing a Win-Win deal is not complex but very hard, because one has to work on putting aside what one wants and try to understand what the other party wants. We are not trained to do that, we always think whats in it for us. I fundamentally think relationships are what matters, in order to build strong relationships one has to understand the other very well. Why am I talking win-win deals? because as an Investor, the person who has access to Capital, most investors abuse the privilege this includes Banks for obvious reason, banks are stewards of other people’s money and so are most Venture Capitalists. Me and my partners are different, we have been investing our group equity into a portfolio of companies since the financial collapse. What it means is that we care more, we work harder, we are hungrier and we feel we are in this to win it… because our incentives and our portfolio company‘s incentives are aligned. The odds that usually get thrown in front of Venture based companies is that 1/3 of the companies fail, 1/3 of them do ok and survive and 1/3 are winners. We refuse to accept those odds. We believe we want to work on making every company that we take on Win, is’nt that what every entrepreneur does? No-one starts a business to fail. So I shun the notion that most startups fail. I started asking myself why do most startups fail? and I know that now… it is quite simple, most startups fail because they don’t have Customers. That is a single most important factor in being an entrepreneur.

Lets start with the first question, How to talk to Investors? I actually don’t know if there is a magic formula, finding investors and getting in front of them is hard and trying to understand what they are looking for is even harder and how you as an entrepreneur going to solve the Investor’s problem is the hardest. Everyone thinks that Investors are after monster returns i.e 10X or 100X, yes, that is nice but the road to those deals is filled with tremendous challenges and the odds of being an early investor in say Google, or Facebook or Twitter is next to impossible. So, if you are an entrepreneur, my advice would be to first understand and select the type of investor you would want to have in your company. Not all investors come in the same shape or size or color.

What do investors want to hear?

Umm, the same thing an entrepreneur wants to hear. I believe entrepreneurs are investors in their companies first so what you want to hear is growing customer base or user base. Growing revenue without growing cost. Discipline in execution. Team building and overall culture of the team. Building a business is hard work, much harder than most people imagine it to be. You have be willing to give it your all ie. Time, Money, Effort. What I want to hear are those things, how is your team? will you strive forward when there are challenges or will you give up? are you building a complementary team where your weaknesses are supplemented by your team.

I don’t know enough about this world to say do this and don’t do this, I think if you focus on building a sustainable business, are sincere about your effort and have a team that works with you, and you focus on your customer problems and are solving it… you are on the way. Don’t drive away people by being arrogant or cocky, there is nothing that turns off investors more than when someone who thinks they know everything. If there is one thing that we know is that we don’t know everything.

I wrote a blog post about the relationship I want to have with the entrepreneurs that I work with the title “When Harry Met Sally“, I wish all investors would view their role that way.

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