Wednesday, February 24, 2010

Entrepreneur's Bill of Rights

I was recently on a panel for SVASE in which I was asked what advice I had for entrepreneurs raising money. This question arises pretty regularly. So, I thought I would take a stab at memorializing some of these thoughts.

Raising money, especially in the current environment, is hard. However, entrepreneurs have power in the process. Hopefully, you have a choice from whom you raise money. Sometimes that isn't the case, and you take money from whomever is willing to invest. If you do have a choice, or even if you don't, you should know from whom you are taking money. This sounds obvious, but many entrepreneurs don't know much about either the firm (if a venture fund is involved) or the partner at that firm (often more important than the firm itself).

Entrepreneurs, you have a right to know the person and firm to which you will be wedded in your endeavor, and make no mistake, you will be getting married. You know, for better... for worse... In other words, do as much diligence on your investors as we do on you. To help you with this, I suggest the following:

1) Ask for CEO and Founder references. Call people on the list and not on the list. LinkedIn is a great resource to enable this activity.
2) Be critical about the process the investors are going through when evaluating your company. Are they asking for customer references as a "way to get started" in diligence? Or are they offering their own customer introductions as a form of diligence? Note: asking for your customer references should come late in the process - not at the beginning.
3) Do your homework about the firm. Do they typically make seed investments? Later stage? If you're raising a seed round, think carefully about pursuing a $400M fund's money.
4) Find out how many boards your prospective investor is on. Hint: more than ten means that the investor is not going to spend much, if any, time with you.
5) Figure out what matters to you in an investor. Are you seeking leads, advice, recruiting help? Assess the fit between your needs and what your investor offers (as told by references).

Remember, even if it doesn't feel like it, you do have power in the financing process.

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