Three things you should never tell a VC when fundraising

isclosure is a good thing.  Early disclosure of thorny issues is a very good thing (such as, "I am embroiled in a legal dispute with my co-founder over ownership of the company and here is why").  That does NOT mean, however, that you should be totally transparent during fundraising. 

In particular, there are three things you should be extremely selective in disclosing:

• How much cash you have and when you are running out of money.  The answer should ALWAYS be along the lines of: "we are well funded for now and our investors are supportive" no matter how desperate for cash you are.  Or "we have a very low burn rate and can sustain ourselves for the time being".   Not: "we are out of money on two months and getting desperate".  There are other ways to create a forcing function and admitting you are going bust or telling investors when you will be is no way to optimise your outcome.  ADD: You should clearly talk about your financial profile and how much you are burning per month, I just do no think it is wise to provide the VC with the exact date from which any lowball offer will become hard for you to turn down...
• Other investors you are talking to.  I always ask, and I always get a very detailed response: well, Index has done two meetings and Atomico is close to term-sheet etc etc.  Why ??? I don't exploit that information except to pace myself but how many stories have you heard of VC's ganging up to avoid competing with each other ?  The management of KDS agreed to collapse us into the Accel Partners term-sheet when we invested there, but it was their decision.  The other issue you face is that VC's may say "if you get Investor X to lead I will join them" or you get top tier VCs (say the mysterious Investor X) thinking "well investor Y and Z are really crap and if they are interested it cannot be that good".  Sounds stupid, but I have seen this happen.
• Your detailed cap table and your last round valuation.  You are telling me now (a) which investors I should be influencing to win the deal and (b) how much upside I should give them, and that may not be in your best interest.  Management ownership matters but be coy and don't reveal more than you need to.

You should keep your cards close to your chest, maintain information asymmetry.  The key is to do this without seeming to be secretive or pretentious, but with confidence: "we are talking to a few select investors, strong brands, and are currently making good progress towards a close".

Some VCs spend their entire time talking to others and asking them forcefully "whether they are looking at company Y and what they think of it and should we not do this together".

The question to ask yourself is: "is this information relevant to the VC's assesment of whether they do or do not want to invest in my business and at what price".  If it's not and it helps the other party's negotiation leverage, you do not have an obligation to answer.

Trust me on this, and always keep your options open.

UPDATE: to be clearer, I am suggesting that this information is valuable and important and that you should be "selective" in disclosing it.  Yes, it gets subtle.  For example, a VC should be able to put the outline of an offer together without knowing your detailed cap table.  However, he won't be able to write you a detailed term-sheet without the full details (voting thresholds and board composition, to take two examples, depend on it).  I thought I would clarify after noting this comment by pg on Hacker News.  In any event, 100% transparency all the time is not the way to go.  This post should have been entitled "Information you should be careful with when talking to VCs".  Not catchy, me no like.  

UPDATE II: I think we should drop my last point on cap table.  I had a specific instance in mind where this was important when writing this, but it's far from universal.  I would not necessarily comment early on last round price when it was very LOW, as this can set the bar too low for the current round of negotiation.  If your last round was overpriced, well this is something you need to address preferably before you are talking to new investors to get existing shareholders aligned.  I invite you to read Eileen for the counter and Reid Curley for a balanced view.

Comments

[Davor]

Alot of valid statements. I would slightly go toward Fred's attitude. But let's go to the basics, if you have unique product that has obvious advantage at present mkt. conditions, you don't need to talk much because VC's will recognize opportunity on their own (if not, you don't need them anyway). But if your offer is slim, no amount of 'smart' talk will persuade a VC to invest. Unfortunately, alot of ideas are quite slim, hence a strong need to persuade a VC to give you money.

So it boils down to this; it is a product attractiveness/sellability what matters, not talk or negotiation amount. You may go talk relaxed, deal doesn't depend on you :)

[coach handbags]

I knew little in this part before,thank you for you information! May the joy and happiness around you today and always.

[Morris Hankfors]

Another thing you may not want to tell them is that there other options apart from VC :)

My company got in touch with eSolve Capital and they have a division handling high tech startups (you can find under http://esolvenano.com/about ) which has access to a wide range of funding offers providing excellent conditions.

[Fred Destin]

I guess a bit of name dropping done well never hurts, that is different from disclosing where you are in the process with which parties and I would always be careful about it, particularly as you'll typically end up with only 2-3 as you move towards the altar; "social proof" as VentureHacks calls is something else, it means credible people are willing to spend time or money on you and is hugely valuable.

[Jay-Z]

Thanks.

Quick question - does this apply to Series A and later rounds? Venture Hacks suggests for closing Seed Round to name-drop to encourage "scarcity", and especially if one possesses "soft-circled" investors - to highlight "social proof"?

[Jay]

I'm surprised by some of the negative comments to this article.

An investor's job is to make money on an investment. The financing terms is a key determinant of that outcome. Its only rationale that an investor will use any and all information provided to him/her to optimize the deal from his perspective (this has nothing to do w/ morals, ethics, etc.)

Fred has only provided, from an investor perspective, some guidance on what information you don't have to fully disclose so that you can still raise money, but hopefully at reasonable terms.

One can choose to disclose all, and that one will surely end up with a worse financial outcome.

[coral games]

The VC can then feel secure that you will be just as discreet with his or her offer as you are being with other parties. And that trust, respect and confidence will go a long way to create the foundations of a healthy long term relationshipPlaying skill games up against other users for cash has become very popular lately. The uniqueness of a skill game is that the game’s outcome is predominantly determined by players

[Reid Curley]

Nice post, Fred. Kudos for being open about what entrepreneurs should not be saying to VCs, at least right out of the gate. My short reaction to your post and the ensuing debate is that you are right about point 1, dead right about point 2 and point 3 really is not that big a deal. Like Eileen, I made a long form reaction into a post on my own blog (http://bit.ly/4Ic4rK).

[Jason Cohen]

As an investor, anyone playing these "hiding" games is an immediate red flag.

Typically when someone doesn't want to disclose something as obviously relevant to investment as a cap table, that's a bad sign.

It's wrong to say that an investor should be able to (for example) provide an LOI (just not details of term sheet) without knowledge of cash position and cap table.

Here's one reason why: A common problem is a company raising too much or too little money. Without knowledge of current cash flow and cash in the bank, and without knowledge of how expensive the next round it (i.e. cap table), you can't determine how much investment is appropriate.

I do understand your point about not necessarily "throwing around" information to just anyone. But if you're going to treat the meeting seriously you can't just dodge these important questions and expect the VC to be impressed with your fortitude.

It just sounds like your hiding something.

[Bhuttan]

I have been on both sides of the fence: a VC and an entrepreneur. I am saddened to see that we have come to a point where the financial deal making - and the games that go with this - has become more important than the opportunity to create wealth and get a win-win for all.

Playing games is what has got us into the global financial mess we are in today. How about going back to basics: It is about building good businesses not just doing deals; is the management good - if not how can we make it better; is there a market, etc.

[Fred Destin]

David:

I agree I think on the overall tone of what you are saying. When you feel in confidence, you can probably be fully transparent out of the gate, and it's a good feeling.

There is also a time to be transparent and a time to be selective. After a VC has given you an offer or indicative offer, it's time to make sure there are no showstoppers.

I still think some information has negotiation value and that has nothing to do with being "good" or "bad". If you tell me you are running out of cash, I am likely to drive a harder bargain. That does not make me an asshole, I am using information to asses my ability to negotiate.

If you can dictate equity terms, good for you. But in many events you need a bit of dynamic pricing tension to determine the clearing price that the market is willing to bear. Just ask Wonga. I am more concerned about the many deals I see where entrepreneur transparency has resulted in really agressive terms that make it harder to raise subsequent finance.

You make good points, thanks for commenting and adding subtletly to the analysis.

[DavidSmuts]

Fred, interesting, controversial and informative post here. In my experience I think you are correct in this advice especially in regards to most VCs. It's all about the "game" of the VC engagement.

For me personally, I don't want to play that game. I'd rather tell the VC the truth. I'll tell him/her where we're at in terms of capital, tell them what funding we require and what we're willing to give in %equity as well as a detailed cap table. I'll tell him/her with full confidence and conviction. (regardless of the outcome).

I'll also disclose our mistakes and get these out of the way rather than surprise them. As for discussion with other VC's that I wouldn't disclose, just as you suggest. I wouldn't lie either, but I would explain I'm talking to a number of interested parties.

In my (idealistic view of the world)I would be presenting an opportunity/partnerhsip for them. Either they are interested or not. What they will get with me, however is honesty, and I would expect nothing less in return.

You're spot on though Fred, about the modern realities of the VC funding game and the people we are dealing with. And in this regard, I think it's very good advice for Entrepreneurs seeking traditional VC financing. I guess for me it's a game I don't want to play (at least not by the old house rules).

Mark Suster had a great article on revealing skeletons in your closet ( http://bit.ly/7JvSY3 )to a VC. It goes in tandem with your post.

As I say, if you're going to blog..., you better say something intelligent or controversial, or say nothing at all.

[Eileen]

As an investor (representing a VC fund and an angel), I most humbly disagree. My logic and thought process here:
http://catalyses.wordpress.com/2009/11/27/three-things-you-should-always-tell-a-vc-if-asked/

What started as a comment but just got longer and longer...

[Fred Destin]

@Jerome: always loved moralistic commentary... If you are selling your company in an M&A exit, are you going to tell the buyer who else you are talking to and how much they are willing to pay ? Do you think that's what they did when ebay was bidding against Google to buy skype ? I am saying: some info is none of the buyer's business and can be used to your detriment in negotiation, and you should be careful how you disclose it.

[jerome camblain]

Who wants to invest in a non transparent company that plays game?

Also who wants to invest into a VC funds that like to invest into opaque management?

[Fred Destin]

@Jkaljundi: Enticing a non-local investor to come into your business (say fred Wilson) will require a strong local investor and you clearly need to bring these parties together. Getting them independently over the line is what mattes. If you dangle Union Square Ventures in front of your local investor, he will then DEMAND their participation and you have created a new hurdle for yourself.

@Jason: I am by no means suggesting that you misrepresent the truth, which is generally a bad habit. All open to specific counterarguments if you can spare the time.

@Anon: To Jason's point, has to reflect the reality of where you are at but could be:
"We are talking to a selected number of investors who we feel understand this space and are getting good engagement right now".

"Management own XX% and we have carefully budgeted our options requirement and feel another YY% will take us through the next 24 months of company building. The rest of the equity is held by private investors of which (ideally) Jeff Bezos and Michael Dell".

Key is: Less Is More. If people leave a 15 seconds blank, don't fall for it. Ask for the next topic. Ask the VC how much they own on average in companies at this stage ---> move the conversation along

[Jason Goldberg]

I disagree with pretty much everything you have written here. If you can't be transparent you shouldn't be doing this. Making up the answers will only come back to bite you.

[Felix]

Startup founders need SAS training to resist VC interrogation.

I am joking of course but the idea isn't so bad. I really think those guys could give entrepreneurs good advice.

[Anon]

Can you give sample responses for each of the questions above?

[Mark Littlewood]

Great post. Struck me that VCs always ask these questions as they know naive entrepreneurs are likely to give overly detailed responses. The comments from 'London VC' in this thread are not unusual (although by no means universal) Why angels are wary of VCs
The more you can do to counter the disinformation, the better.

The more experience you have in your team of venture fund raising, the less likely you are to fall for such tricks.

Keep up the good work.

[howard]

Excellent post. I would go even further and say that any VC taken aback by these non-disclosures is a VC you should run away from.

Playing the financials close to the vest is a clear signal that you are an intelligent, experienced and self-aware entrepreneur.

The VC can then feel secure that you will be just as discreet with his or her offer as you are being with other parties. And that trust, respect and confidence will go a long way to create the foundations of a healthy long term relationship.

[Jkaljundi]

In the Baltics or Central and Eastern Europe what I have seen is US or Western European investors asking for a local VC to be involved. So they also want information on potential local co-investors and who you are talking to locally. This has changed a little bit over the last 10 years, with US/UK guys not being so afraid to be the sole investor to a Baltic/CEE company.