A common question that comes up during strategy mapping sessions at the headquarters (be it an ultra-modern office or mom and dad’s garage) of a newly founded startup is when to enter into talks with venture capitalists.
How early is too early?
If you’re a startup founder and have been frustrated by vague advices and indefinite tips, then I have some good news for you: I won’t add to your frustration. I’m here to give you a hardline answer as to when is too early to deal with VCs.
Don’t bother with VCs until you have a minimum viable product (MVP).
Launching a startup is incredibly time-consuming. If you aren’t busy conducting market research, finding suppliers, or brainstorming name ideas, then you’re probably occupied with building your startup’s brand on social media, test-driving the prototype, or scoping out customers. Adding talks with VCs into the mix during those crucial early days of a startup’s life will force you to dedicate less time to those important tasks as you pander to VCs.
Don’t lose focus. Use your limited resources to get your MVP up and running. The VCs will still be there once that milestone has been reached.
You enter an elevator and press the button for the 84th floor. After the long ride up, the doors open to an elegantly designed lobby. “I have an appointment for two o’clock with Mr. Rowin,” you inform the receptionist. She directs you to take a seat on the antique leather couch adjacent to her desk. “He’ll be right out,” she says.
Mr. Rowin is a partner at a distinguished venture capital firm. He’s doled out nearly $300 million to startups around the world. You, meanwhile, have a terrific idea for a product, but don’t have any customers or an MVP yet.
The door to Mr. Rowin’s office opens. A sharply dressed man steps out, and walks towards you, hand outstretched, greeting you as you prepare to pitch your idea to him and his team.
Who do you think holds all the bargaining power? Without an MVP, it’s doubtful that you’ll have much of a voice during negotiations. By getting your MVP out there before pitching to VCs, your chances of receiving a favorable term sheet increase dramatically.
VCs are always on the lookout for exciting new startups to invest in. If you successfully deliver your MVP, build a client base, and develop your brand, VCs will be knocking on your door. Consequently, you’ll be able to continue to focus your energy on growing your company, as you won’t be required to go on the hunt for investors.
Forget pushing. Let your MVP pull VCs in.
If your MVP is generating positive results, then you won’t just be approached by one VC. More likely, a number of investors will want to discuss potential offers with you. This, of course, gives you more bargaining power and increases your chances of finding a VC that aligns with your mission, company culture, and values.
Creative and Strategic Control
A common frustration for startup founders who have signed on with a VC is the loss of control over their enterprise. One of those most frequently cited reason given by entrepreneurs for quitting their 9 to 5 and launching their own business is because they wanted to stop taking orders and start making decisions for themselves. When a significant portion of that control is signed over to a VC, startup founders find themselves disillusioned with the entrepreneurial game and lose their drive.
Prior to the release of an MVP, a 50% stake in a hypothetical startup might have been worth, say, $50,000. With a proven MVP to show to investors, however, the valuation of that business increases significantly. $50,000 now only earns a VC a 10% stake. With an MVP in hand, you’ll be able to surrender a smaller stake in your company and maintain more control should you choose to work with a VC.