If you’re an entrepreneur focused on building a high-growth scalable startup it’s very likely that at some point you’ll want to raise institutional capital in the form of VC or private equity (PE) money. Many others have written about how to prepare your pitch presentation, which VCs to raise money from (good list from Chris Dixon), and how to raise money and interpret the level of interest a VC is showing (VC’s rarely speak directly).
But what all of this great thinking on the fundraising process often neglects is how to handle the endgame of a financing process. If you’ve been fortunate enough to get to the point where you have a term sheet – or preferably, term sheets (plural) – what does a term sheet mean exactly? Can you start spending the money? Telling the press? Sharing all with your new VC friend? The quick answer: NO NO NO.
A term sheet is not a closed deal no matter how much it may start to feel like one. In the best fundraising scenarios, you’ll start to work collaboratively with the funding source. You’ll like them. They’ll like you. You’ll go to dinner and talk about the future and your ambitions. It will FEEL like the deal is closed. But that’s just a feeling. It’s not reality. Closed is when the docs (not the term sheet) are signed and you see the investors money in the bank.
Until you’ve actually closed, you NEED to behave as if you haven’t. You NEED to keep multiple funding leads as warm as possible and you should absolutely not start to treat the potential investor as if they are are already a shareholder (or your best friend). A term sheet is NOT a closed deal and even though you don’t hear about it all that often, deals absolutely do fall apart after a term sheet is signed. Term sheets are basically always, very explicitly stated, non-binding documents. These deal blowups don’t receive a lot of press – entrepreneurs often don’t tell the stories in a public setting and even when they do, journalists often don’t want to write about them for fear of getting involved in what is basically always going to be a he-said she-said, potentially making future stories harder to access. Fortunately for entrepreneurs, these stories are starting to be told by bolder journalists.
I’m saddened by yesterday’s article by Sarah Lacy about BNTER‘s misfortune with a fundraising process with Spark Capital; unfortunately, having had my own bad experience with Spark, I’m not particularly surprised. Despite Spark’s impressive portfolio – with standout Twitter among it – my personal experience with them showed them to be completely unprofessional, insensitive, arrogant and disrespectful – exactly the behaviors that I associate with the BNTER fundraising fiasco. But above and beyond the terrible experience that this is for Lauren Leto and her company, it is also a critical lesson for VC seeking entrepreneurs everywhere. Don’t be a victim. Have an explicit plan for how you’ll deal with a failed process. It’s not closed until the docs are signed and their check clears the bank. Period.
Speaking of closing, Oyster just closed (docs signed, money in the bank) a big new financing and strategic partnership. Details soon.