Disclosure 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”). Transparency is an important quality when starting a risky new business; it builds trust. That does NOT mean, however, that you should be totally transparent during fundraising.
In particular, here are two things you should be extremely careful about when and how you disclose them:
- How much cash you have and when you are running out of money. Sure, talk about your financial profile and how cash you are burning, but let’s get real: 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… The right answer when asked about your out-of-cash date should 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.
- 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 do you tell me all that? How is that relevant to my analysis of your business? 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 investors Y and Z are really crap, so if they are interested it cannot be that good”. Sounds stupid, but I have seen this happen.
You should keep your cards close to your chest to 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”.
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.
I have had a number of comments on this topic with people violently disagreeing, on the notion that, hey, this lack of the transparency is the reason why we ended up in this whole financial crisis mess in the first place. I respectfully disagree: fundraising is a negotiation, and giving away information that helps the other party (the one that is already holding the bag with the money) to game the process is downright naive.
So start raising money early, and keep fundraising process information to yourself. Trust me on this, and always keep your options open.
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