And how it can doom your company
When you hear about fundraising, all you hear is how much, and for what percent. They raised $100,000 for 10%, or $5 billion for 30%. Yet, like all things, all of these numbers are meaningless in the face of time. No one talks about how long, painful and mutually destructive the fundraising process is, but it is. These are my experiences in the kiddie pool, but I think that they apply anywhere.
If you want a TLDR, this is it: Time is money.
Magical Disappearing Money
Let’s say someone offers to invest $100,000 in your startup. That’s great. You make a pitch-deck, spreadsheet, open up your books, etc. They bring in an auditor and you spread ’em for due diligence. Then let’s say you sign a term sheet. Yay, you’re done. No. No.
A term sheet has terms, likely including something called ‘conditions precedent’. That’s more paperwork that has to be done before any cheques are signed. It’s like a stupid treasure hunt, get this from the company registrar, get this sacred amulet from a lawyer, a lock of hair from some accountant.
This whole thing takes time. The meeting takes time, waiting for emails takes time, then once lawyers and accountants are involved they create more work, which takes more time. Suddenly this is your job, and you’re not shipping products. You’ve gone from raising money, to spending money. AKA, time.
Meanwhile, two things are happening. One is, that $100,000 investment is actually reducing. This is called the time value of money. Let’s say the process takes 6 months. If you had invested the money at 12% (normal here), you would have made $5,000. You don’t feel it because you’re not paying, but each day, each delayed email costs you cash. And that’s not all.
The second thing that happens is that the market is moving. While you’re spending six months finding stamps and seals, your competitors are shipping products. By the time your deal closes, the entire market may have changed.
This happened to me. By the time we closed our deal an international competitor had come in and then we were just playing catch-up for a year. We never actually caught up.
This is how the deal-making process becomes a lose-lose for everyone except your competitors. Sometimes investors can be so risk-averse in deal-making that they’re taking a huge market risk. In my case, if the investor had made a handshake deal for even three times the amount they would have saved money because they would have saved time. We would have got to market faster.
At the same time, founders can drag their feet over percentages when what really matters is time. While you’re fighting about control, your competitor is taking control of the only thing that matters. The market. Meanwhile, you’re hanging out with lawyers.
The fact is that fundraising should be looked at as a cost. Because it takes so much time. The more time you spend talking about money, the more it disappears.
Magically Disappearing Term Sheets
If I was doing it again, I’d do something different. Instead of greedily worrying about percentages and dollar amounts, I’d bake time right into the negotiation.
For example, you can invest at $100,000 in two months or $80,000 right now. And that two months doesn’t get extended, after that the term sheet disappears. Alternately, if you close now you get 25%. For each month's delay, the equity goes down 5%. The dollar value stays the same.
For this to work, of course, you need to have your house in order first. No one should have to ask you for a single document, you should have a Virtual Document Room ready. They shouldn’t need due diligence because you have an internal audit from the Big Four. And all of this stuff should have been thought of because you had an audit committee from the start.
You also need to be ready to walk away. Because the time value of money degrades, and because market advantages disappear. This means raising money when you don’t need to, not when you’re about to disappear.
And then, like any negotiation with a street vendor, you need to walk away. Because your time is valuable, and their time is valuable, and any extended dance is just a cost and a hindrance to the company you’re trying to run.
Time is money. When you raise is as important as how much and for what percent. Given that we’re all dead in the long run, time may actually be the most important thing. You can always raise money, but you can never raise the dead. Get it done quickly, and set that expectation from the start.