Chapter 6 - Negotiating the Deal
IN THIS LESSON
Understanding Where, When and How VCs Think and Operate
Answering the “where, when and how” questions about VCs reveals that VCs have a geographic bias, a seasonality to doing deals, and a way of going about getting and spending their money. Your understanding of these three areas will save you time, money and possibly heartaches.
Geography (Where)
VCs tend to be concentrated in certain cities, and they like to invest in certain geographic areas. San Francisco, New York and San Jose, California are dominant areas for VCs and the companies they invest in. VC firms are disproportionately concentrated in regions where VC investments have been particularly successful in the past, especially over the past 25 years, accelerating with the Internet boom of the 1990s.
Start-ups tend to locate in cities where there is a strong VC presence for financing. The Bay Area and the east coast cities of Boston, New York, and Washington DC account for approximately two-thirds of all VC-backed invent in the U.S, according to the Martin Prosperity Institute. The VC investments per capita in San Francisco is about $5,000 vs $495 per capita in Austin, but data is still showing that Austin is on the upswing as a smaller tech hub and college town.
The city of Austin is consistently in the top 20 cities where venture capital deals are happening. In 2019, Austin is seeing a surge in VC funding. Austin-based start-up companies raises $704 million in Q1 of 2019, which was $99 million more than Austin companies raised in Q1 of 2018, according to PricewaterhouseCoopers. When the Austin numbers are combined with the numbers of all of Texas, the amount of money raised for start-ups is the most since the dot boom days in the year 2000. Last year, the average deal in Texas was over $9 million, whereas the average deal in San Francisco was over $50 million.
Seasonality (When)
You need to know the timeframes when VCs are doing meetings and making deals. If you don’t understand the timing issues, you could completely miss the best time of the year to start the process of raising money and meeting with VCs, and you’d have to wait months.
The best parts of the year when to really engage with VCs are:
Between January 7 and May 15
Between September 8 and October 15
The second-best times of the year are:
Between May 16 and June 30
Between October 16 and October 30
The “blackout periods” that are the worst times to be trying to make progress with VCs are:
Between November 1 and January 6
Between July 1 and early September
The reason for the blackout periods is not because VCs don’t work during those times. It’s because more of them are taking time off from work at different times, making it very difficult to bring all the right people to a meeting in the middle of summer vacations or Thanksgiving and Christmas holidays.
How VCs Get Money and How They Are Judged
VCs typically get their money from large institutions, such as pension funds, university endowments, charitable foundations, insurance companies, very wealthy families, and corporations. They are called outside limited partner investors (LPs).
As you can see, VCs are investing with other people’s money, not their own money, unlike angel investors. This feeds into why they are so intense, so matter-of-factly and so data focused. They must report back to the LPs and if they don’t have a positive report, they will be in hot water or out of work. The VCs owe the LPs a return on their investments. This affects the VCs’ mindset. This is their reality.
To keep the money flowing, VCs need to keep raising new funds and invest in more start-ups that are promising in high-growth potential market segments. Exists take a long time, but a VC is likely to raise a new fund before the first fund exits. So, these unicorn valuations – even though they are not cash on exit – still help these VCs raise their next fund.
When you get rejected by a VC, don’t take it too personally. Move on to the next one. It’s part of the game. The more you know how they think and operate, the more persistent you will become. Know your audience.