The startup ecosystem in Silicon Valley is exceptional. Talented entrepreneurs, top class lawyers, experienced mentors and savvy investors all within a stone throw coexisting in a tight-knit ecosystem.
Fundraising here is amazing and there is definitely lots of tricks to the trade. Whilst I am no expert on the subject I would like to share with you a couple of broad learning points you should definitely do when fundraising in the Valley.
1. Talk to people
The Valley is a unique place not just because of the startup talent and experience here but also the willingness of people to give advice. Experienced entrepreneurs and lawyers are great sources for free advice. Veteran entrepreneurs mentor other startups to stay plugged into trending developments of rising startups and to seek advisory roles .Lawyers hold free initial consultations to win clients. Use social networks to find people and ask to meet them. Do your homework and go with specific question to make the most of these meetings.
Today for instance I had a great meeting with Wilmer Hale, a law firm I am likely to engage with, where I received great insights on where the market is pricing startups at various stages of developments. This greatly increased my ability to sense where the market is at right now and what valuation I should be seeking here. They also gave me specific valuation advice about Fundacity. Remember lawyers see deals all the time and have a great sense of where the market is at.
2. Get a plan B
This can never be overemphasize. “The best Plan A has a great Plan B standing behind it. The more potential investors you have interested in your company, the better your negotiating position is. Spend as much time on your best alternative to a negotiated agreement (BATNA) as possible”(1). Also, I strongly suggest you clearly decide what the price point is at which you will walk away from a deal. Never begin a negotiation without that. When walking away also be transparent and communicative about that point to help the other party understand. In this way, if possible and meant to be, the other party will understand your stance and can still make it work. Don’t rush the process. Enjoy the thrill of the brewing deal. Never forget to consider the option of falling back on sweat equity and bootstrapping a little longer until the time and the price is right.
3. Value value value
The deal terms are driven by many factors but fundamentally it is the value your product/service is hoping to create. Focus on creating real benefits to your target users. Benefits not features. Understand your user and get the value proposition straight. In the end of the day this is what earns the prize.
Some useful books I can recommend for some background reading are:
1-Venture Deals by Brad Feld and Jason Mendelson (great read with some good fundamentals. I particularly like the “entrepreneurs perspective” at the end of each section. You can flip through this over a weekend)
2. Term Sheets & Valuations: A line by Look at the Intricacies of Term Sheets & Valuations by Bigwig Briefs (Very technical book. More dry than Venture Deals but definitely gives you lots of answers)
3. The Business of Venture Capital by Wiley Finance (more about VC than about a startup raising funds. However understanding how VCs function is a great way to understand your negotiation partner)