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Second and Third Meetings
The second meeting you have with an investor can have a few goals. This second meeting could be casual, or it could be around a conference table, where you’re repeating what you said in your first meeting to more people. An investor might be thinking, “I just want to know more so that if I do say no, I know I’ve done my research.” Or they might tell you, “I want you to come in and pitch this to four other people.” In the latter case, hopefully, the VC you’ve already met with becomes a kind of sponsor for you at the firm. The investor who’s sponsoring you will tell you what to expect. She might tell you a few things about the other people you’ll be meeting, like, “John’s enthusiastic, Ella is skeptical.” They will tell you to come in and pitch your deck or just to repeat what you said in the first meeting, and they’ll tell you how long the meeting will be.
If the investors want a third meeting, things are getting pretty serious. If you haven’t met with partners at the firm yet, you will now (these would be “partner meetings”). They’re thinking, “Alright, we’re really interested, we think we want to make a deal. We’ve done our research, and now we want some answers to a few questions we can’t answer on our own. Like, “How are you thinking about X company as a competitor? This is the issue that’s kind of outstanding for us.” Your job is to convince them you’ve thought of everything. If you’re coming in to the firm for a third meeting, your sponsoring investor will tell you what to expect. If you haven’t delivered a formal pitch yet, you will now.
At later stages, the nature of these meetings evolves. For a company raising Series B, the VCs are going to ask deeper questions focused on numbers, your business model, and economics. “We did some diligence on this and we want to dig into your financials and see how you’re calculating X.” But at earlier stages, VCs are just trying to figure out how you think problems through.
At some point around the second or third meeting, the VCs will start doing more serious reference checks. Usually they’ll ask you, “Who should we talk to who can give us an honest take on your work?” Have these names in mind, and make sure you’ve reached out to these people to make sure they’d be willing to receive a call or email from the firm you’ve been meeting with. They could be past coworkers, past investors if you’ve already raised a round, or mentors. They should not be college roommates (unless you started a company with that person!) or family members.
Investors’ due diligence can also include talking with a few of your company’s customers, if you have any.
important Remember, investors have limited time. They’re meeting with dozens of founders every week. Having an investor ask for references can be frightening, but keep in mind that this is a good sign. Whatever time they spend checking your references, they’re not spending researching other companies to invest in. The more time they’re willing to invest in you, the more serious they are about turning that time into money.
Once you get to your third meeting, you’re going to have a sense of whether it’s going well. Your first task is to get the firm sold on working with you. Once you feel like you’re there, this is your opportunity to ask a lot of questions from the firm.
Some founders feel more comfortable saving all their questions for a third meeting. Others might wait until the investors have offered a term sheet, and respond with something like, “Cool, I have a few questions. Can we hop on the phone?” You want to make sure investors are excited about your company before you bombard them with details, but you should also feel free to ask questions at every meeting you take. It’ll show you know what you’re doing! Whatever your style, the most important thing is that you feel you’ve gotten all your questions answered. Before you meet with anyone, it’s wise to have a list of questions you want answered from every firm, and check them off as you go along.
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Some of these questions fall under the category of due diligence, focused questions about what it would be like to work with this firm. “What would happen in the case that one of the partners I’d be working with who’d be on my board leaves the company?” “How do you make a decision on a deal? Consensus from the team, or one person?” Run through a whole set of questions. Not only will this educate you, but it’ll show the firm that you’re thoughtful, reasonable, and serious.
Here’s helpful phrasing for a couple of common questions you might ask:
When you want to test a VC’s interest to determine where to put your energy, you don’t want to sound desperate or pushy: “I know that you’re not likely to give me a strong indication at this meeting, but I’d love to know if this is the sort of opportunity you could imagine taking. I’ll happily put in the work to persuade you over time! But would I be better off focusing my attention on other VCs?”*
“Are you planning on investing in this space any time soon?” This is a favorite tip from startup consultant Eric Friedman, who reminds us that this usually yields a good discussion about who the investors have seen in the space, and might lead naturally into whether they are interested in this very meeting.
contribute We will add more helpful phrasing for challenging moments in investor meetings. Are there questions you’ve faced that you didn’t quite know how to answer? Let us know in a comment here.
As always, we recommend being nice. There are VCs out there who respond well to bravado, to founders who ask questions like, “Why should I let you in my round?” Some might see this as confident, others will think, “I don’t want to work with this person.” There are other ways to build a sense of scarcity.
Discussing Price and Valuation
If the investors haven’t brought up any numbers by the third meeting, you should ask, “Hey, I feel like we’re getting pretty far along. Can we talk about price so we make sure we’re on the same page?” Before a firm makes a deal, you should have discussed what a good deal would look like to you and what you’re expecting with regard to valuation.
controversy There is some disagreement on whether to ask for a specific number, or a range, when it comes to the investment dollars you want.
One side says to avoid giving a desired valuation because you’ll end up having to back that up, or maybe an investor will decide too early that they’re not interested. If you were to go this route and avoid specifics (something Rob Go of NextView Ventures advises, as does Paul Graham in his (somewhat outdated) 2013 piece “How to Raise Money”) and an investor pushes the point, you can say something like, “I’m not really focused on valuation. I’m more interested in finding the right fit in a partner.”
important We strongly believe that if you cannot back up your desired valuation you simply aren’t ready to raise money. Here’s our take:
Pick the number you think you need and be able to articulate a strong, rational case for why that number is right. You might go up by a million, you might take a little extra. But know in your head what valuation you’re expecting, because that affects how much money you’ll take. Is the amount connected to reality? Ask your lawyer what they’re seeing for seed deals like yours. Ask around for what’s “market” for a company at your stage (for example, for a company with a product, with customers and revenue, or a company that’s reached product-market fit). When you’re raising a later round, investors you already have who are unable to lead your next round can give you good advice about what to ask for.
If you want some wiggle room or are reluctant to get too specific with investors, giving them a lower number than what you need can be a smart move. Among other reasons, a lower number makes you appear closer to your goal, which will increase the investor’s confidence in you and their urgency to invest in your company.
Finally, don’t expect a sky-high valuation. The odds of your company reaching a billion dollar valuation—so-called unicorn status—are less than one in a hundred according to a CB Insights study of a thousand companies that raised seed rounds between 2008 and 2010.*
important In any case, valuation shouldn’t be your main focus. Look for investors you can trust, who offer terms that won’t destroy your business and your personal finances if times get rough. The right investor may be worth compromising on valuation or even the amount of money you raise. You want to like the VC that invests in you.* It may even be worth it to raise less money if you’re raising it from someone you like. Remember, you could be in a relationship with a firm and even a particular partner for 11 years or more before IPO!
So you made it into the room. The room where decisions happen. Where financing is secured. Careers are made. Legacies begin. Wait, this is that room, right?
By the second or third meeting with investors from a firm, you’re going to a conference room, where a few people are going to sit around a table and welcome you to speak to them for a few minutes of your life. Your job is to show them that your company has a great story and the substance to back that story up.
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