Just Say No - Getting the Straight Answer from Your VC

When you're raising venture capital, getting a quick rejection is actually better for the health of a startup than a drawn out 'maybe'. Unfortunately, not all venture capitalists (VCs) are as quick with a "No" as they should be, so it's often up to the fledgling startup to read between the lines. Consider some of the following stories when talking with VCs, and do what you can to make sure you invest your time as wisely as the VC invests its funds.

"LET'S TOUCH BASE IN 6 MONTHS"

Here's one we hear all the time. "It's great," says the hopeful startup founder. "One VC said they really like our business model and that we should touch base with them in six months to determine next steps." The optimism in these startups' eyes is often incredible. Only six months until they've got financing wrapped up.

Wrong.

Put yourself in the investor's shoes. If you see a great opportunity, are you going to let that chance shop itself around for six months? Do you even know that your entire fund won't be committed by then?

Lesson 1: If follow-up isn't within the next two weeks, the answer is NO.

"ONE OF OUR ASSOCIATES SHOULD TAKE A LOOK AT THIS"

Another one we hear from many startups is: "Things are going great. We've talked with three of their associates and are supposed to follow up with another one within the next two weeks. We just need to get a revised version of our marketing plan together."

This scenario raises two red flags: getting bounced from one junior associate to another, and preparing massive amounts of documentation. Most VCs will insist that people are the most critical factor in deciding on investment opportunities. Not marketing plans, not sales projections, not even patents. Furthermore, investment decisions are always made at the partner level, not at the associate or analyst level.

Michael Serbinis, co-founder of The DocSpace Company and now CSO of Critical Path (NASDAQ: CPTH), ran into this exact scenario when trying to raise Canadian venture capital. "The amount of time we spent preparing volumes of documentation was horrendous. And at the end of the day, I'm sure nobody read anything more than our original powerpoint presentation."

Lesson 2: If you've met more associates and analysts than you have partners, or if you find yourself spending most of your time extrapolating IDC statistics for a new marketing plan, the answer is NO.

"WE'LL GET BACK TO YOU"

A number of newer Canadian incubators have carved a niche for themselves as the side of the venture capital industry known for its opportunistic attitude. Contrary to most VCs, incubators often openly call for the submission of ideas and business plans from across the country, and not just through personal referrals. Sounds great in theory.

In practice, however, this model makes it difficult to provide startups with a quick response, even if that response is 'No'. Narinder Bhachu of Zengent Corporation, a Toronto-based startup offering plug and play Internet services, experienced this first hand. After initial conversations with the partners in one incubator he was told there was a great interest in moving forward and follow up would come from them shortly. He waited a month for the first return phone call, and another month for a request to meet.

By the time the two months had elapsed, Bhachu had already secured a strategic financing relationship with other sources and was continuing to grow out his company's business model. Smart move, but not the obvious one for everyone, particularly those who are typically optimistic.

Lesson 3: If phone calls and emails aren't returned after a seemingly positive meeting, the answer is NO.

"PLEASE MAKE CHEQUE PAYABLE TO..."

Here's a story that will send you reeling. Kelly Martin of Nesda Net (www.nesdanet.com) was at a previous startup company when she approached a well-known "startup friendly" bank for funding. She met with several managers and prepared mountains of documentation. A month later an invoice arrived in the mail. Kelly was being billed for the time and "consultation" that the bank gave her. Talk about a letdown!

To add insult to injury, Kelly later learned that the same bank provided funding for the same technology to one of her resellers! This isn't the typical story we hear, but it does teach us to beware not only of the long, drawn out response, but also the dreaded invoice for services rendered.

Lesson 4: If you get a bill instead of a cheque, the answer is definitely NO.

While the most high profile task on a startup's plate is undoubtedly raising financing, seasoned startup types will tell you that their biggest asset (and biggest liability) is time. Whether racing for first mover advantage, the first Fortune 500 customer, or the first round of venture financing, the key word in the startup's vocabulary is 'race', with every day being more valuable than the one before.

With this in mind, ask the VCs you approach to be up front and honest. Interpret their responses objectively, not overly optimistically. Trust your gut, because nine times out of ten it's dead on.

Most of all, remember that whether you're raising your first round of angel funding or are going back to the public market for your second public offering, raising capital is merely a function in the overall process of running your business - not the focus of it.

Michael Corcoran is Founder and CEO of CanadaStartups.com an online resource dedicated to the Canadian Internet startup. Michael is a regular contributor to Businessmatch-maker.com.