I have always operated under the assumption that being open and transparent is good for me. It reduces unnecessary clarifications and confusion at a later day. As I have more experience dealing with investors now, I understand the shades of grey that exist in the startup world. This post is based on my experiences of raising funds from institutional funds and is valid for those entrepreneurs who wish to raise money from a VC or an angel network.
Most technology entrepreneurs would know chess, but many may not know poker. Both games are largely strategy driven and there’s relatively more luck involved in poker than chess.
When it comes to fund raising is it more like a game of chess – your opponent can see all your pieces and is aware of your moves but not your strategy OR is it more like poker - the winner is determined by the ranks and combinations of their cards, some of which remain hidden until the end of the game.
Lets focus just on the initial rounds of funding (after series B, fundraising is more like craps :).
At the friends and family round, it does not matter which game it is more like. Since your F&F are betting on you, they don’t like to play regular games, only mind games – “I was saving this money for your sister’s / niece’s wedding, but since you are starting a business, I know you will return the money many-fold in 2 years”. (Cue: forced laughter, but quickly realize this is true).
At the seed round (lets say this stage comes after the F&F round), most entrepreneurs are going to angels, angel networks or venture capitalists (those who invest in seed stage). With most individual angels the game is boring. They either like you & your space and invest or not.
With angel networks and VC’s, it gets interesting.
There are very few investors who you are going to play chess with. The large majority are keenly aware that the game is one of poker.
Industry executives and analysts often mistakenly talk about strategy as if it were some kind of chess match. But in chess, you have just two opponents, each with identical resources, and with luck playing a minimal role. The real world is much more like a poker game, with multiple players trying to make the best of whatever hand fortune has dealt them. In our industry, Bill Gates owns the table until someone proves otherwise. ~ David Moschella
Am I suggesting you hide information from your potential investors? That might be what you take away from this post, but that’s not what I am implying.
Most investors will tell you they like transparency, but it only applies to you (there are some exceptions to the rule, and Shekhar Kirani & other Accel folks are ones that comes to mind as upfront folks) and your data. They need not disclose the other 4 investments they are considering in the same space, nor that they are merely kicking the tires with no real intent to invest in this area.
So what are the things you need not disclose upfront:
1. Who are the other investors you are talking to? This needs to be treated as your confidential, proprietary information.
2. What are the criteria you would chose an investment from them versus other competing firms? You can put a wish list, but its really not going to change things much.
3. What stage are you at in your fund-raising process? Have to talked to many folks or a few? Do you have term sheets from anyone else? This is largely for these investors to understand the “level of competition” for this deal. I would not advice you share this information with them.
P.S. As with any game, (s)he who cheats is asking for trouble. They may win a round or two, but in the small world of startups, everyone knows who the cheats and unethical folks are. So, don’t lie and certainly don’t withhold any material information such as customer losses, co-founder issues, etc. You will open yourself up for unnecessary legal trouble if you don’t disclose those.
Be a force of good.