Fund raising – is it a game of chess or poker?

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.

7 thoughts on “Fund raising – is it a game of chess or poker?”

  1. Nice post. Here’s another scenario and I’d love to hear your perspective on it:

    A startup with 2 co-founders is at an early-stage and is pre-revenue, pre-traction but is building something that sounds like an exciting idea with a potentially large market. They get approached by a large VC fund, do a couple phone calls and are then invited to their office. The entrepreneurs are not looking to raise cash anytime soon and very well realize this is just an exploratory meeting for both sides but they know that the VC is sure to ask, “how much are you looking to raise?”. The entrepreneurs know that they will eventually (in 12-18 months) need financing, but not right away.

    Should they be transparent about this to the VC and tell them that they don’t need cash today or just lead them on assuming it will take a year anyway for something to materialize (if things were to work out)?

    1. Vishal – as an entrepreneur, I will always go for taking the money rather than rejecting it. You can determine the terms in your favour, and ask for a very high valuation or other terms as suitable. Do not say no to money, specially when there are some egoistic investors around who may take your NO as a show of attitude!

      1. Thanks Amit! I appreciate your feedback.

        However, isn’t it logical to politely ask the VC if they’d like to, instead, remain in touch and consider investing once the startup’s achieved a solid product / market fit? This way, the entrepreneur and investor’s interests are aligned when the Series A comes in i.e. to grow and optimize as opposed to continue searching for a scalable business model.

  2. Mukund, lovely post. Enjoyed it.
    In my own experience, it always pays to have several options.
    There is nothing wrong in keeping to ourselves, some information – exactly the ones you talk about here in this article.
    This is akin to going and seeing a girl to get hitched – aka the arranged marriage strategy.
    The girl and her family knows pretty well that you are looking at ‘more girls’ and they don’t ask you that. Neither do you say it openly unless it is asked.
    So, if it is important for the other person, (s)he will ask. Then you disclose.
    This is true even for the VCs/ Angel Networks.

    The saddest thing I notice is that the angel networks sometimes tend to introduce a few clauses at the last minute [‘deal breakers’] when one’s patience has totally drained out and we need to just close the deal – they end up showing their poker cards then and then clinching the deal. I did not think it was ethical practice to follow.

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