If you can’t buy your investor a beer, don’t take their money

We just had our second official board meeting. Posterous has been around for over two years, but I still count this as number two. Because in the past, a board meeting just meant Garry and I were at a bar talking about the future of our company.

But there were new faces at this meeting. Satish Dharmaraj from Redpoint Ventures, Gus Tai from Trinity Ventures, and our lawyer, John Bautista from Orrick. There was no beer. And I was presenting the state of Posterous through a Powerpoint presentation. I had barely touched Powerpoint before starting Posterous.

The guys around this table have a lot of power over our company. They are on the board. They have voting rights. They can fire me.

So how do we know we picked the right people for the job? Some of the VCs we were pitching to, we met only three or four times. Is that enough to really get to know someone, to give them power over your company and future?

Do they know me? Do they know what my goals are, what kind of company I’m trying to build, what gets me excited?

There are plenty of posts online about valuations, term sheets, and how to negotiate. I’m not going to get into that stuff here. This post is about the personal side of finding investors. These are tips to make sure the people you let invest in your company are a good fit.

You need to trust your investor, and you only have a short amount of time to find out if you do. Here are some things Posterous did to get to know our investors before letting them invest.

Get to know the VCs early. If you need money, you are too late.

If you aren’t raising money, you have the luxury of time. Use it to meet and get to know as many VCs as possible.

  1. Go to startup events and introduce yourself to every VC in the room. Don’t just do a five second hello. Tell them who you are and what you’re working on. Even if you aren’t looking for money, they will appreciate meeting you.
  2. Read VC blogs. What VCs do you look up to? Find out what every VC writes about, what his beliefs are, and what he’s invested in.
  3. Beware of associates. We had some bad experiences. If an associate sets up a meeting with you, make sure a partner will also be there.
  4. Get introductions to VCs from your angel investors and other startup friends. These go a long way. If you have multiple connections to a VC, have them all plug you. If a VC hears about your company from 5 of his friends, he will meet with you.
  5. Don’t be shy. Be proud of what you’re building. Your competition will be. Highlight your strengths, be confident.
  6. A couple months before you’re going to raise, schedule a coffee meeting with all the VCs. No pitching, no deck. We did this and it was a great way to meet VC partners in a more casual setting. If they like you, they will even help you with your pitch.
  7. Continue building a relationship with VCs you meet. Send them updates about your company, news in TechCrunch, and updated stats.
  8. Get them to use your product. If they haven’t used it by the time you’re pitching them, you’re wasting your time.

Let the pitching begin

You are not cattle. Make the VCs respect you and your time.

  1. Cram all your meetings in the shortest amount of time possible. You want to get this over with quickly. (You also want your term sheets to come at the same time).
  2. Refine your pitch everyday. Figure out what works and what doesn’t, then change it.
  3. Put your least desirable VCs up front. You will learn a lot as you go. You will figure out which questions are good, and which are signs of interest.
  4. Don’t read too many posts about what a VC pitch deck should look like. You know what it should contain? Whatever you want it to. Because it should be personal. It should convey what you think it important. Otherwise you might try to squeeze your pitch into a mold that isn’t right for you.
  5. Your pitch should be natural. By the middle of our pitching calendar, I could give our pitch by heart and it was 90% the same as the last time I gave it. That’s not because it was memorized. It’s because it was natural and automatic.
  6. Before starting your pitch, make everyone in the room introduce themselves. Sometimes they don’t and it’s very odd. They should be selling to you as well.
  7. Get through your pitch and divert as many questions as you can. You should run the show.
  8. Have one person speak, whoever is the most confident. It will flow better this way and you won’t be repeating yourself as much.
  9. When asked a question, have one person ready to answer it. Don’t look at each other, don’t hesitate.
  10. Ask the VCs questions. Have these ready beforehand. Ask them about the firm structure, their funds, and other investments.
  11. Evaluate the VC’s questions. Are they asking you smart things? You can pretty accurately figure out if the VC “gets” what you’re building and is excited about it based on their questions. If they don’t get it, don’t waste your time.
  12. If they don’t get it, walk out. Say, “no thanks.” I said “no” to a couple VCs when I thought there was no fit. I don’t want to waste their time, and they shouldn’t waste mine. If you ask me about barriers to entry, you don’t understand the internet.
  13. Follow up with a thank you email, and additional questions. This is your chance to ask anything.

So you got a term sheet. But do you want their money?

If you’re fortunate enough to get multiple term sheets, here’s when you decide which VC you want on your board. Terms are important, but your fit with the partner will mean much more at the end of the day than a higher valuation.

  1. Hang out with the partner over beer. The more beer you have, the better. If you are going to work with this person for years to come, you have to be comfortable around them.
  2. Check up on references. Talk to other companies they have invested in. Ask friends who might know people at those companies. Try to figure out which references are honest and which are just siding with the VC by default.
  3. Talk to CEOs that have been fired by this VC. You’ll get a good story at least.
  4. If the VCs are prepping their references for your call, be afraid. Our best offer to check references came from Gus when he said, “Feel free to contact any person I have ever worked with through my entire career.”

Raising series A financing is one of the most stressful, unique, and exciting things I’ve done at Posterous. I had the time of my life. It was a two month long roller coaster of meetings, negotiations, dinners, and eventually, money.

We couldn’t be happier with the ways things turned out. We love having Satish and Gus invest their money, time, and expertise into Posterous. In fact, the reason why we have two VCs is because we wanted them both!

We have a long relationship with Satish, and I trust him like he’s part of my family. We often call him Uncle Satish. The first time I met Gus, months before we were ready to raise a VC round, I was instantly impressed by him. Kate met Gus at a Christmas party, and after just a few minutes, commented about how great of a guy he is. These things matter.

So what are our board meetings like? We rush through the legal and finance business as quick as we can, and then we talk product. We all love talking about Posterous and what we should build next. I love it.

PhotoPhoto_2

You should follow me on Twitter here

Photos by Garry Tan.

Thanks to the YC community for giving me lots of these tips as we were raising our round.

Thanks to Jeff Vyduna for editing.

25 comments

  1. Hey Sachin! I saw this on Hacker News and yes, this is a cool article, but more importantly…if your tagline says Stanford and Phi Psi…were you a CA Beta? If so, I’m a RI Alpha! I just thought it was really cool to find another Phi Psi computer scientist who is doing something cool. I love Posterous and I think what you guys are doing is awesome. Cheers!

  2. Hey Adam. Yeah I am a Cal Betan. So is my cofounder, Garry. Let me know if you’re in the bay area anytime!

  3. "Talk to CEOs that have been fired by this VC. You’ll get a good story at least." How do you find that out? Do you just ask the VC for a CEO they’ve fired?

  4. Whoa smaller world! Garry and I both have worked at MSFT too. Ask him if he knows Eli Schleifer, I worked with him and he worked on ActiveSync in the mid 2000s as well.

  5. <html><head></head><body style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space; ">yes, ask the VC to tell you who they have fired/replaced in the past and then contact them directly.<br><div><div></div></div></body></html>

  6. Hey Sachin…first time on your blog…great stuffJust wanted u to elaborate on what you meant and what kind of conversations came up when you said "If you ask me about barriers to entry, you don’t understand the internet."thanks

  7. Sachin, pretty incredible, and thanks for the tips. I’m certain these are really going to come in handy. The impression I’m getting is that you ultimately want investors that you are comfortable with and enjoy being around, and they need to feel comfortable with you. It’s not just numbers, it’s a relationship, and it needs to feel right, others we’ll be in pain.Thanks again and I look forward to future posts.Kevin

  8. <html><head></head><body style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space; ">Hi Mahmoud: my point is that most things on the internet can be copied. There’s not much about <a href="http://Posterous.com">Posterous.com</a&gt; that prevents a team in India from making a clone. There aren’t many barriers to entry for companies, with exceptions like Google Search.<div><br></div><div>So I don’t believe a VC should focus on these issues. They should focus on the product being built and on the team. A VC who asks this probably couldn’t come up with a better question to ask.</div><div><br></div><div>My dad didn’t give up on starting his restaurant just because someone else could open an identical restaurant next door. He knew he could do it better.<br><div><br></div><div><br><div><div></div></div></div></div></body></html>

  9. <html><head></head><body style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space; ">Apoorva: we had some bad experiences with associates. They often just schedule as many meetings with companies as they can, to gain intel and then feed this back to the partners. I found it was better to cut out the middle man and talk to a VC partner right off the bat.<div><br></div><div>This might have been an isolated instance, but we had one associate reschedule on us many times, and lie about partners being at the meeting<br><div><div></div></div></div></body></html>

  10. Great post. I imagine a lot of the same rules apply to raising seed/angel financing. We’re currently in this process and this post is very helpful. As a short on-topic plug, we usually send the people we meet a beer through our product buddybeers.com. Kills two birds with one stone!

  11. Great quote by Sachin "If you ask me about barriers to entry, you don’t understand the internet" 🙂

  12. Sachin, you rock. I’ve read too much on this subject, but this stands out above the others. Tipping a virtual beer toward you

  13. Thank you for a very enjoyable business article. I really like the path Posterous is on. As a regular user I look forward to receiving the posts from other subscribers that I follow – like yours.

  14. Sachin, loved this quote "If you need money, you are too late" ~ keep up the great work and thanks for this valuable VC funding insight.

  15. <html><head></head><body style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space; ">Harold: i’m not going to argue that alcohol must be a part of the investment process<div><br></div><div>But sometimes coffee is just too formal. It’s too business like. The idea here to find investors that you are comfortable with and you know well. And I think being able to go a bar with someone is a good sign of that.<br><div><br><div><div></div></div></div></div></body></html>

  16. OK, this was the message I needed to hear this morning. You made some great points. I am not interested in raising money right now but I should start that process of connecting with VCs to find the right ones so that when I do want to raise money I have a full deck of VC contacts that are qualified and quality.And I LOVE the part about – "if they don’t get it then walk out". Come from a position of strength. I think that shows how much you believe in what you are doing. That also goes with "don’t take advice from a VC or anyone who has no experience in your industry". Anyone can give advice but only take qualified advice. Thanks!

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