In a previous post, I talked about how money is just never in a hurry and how you really need to plan for a looong process when fundraising, especially if you are in a nontraditional business or geography (in Mexico, I have seen good companies with solid investors take 9 months for fundraising from start to finish). In this post, I will focus on managing the final stretch once you have some clear indication of interest.
A term sheet is the first step to your nirvana of money in the bank. There are important differences between what this means from country to country. In the US, the Term Sheet (yes, in caps), in general means the venture firm’s investment committee has approved the investment and that all that is pending is the legal and accounting review to make sure everything you said is there and in order. Although in general few of these Term Sheets get pulled, you need to be very cautious about what is needed to turn the Term Sheet into money and which of those things you control and which you do not.
In a recent case I know of, the VC was very close to pulling their TS because the IT consultant they hired for a fairly routine due diligence did not like some of the development processes in place at the startup. It may very well be that the consultant was right, but it also almost cost the company its funding, even though they thought it was in the bag. Term Sheets can also get pulled for macro events totally unrelated to your business. A disputed election result in your country could make the investors weary of the increased risk and push the decision over the edge, but the wrong way (for you), after they gave you a Term Sheet.
The key to converting a Term Sheet into money in the bank is to, as Ammar Hanafi, a friend and seasoned VC tells me, “Babysit it until the end.” As a CEO, this now becomes your number one priority. You cannot leave it to the lawyers, accountants or your trusted business development folks.
YOU must be fully engaged and completely involved at every step of the process if you are to safely land the plane (as another one of my metaphor-loving friends says). Though it might sound obvious, it is not for many a busy CEOs. Since getting to the Term Sheet is seen as a culmination of a long and painful pitch and business diligence process, you could reasonably assume that the final steps are mostly just rubber stamping from lawyers and accountants. Not so. It is a long and tedious process, which might take several weeks or a few months and will involve mind-numbing legal, financial and tax conversations. You will be tempted to let your attorneys or your finance folks take point for you (or, as in the example above, your IT team host the consultant). Resist that temptation. As Fabrice Serfati, another respected investor, tells me, “deals come close to failing 100 times before they are done.” You definitely want to be there those 100 times and make sure to keep it moving until the money is actually in the bank.
I recently heard of a painful example of the kinds of things that might get past you if you are not in every conversation and read every document. A company in Mexico closed a round some months back. The investment was confirmed and approved by the small syndicate of VCs that were in the deal. The last little detail, however, was the funds’ argument that since the company would not spend all the money on day 1 and the banks gave zero interest on deposits it really was in nobody’s benefit to wire the full investment immediately. They could give out a part today and the rest in a few months when needed. Note that this was not supposed to be a tranched investment, subject to any metrics or conditions, it was just a “reasonable financial move” on the part of the investors, though of course the full investment was confirmed. You can guess where this is going. Some things went different than plan in the startup and the investors simply did not deposit the rest. This happened outside the US and it would be unlikely to happen in the country since you could sue and there is a lot of reputational value for VCs stateside. Though this definitely was a worst-case scenario, the lesson applies everywhere: only the money in the bank is the money in the bank and to ensure it gets there, you, the founding CEO, have to be micromanaging it every step of the way.