Its always great to sign a term sheet as a mark of a new beginning. Typically we entrepreneurs have nurtured a set of ideas that we are very protective of. A strong term sheet begins the market validation process. I say “begins” because we all know what the failure rate of startups, even venture-backed startups, looks like.
That said, its also fun to look back to see if the criteria you set out forth in the beginning to establish a new gig, still holds true. Let’s see:
- Domain Expertise
There is no question that pre-existing domain expertise helps the entrepreneur tremendously. You are jumpstarting a set of processes in company and product development and hopefully thereby being much more capital efficient.But, at the same time, you can be too confident and cocky and miss the market entirely. The world is littered with one-note successes. I am particularly pleased that while I have some domain knowledge, I realize how much I don’t know and I live in that healthy paranoid state that should keep me close to the customer and listening intently. - Business model — Look for where the money is really being spent
For all of its difficulties, consumer plays can leverage subscriptions and ad supported, which is really where the money is. If you can create a play that interests advertisers, then there is no question that they will spend the money.That’s different than trying to extract money from customers who don’t spend it as a normal course of business. The challenge is not trying to charge customers who are not used to paying for your service. - Market opportunity
I’m in a big space. Let’s leave it at that. No VC I have met doubted that. - Enterprise vs SMB vs Consumer
I’ve done the enterprise play for years in two different startups. Its a tough space, not just because IT and business spending is so tied up in knots, but also because its really hard to know what the enterprise wants. They differ by vertical, by business model, by geography, pre-existing IT architecture, etc… Getting enterprise needs right, in the right IT architecture, with the right globalization, with the right pricing model is threading a needle.I like where I am a lot. I get lots of feedback and great ideas and energy from my potential customers - Existing or new company?
This one was a little tougher, but I did not see anything out there that really excited me at the right stock play. If I have one bullet, I want to make sure there is enough powder to fire it. - Work with really good VC’s
I can’t say enough about the importance of the right partner early on. Pick who you approach carefully. Bad VC stories rarely come to light. I am aware of one large firm that has personally buried three quality startups because of bad VC involvement. You can be sure I avoided that firm.Instead, I have had the luxury of working through term sheets with a couple of fabulous firms. I did not shop this deal and was quite selective up front. It was challenging to choose one. - Founder relationship
This one has to be managed right or a good idea and great customers can go sideways unless the founder dynamics are well understood and managed carefully.I have had the opportunity to work with a brilliant technical founder. However, I had to be very firm about my rights, contribution and role in the company. If I didn’t sort that out up front, in the very beginning of my discussions/relationship, I don’t think I would be able to “correct” things downstream without pain. That is not to say that the founder dilemma won’t strike me, but I can mitigate a lot of issues up front. Technical founders do not like or understand change very well. Introduce change up front and turn the change into a consistent pattern that the technical founder can understand. - Existing cap structure — clean up the mess upfront.
Which investors are already in the deal is very important. It helps me understand what if any challenges I am likely to face going forward.Like the technical founder relationship, it is essential to clean up everything before you even entertain an offer. In my new gig, I was looking at a pre-existing corporate structure that gave complete blocking rights (I mean complete) to the VC, who had put 50K of debt into the company. The existing VC wanted me to bring term sheets in and then negotiate away the block rights. I insisted on removing these rights before I sought outside capital as a condition for accepting the job as CEO. You can see who would have had the leverage had I listened to them.