How to Get Multiple Term Sheets for Your Next Funding Round in Three Weeks
I remember the exact day. It was March 1, 2018. I was about to board my plane back to Toronto after spending three weeks in the Valley area when my phone rang. It was the call every CEO wants to hear: “We want to present you a term sheet to lead your A round.”
I’m not going to lie. While I tried to remain calm, I was ecstatic. I did it! I had promised myself that I wasn’t going home without a term sheet for BenchSci’s series A. In fact, we were fortunate to get five term sheets in three weeks, from investors including Gradient Ventures, Google’s AI fund.
When people hear this story, they typically have one question: How? There are many details. But, in a nutshell: We did the exact opposite of what we did for our seed round fundraising.
Nothing was harder in my professional life than raising our seed round. That was my first time raising money, and I had no professional network as I had just moved to Canada from Israel. I read blogs and spoke to VCs and other founders to understand how to raise money. I followed their advice and, in retrospect, did everything wrong. I met every VC that agreed to take a meeting, I didn’t have our story nailed down, I did not run a process, and I had no real fundraising strategy. The result: Nine months of fundraising and one term sheet.
When the time came to raise our A round, I promised myself that it would be different. We are lucky to have great seed-stage investors, so I asked for their advice. I had two questions: How long did it take your best portfolio companies to raise their A round, and how did they do it? The answer was simple: They ran a fundraising process, and if done well, it shouldn’t take more than a few weeks to secure a term sheet.
In this post, I want to share with you that process in the hopes that instead of wasting months raising money, you’ll spend that time building your company.
Step 1: Don’t meet anyone before you have your act together
The number one misconception about fundraising is that you have to build relationships with VCs months in advance to raise money. That’s what I thought when we raised our seed and the reason it took nine months. What I learned from experience and asking all our investors is that up to a C stage funding round VCs don’t need more than three weeks to decide whether to invest in your company. I know this is the opposite of most advice that you get, but it’s true. If you don’t believe me, ask your investors.
VCs will tell you they want to get to know you more before investing. Why? Because (1) it’s their job to meet companies and (2) it allows them to collect more information about your company and de-risk their decision.
The reason you shouldn’t meet VCs before fundraising is that, in my opinion, it’s terrible for two main reasons:
- It’s a massive time suck. Not only meeting the VCs but answering the many questions they will have and attending follow-up meetings.
- If you aren’t fundraising right now, then your story isn’t ready to be told. It takes months of work to create the right story and the right pitch deck to complete a funding round. Talking to investors before you polish your deck does three things, all of them bad:
- It creates the wrong first impression. VCs will find the holes in your story. When you’re ready to raise, they’ll probably use those gaps to either not take a meeting or, worse, drag you into a long maybe.
- At an early stage, things change very fast as you learn at light speed. Things will change. When you’re not fundraising, speaking to VCs might make you look unfocused, as the story you tell when you do fundraise might be completely different.
- VCs talk to each other Making the wrong impression with one of them might impact your ability to meet other VCs.
Step 2: Get your act together
No venture capitalist wants to spend an hour with you and hear a bad story. They don’t want you to fail. They want you to be the one to three ventures they’re going to invest in each year. For this to happen, they need to be very excited by your story. How do you get them excited? You put in the work.
In my experience, to create a solid fundable deck takes around two months (200 to 300 hours) of heads-down work. This is what getting your act together looks like:
1. A solid deck that you have tested with other founders and friendly VCs before going out to fundraise. A solid story at the pre-seed, seed, and A stage will have the following components:
- Why now
- Technology and product
- Go-to-market strategy
- Total addressable market (TAM)
2. A business data room. Most founders stop with their deck, but this is only one part of your story. The truth is that VCs will be skeptical of everything you told them (as they should) and will have to conduct due diligence and research to validate your story. That requires much work. The other thing to remember is that you’re not the only venture they’re meeting and if they have to do much work to validate your story, will they do it or just pass? The easier you make it for them to believe your story, the more likely you are to get an investment. I found that the best way to do this is to create a business data room (in Google Drive, Dropbox, etc.), which you share with each VC after pitching to them. What does the business data room include?
- Your full deck with an appendix
- Every report, blog post, and data source that you used to create your deck
- Team profiles
- Cap table
- Financial projections
- 18–24 month budget
- Reviews and feedback from users or industry leaders
- LOIs and contracts with customers (if you have)
- User growth projections
3. References. The last part of getting your act together before fundraising is getting your references ready to go before you start the process. Every VC will want to talk to your customers and users before investing. Get your users’ and customers’ approval and prep them before meeting VCs. Make sure they know their feedback will make or break your company. You should get 3–5 customers and users ready to go. I can’t emphasize enough how valuable their feedback is. (One critical comment here. VCs will want to talk to your customers and users at the beginning of the process. Since you’re going to meet around 30 VCs, you can’t send them all to your references, which might damage your startup. What you say to VCs is that you’re happy to make intros to three customers, but you will do it once you enter the due diligence stage (see below). I never got any pushback on this.)
The reason steps 1 and 2 encourage you to “get your act together” is the best compliment I got during our fundraising process. One of the VCs we pitched to said, “you guys really have your shit together.”
Step 3: VCs run a process and so should you
Once you have your act together, it’s time to run your process. The main reason you should run a process is to create a market for your fundraising. Creating a market will lead to an urgency to present your company a term sheet, better terms, and an increased valuation. In simple words: all the benefits of competition.
The first step for this is to identify your targets. I learned that the ratio of meetings to term sheets is 10:1, according to companies in our investors’ portfolios who raised their A round by following this process. This means that you need to meet ten VCs to get one term sheet. Since you want to get a few term sheets to get the best terms, the first step is to create a list of 30–40 VCs you would like to meet (not all of them will take a meeting).
Before I outline the process you should follow, it’s essential to understand a VC’s decision process. From my experience engaging with hundreds of VCs over the years, all North American VCs follow this process:
- Meet with a partner for the first pitch. Make sure you meet with a partner-level person at the VC. The partner is the one that can push the deal forward. If you are meeting someone at a lower level, you are adding a few more meetings to the process.
- If the partner liked your pitch, you would hear back within 48 hours. The partner will invite you for another meeting with a second partner. If you haven’t heard back within 48 hours move on as they are not interested
- Meet with the entire partnership. This meeting is called a “partnership meeting” and always happens on Mondays. Like before, you should hear back within 48 hours after your second meeting. If not, move on. The partner meeting is the final stage before you become a “priority deal” and the VC starts its due diligence. This is the most significant meeting you will have with the VC. You will be presenting to all of the partners, and the meeting will be longer than before. You should hear the same day if the VC wants to move forward or not.
- Undergo due diligence. If the partner meeting went well, the VC would enter the final stage before presenting you with a term sheet. You will hear back from the partner on the same day. Due diligence should then take at most ten days. The VC will talk to your customers, meet your founders and leadership team, deep dive into your model, and more.
- Get a term sheet. If the due diligence went well, and there are no surprises, you will receive a term sheet from the VC within 10 days from the partner meeting.
This is the process that 99% of North American VCs follow. This process should take no longer than three weeks. To ensure you create urgency, you need to run your own process. You need to create a target list of 30–40 VCs and meet them all in the same time frame. It’s crucial you meet them during the same short period as you want to get the term sheets at the same time to create competition. Here’s what I did:
- Reached out via my existing investors to set up meetings with partners at target VCs. I reached out four to five weeks before I wanted to meet them.
- Set up all the meetings over 14 days. I met around five VCs a day. I met the ones I didn’t want to raise from at the beginning as my pitch was not as good then and got better with time.
- Set up all the follow-up meetings within the three-week period.
- Had two Mondays with five partner meetings each day.
Following this process, we created urgency and competition, which resulted in five term sheets and great terms.
Step 4: It can only go wrong, so close it fast
I have a personal bias toward urgency. From my perspective, once you sign a term sheet, the situation cannot improve, things can only go wrong. Therefore, you should push to close as soon as possible.
Once you sign a term sheet, you agree on pricing and terms, and you also agree not to “shop around.” That means that you can’t talk to any more VCs. If for some reason the deal falls through, you might be screwed. You would have wasted much runway, and other VCs might not want to invest if they think that the VC that gave the term sheet found out something bad about your company.
I had two very close calls with closing rounds. If we hadn’t acted with urgency and pushed our lawyers to close the deal ASAP, the entire round would have fallen through. One close call was when the partner that was leading our deal decided to leave the fund and start his own venture only a few weeks after we closed the round. The second close call was COVID-19; we closed our B round just before the pandemic started. Since then, we have heard about VCs pulling their term sheets because of the pandemic. Those are situations you can’t predict or control.
So how can you get the round closed faster?
- Set a closing date with your lawyers and the VC. And hold everyone accountable.
- Touch base with your lawyer daily. You would be amazed at how many days to weeks can be wasted with the back-and-forth between lawyers on issues that don’t truly matter.
- Prepare your legal due diligence package before receiving a term sheet. The main reason the closing process takes 6–8 weeks is due diligence. This due diligence is different from the one the VC previously conducted. Lawyers do this one, and they will review all of your contracts, IP, etc. It can take three weeks to get all the materials ready, and it isn’t optional. Most founders wait to do this until they get a term sheet, which adds three weeks to the process. Do it before the term sheet, and you can shave three weeks from your close.
We are lucky to have great investors that shared these insights with us. I wrote this post to pay it forward. Running a proper fundraising process has made a massive impact on our company and increased our chances of success. It gave us the resources we need to succeed on the best terms possible — and saved months of valuable time. I hope you find this framework helpful for your next billion-dollar idea.