Okay, so, welcome to First Checks 101 episodes. This episode is 101 with a bit of a twist, we're going to teach you something, I promise, but it's also going to be quite funny. Mostly for us, because we'll be making fun of ourselves and pretty much all investors, but also for the founders out there who happen to listen to this episode. We do appreciate you, and this one is for you. We hope you enjoy it.
Maxine:I love, in the prep for this, you were like, "So we have to be funny." And I was like, I don't think it's like peeing; you just can't pee on demand. It just doesn't work, like, I can't be funny on demand. It felt like intense pressure to be funny, so prepare for terrible jokes and a lot of cringe, folks.
Okay, we're going to do this in three parts. We're going to focus on translating VC-speak for founders, and probably some angels out there as well. We'll do it in three parts: we'll start with the fundraising dynamic, because obviously that's where a lot of this pops up, then we'll think about the actual negotiation dynamics, and lastly, we'll talk a bit about once we're working alongside them and they're "in the tent," so to speak.
Cheryl, you wanna kick us off?
Cheryl:Let's get interpreting.
Adam Spencer:You're listening to a Day One FM show.
Cheryl:Here's my favourite one, and look, I'll be honest, I'm guilty of this too, which is the, "It's not a good fit for us." And you, I've said it. Tell me you, you can't lie.
Maxine:Yes, yes, like hundreds of times. It happens all the time. "It's not a good fit for us. You are not a good fit for us. The company's not a good fit for us. Fit, fit, fit." But how useless is that statement for a founder? Totally. Actually, well, this is a bad one to start on, because I don't know that it's that useless, because fund theses are important, right? They are an important part of the filter.
So what that actually means, let me translate, what it actually means is one of a range of things. Most likely, it means that the company you're building isn't a thesis fit for the fund you're talking to. That might mean you're building a software business, when they're a deep tech fund. That might mean you're building hardware, when they're a software fund. So, most VCs can't invest in hardware; they don't invest in deep tech or scientific things. So lots of companies just aren't a fit for those funds.
Then there's the version that is, "The company's not a fit for us on stage." You might be at the idea stage, for example, and they're talking to me or to another investor, but you're talking to someone who is way later down the track. So you spoke at idea stage, very, very early, but they want to see revenue and customers and all of that. So it's just not a fit for you on stage. The old adage, "You're too early," is what you'll hear in that circumstance.
Then there is also, "You're not a fit for us",
Cheryl:Which is really like, we don't like you.
Maxine:I mean, in some circumstances, yes. It's also, "We don't think you're a fit for the company. We don't think you're compelling in that category," and that's tough feedback to deliver. So what I've noticed is, VCs just bucket it all together, "Sorry, it's not a fit," and they don't distinguish between the human and the company. So it can mean anything in that.
If you're feeling brave, if your confidence is feeling particularly robust, I recommend you ask them: "Oh, great, what isn't a fit? Is it the stage of our company, the industry we're in, or me personally? And if it's me personally, can you please explain that?" That can be really helpful feedback.
Cheryl:In what world would you answer that honestly, though? Like if a founder asked me, "If it's me personally, please explain why you don't like me personally." In no world am I replying to that, you know.
Maxine:It's not necessarily personal, right? Like it doesn't have to be, "I don't like you as a human and refuse to invest in your company."
Cheryl:No, but you're basically saying, even on your other examples, "I personally don't think you're the right person to solve this problem," which is, "I don't like you for this company." Your other example was, "I don't think you're compelling enough," which is still a version of "I don't really like you." So all of those are still, "You're not good."
Maxine:I would answer that question if you asked me that question, would you? I would. And the reason is because one of the first VCs I ever pitched for Fair Shake said this. He was like, "It's not a fit," and I had the courage to be like, "Why not? What does that mean?" And he was brave enough, and kind enough, or cruel enough, to explain it to me. He was like, "Look, I just don't think you're the kind of operator that's going to build an interesting company."
Wow. Hard. And I was like, "Oof, okay, let's have a conversation. Why?" And he said, "Well, lawyers don't generally build great companies," and explained it all to me, which was really helpful to understand his biases, and to help me understand where I needed to be different in the way I told my story, or highlight different things I'd done. I didn't have my best evening ever after that.
Cheryl:You went on and cried yourself to sleep.
Maxine:Yeah, it was really helpful information. So yes, I try as much as I can to be brave when someone asks me a question like that. I would encourage you to ask the question, not in an abrasive, rude way, but in a genuinely curious way.
Cheryl:On the flip side, I think as investors, we can be better at explaining, even if it’s just one or two extra words in that sentence. "It's not a fit for us" is actually a very confusing statement for founders, right? They're like, "It being what? Fit meaning what? Us being who?"
Maxine:Literally the whole sentence, every single word you've just said is ambiguous.
Cheryl:Exactly. So adding a few words to that sentence, I actually think, would be really helpful. You could say, "We don't invest in FinTech," or, "We don't invest in consumer, so it's not a fit for us." Even if you didn't want to deliver that hard feedback of "I don't think you're the right founder," you can still add something, "You're at the wrong stage for our fund" is still a version that's way more helpful.
Maxine:What about the, "You're too early for us"? Oh, this one. I'm at risk of ranting, what do you think they mean? I'm going to hold my tongue for a moment and let you go.
Cheryl:Look, I used to be super sceptical on this one and always used to tell founders it's just another way of saying no. They say they'll look at it later, but really they won't. You kind of do have one chance to make an impression, and if it's, "You're too early," that's really just another way of saying no, or, "We just don't have conviction in you."
However, in recent years, I have seen a couple come back and end up getting investment in their next round, when they were told, "You're too early for us," and then it became not too early. So I still want to say that 90% of the time, it's just another way of saying no, but there's that five to ten percent chance they actually mean you're too early.
Maxine:Yeah, and I think in that circumstance, it's probably a fit question as well. For a lot of founders, it means we haven't done a good enough job qualifying which investors to talk to. If you look at their portfolio and the companies they're investing in, and they're investing in Series A and you're at pre-idea or a few dollars of revenue, they're just not going to make that investment. But I think it really muddies the water.
Cheryl:Well, what about all those VCs that go, "It's never too early to come talk to us," and then they're,
Maxine:Right. Except for right now, when you're too early.
Cheryl:Yeah, we told you this would be a lot of bagging on VCs in this episode.
Maxine:Right. Also, increasingly for folks like us, "You're too late for us." True, so both directions, right? I say that: "Sorry, it's too far along," and I think that's even more confusing. It's fairly obvious for folks to be told, "You're too early," i.e., there's too much to prove, still too much risk. But when you're told, "You're too far along," what does that mean?
Cheryl:I think that one's obvious, no, I invest early stage. If you've got $2 million in ARR already, I'm here for the huge risk, and you've de-risked it too much for me to get a good return, so, no.
Maxine:Right, but that's the not obvious point. Especially in the Australian ecosystem, if you're operating early stage, everything prior to product-market fit, prior to your Series A, so many people will tell you that's early, that's scary, that's early stage. But if you're talking to me, or maybe me, you'll do Seed and Series A, but I won't. There are a lot of angels that won't do that. They'll say, "Sorry, too far along," or "Not a good fit." It essentially means they're assuming your valuation is too high, or they have a thesis about stage of risk.
For us, we're not valuation sensitive, but we're most useful at that very early stage, early product decisions, early customer decisions, etc. By the time you have a great customer, go-to-market and are ready to scale, I'm dumb money on your cap table, just hanging onto your coattails while you make billions. I'm not going to do that to you. So for a lot of angels, if they're saying, "Sorry, too far along," it's a product question, they're selling or wanting to buy a different product than what you're selling.
Cheryl:Yeah, 100%. I think that one's obvious, but it helps when you explain it like that.
Maxine:Okay, so when you're in those fundraising conversations, what does it mean: "Let's have one more meeting"?
Cheryl:Ooh. I don't know that one.
Maxine:If you've already had one or two meetings and they ask for another, and then another after that,
Cheryl:I think that could go either way.
Maxine:Okay.
Cheryl:How would you interpret it? The optimist in me would say, "They want to spend more time, this is the last meeting to tick some boxes." But if I heard it twice, if you’re getting that, then they’re just wasting your time. Unclear why. This always baffled me. The ghosting, VCs ghost all the time. That one kind of makes sense, it’s like you deprioritised that, and I’m not here for,
Maxine:Normalising that, don't ghost people, in any forum, but especially ours. Just don't do it. I know it's scary to say, "I'm passing, here’s why, I’m probably wrong," but just don't ghost.
Cheryl:I think a lot of ghosting at the earlier, especially angel, stage is not a fear of passing, it's more indecision. "I just didn't get to a yes or no, and because I can't get to a yes…"
Maxine:Which is effectively a no. Sure, but in my mind, just send the, "I don't have time, I'm sorry," or a constructive no, even if you don't want to say the word.
Cheryl:Yeah, I've started saying that to a few founders. But there've been moments where I'm like, "Shit, it's been four weeks and I still haven't got to a yes or no," which they've hopefully just assumed is a no, but it's, I mean,
Maxine:I just think it’s so valuable to close the loop, even if you’re like, "By the way, I'm passing," and they’re like, "Yeah, I didn't want you on my cap table anyway." But it is a helpful thing to close that. But when I hear that continual, "Next meeting, one more meeting, next meeting," what does it mean? Probably after two or three, unless you’re in deep diligence with a big fund, it means, "I'm on the fence." I want the optionality to invest if I can get to a yes.
Cheryl:Or I'm waiting for someone else in your round to pop up and be impressed by them. So, "Let's have one more meeting, who else do you have in the round?" That might be the first question: "Who else do you have in the round?" "Oh, no one good yet? Okay, let me ask you a few questions, we'll take this down the road. Let's, oh, you're coming back to, okay."
Maxine:"Let's have one more meeting. Who have you got?" Exactly. They’re keeping you close, keeping touchpoints on what you’re doing, but they’re not yet at conviction. If you’re in that situation, and you're trying to catalyse them into conviction or there’s genuine time pressure, make sure you tell them: "We are closing the round on X date," or construct that momentum for them. Let them know as people are committing to the round, help build them onto the other side. Or ask them directly: "What would be required for you to get to a yes here? What do you need to know for a yes or a no?" Because I find those, "Let's have one more meeting," is yes by a thousand cuts.
If you’re maintaining 15 angels or funds in your funnel and they’re all, "Next meeting, next meeting," that gets a lot, it’s just a waste of your time.
Cheryl:Yeah, 100%. What about all the ones that say, "We're discussing it internally," or, "We'll circle back after we do more diligence," or, "We're having more discussions," or, "We'll do this at the next IC meeting"? There's a tonne of that out there.
Maxine:Yeah, I’d put that in the same category, "We’re not at a heck yes yet." If you’ve got a single decision maker, like a small fund or angel, that’s internal coordination. Investing out of a small fund or single decision-maker dynamic is like an SMB sales motion, convince one person and they’ll sign and start using your product. Bigger VCs are like an enterprise sales motion, you have to convince the associate or principal, then the partner, then that partner convinces other partners to get to yes.
Cheryl:Multiple stakeholders.
Maxine:Exactly. So if the person says, "I need to speak to my people," and they're the only decision maker, not a good sign. But if they're in a seven-partner fund, and say, "I need to talk to my people," that's probably legit, they're literally talking to their people.
Cheryl:At the same time though, we've all seen deals that the VC turns around in three days. So if they’re delaying things, it probably just means you’re not a priority. At that stage, discount that and say, "Okay, cool, we’re not a priority for this fund," or figure out how to make yourself a priority, which is often harder to do.
Maxine:100%. I’ll also say, in the ZIRP era, there was this whole momentum-raise, make it feel scarce, etc. People were stepping into market, "We’re in market for seven days, you have to sign and wire immediately." That’s no longer the case. If you saw that dynamic in 2020, 2021, 2022, it's just a sign of being out of touch if you try to do that today.
On the investor side: investors have contractual commitments with each other if they’re a multi-partner fund, and with their LPs, about what they will do to diligence a company. If you say, "I’ll give you seven days to diligence this company," and they can’t get through the process, they’ll just pass.
Try to make yourself more relevant, but also, even if it takes two, three weeks for proper diligence, that doesn’t mean they’re any less excited about you, just that there’s a lot going on. This is especially the case if you raise around peak moments.
Cheryl:Yeah, like June 30th.
Maxine:In the ramp-up to end of financial year. Savage time.
Cheryl:Can we just bag on founders for a minute on this one? You’re all setting this artificial deadline of June 30th. There are very few scenarios where it actually makes a difference whether the money is in your bank on June 30th or July 1st, you’re just making your lives difficult for all of June.
Maxine:Also, in a lot of circumstances, investors will pass because they just don’t have the capacity or diligence. You’re unnecessarily creating a competitive dynamic that doesn’t need to exist. If you go into market in July or August in Australia, not in the US, that is when people will take the time to really understand your business and get excited, rather than, "Sorry, I can’t look at it, I’m already trying to diligence six other companies." It’s not pretty inside VCs between June 1 and June 30.
Cheryl:It really is not,
Maxine:or in the US between kind of November one and Thanksgiving, whenever that falls, or the end of year, like just don't try and close your transactions in those periods of time. It just is unnecessary compression on everyone.
Cheryl:Yeah.
Maxine:Anyway, that's for us. That wasn't for you.
So what about this whole idea of conviction, right? This is actually a jargon word that,
Cheryl:, we use a lot. They say, yeah, we've just invented this word. And it, like, I don't think it means what we have used it for. We just pulled the word from somewhere, decided it meant something else, started using it with founders and didn't ever explain it to them. Right? In any other scenario, we would be the assholes.
Maxine:I think mostly investors are the assholes in most of these situations. Am I the asshole? The answer is yes. So, what does it mean if someone says, "I'm still trying to get to conviction," "I'm trying to build conviction," "We are trying to get to conviction," "We're not yet convicted," or "We are convicted that..."
Cheryl:What does that even mean? That we like to use jargon and confuse you, just kidding. No, I think we like this gibberish word because it's more abstract and it allows us to assign its own meaning. But generally, we mean that we're not there yet. We're not convinced that you are the thing we want to invest in yet. We're not convinced that your market size is big enough or that you're the right founder for this.
Generally though, when we talk about conviction, it's usually in sentences where we're working, we're actually trying to get there. So I often will say, "Here's the next step that I need to get to conviction, it's these three things. I need to go deep on these three things." So if they're using the word conviction with you, I'd say that's generally kind of a good sign. Would you agree?
Maxine:Well, mostly, I wouldn't say categorically, right? Because sometimes I think, I think it is a piece of it, it is a jargon word that VCs use to abstract the experience of being irrationally in love with a business, a founder, the combination of those things, or a market moment, right? It is this kind of hypothetical and very rarely real moment that you go from a no to a yes, like it assumes this switch.
That's like all of these reasons why I wouldn't, to, "I'm going to." But actually in reality, it's a continuum, right? There's no hard switchover. So what it means is I'm still in my process of getting to that critical mass where I can do the deal. But I sometimes will say, you know, "I'm just not convicted that ABC..." But what it actually means is that I don't agree with any of those, like, and maybe core assumptions that sit behind your business. Very often, you know, "I just don't have conviction that this customer will buy in this way," all those kinds of things. And so, it sometimes can mean I'm not investing because I'm essentially telling you I don't believe.
Cheryl:When you're using it in that sentence, you're like, "No, I didn't get to conviction."
But if you're still, if you're before the no and using it and nearing it, then it could be a good sign.
Maxine:If there's no negative term in the sentence, yeah, it's good. You're working towards conviction.
Cheryl:Exactly. Oh man. What about all the things that VCs say that are like, "We want to keep optionality here"? It's like, you know, "Keep us in the loop," or "We love what you're doing."
Maxine:I mean, as we are running through these, my overall takeaway is investors are just trying to wait, you're just maximizing for the money value of time, right? They're waiting and waiting until they absolutely have to make a decision.
Or, "Let us know when you have a lead." That one's slightly different. So I think the ones that are like, "Keep us in the loop with what you're building," "We love what you're doing," etc.,
Cheryl:"We'd love to support in non-capital ways."
Maxine:Yeah. That's just a no. That's a, "We wish we could invest in everything because we would love to be involved, but we can't, so we're going to sit on the sidelines and cheer for you." But I think, "We want to stay in touch,", sometimes genuinely, that's what it means. It's a reference to the top, like, "It's not the right fit for us yet, you're too early." They want to stay in touch because there are some investments that aren't obvious or can't be done too early, but once you get some traction points, it becomes more obvious. You de-risk it enough that some of these investors will then come in and invest.
If an investor is saying to you... So I think there is a world where you can hear any of those things, it means, "I want to stay close, I want to build more information to get me to a yes, build me to conviction, but probably not this round."
Or it means, as you said, "I'm not in a position to lead. Either I'm not convicted, crazy in love with this business and therefore going to lead this round, but I'm willing to come in if someone else I trust comes in, and I trust their taste (though I have some opinions about that)."
I might, if someone else we trust is in, then we might FOMO in at the last minute,
Cheryl:, is really what that means.
Maxine:Yeah, that's essentially like, "Please go and create FOMO for me and then I may invest."
Cheryl:And possibly be mad that there's not enough allocation for me when I decide at the very last minute, three minutes before your deadline and your round is 95% full.
Maxine:Right? That's the moment that I really want to invest, when it is least convenient for you, and I want you to make more room in the round so I can fit my full check size in. It's a low ego for me. Sometimes that is what it means.
If they're saying, "We'd love to support in non-capital ways," it either means they have no capital to invest...
Cheryl:Yeah, it could mean, "We don't have any dry powder right now."
Maxine:Yeah.
Cheryl:But they're not going to say that. No VC fund is going to say that.
Maxine:But they might not invest, not because they don't want to, but because they can't, they've got no capital to invest at the moment.
I had a horrifying realisation. I was on a webinar recently with the PitchBook team, and according to their data, only one fund was closed in 2024, no, 2025 so far in Australia. One.
Cheryl:Not good.
Maxine:Damn. As in, one new fund. Or new fund, but not new brand, right? I suspect that's maybe AirTree, or actually, maybe AirTree's not closed yet. But anyway, I think it's very possible that what they're saying is, "We don't have any dry powder, we've got nothing to invest." Or they're saying that they're not going to invest because you're not a fit, they're not convicted, and then just pull in all the jargon.
Whereas, Maxine, we're trying to...
Cheryl:...Oh, the jargon!
Maxine:Yeah, we're trying to use less jargon.
Cheryl:List of jargon!
Maxine:Okay, so that's the fundraising process. Negotiating, you have a term sheet, you're in negotiations, what are some things you're going to hear from investors that make absolutely no sense?
Cheryl:Oh man, just, I think, all the terms, right? The terms we come up with, you're like, "I basically need a dictionary for this."
Maxine:Totally. I think we've actually done quite a few episodes on round construction, deal docs, those kinds of things, so I recommend listening to those. If any of these terms sound like jargon to you, valuation, dilution, ownership targets, pre-money cap and post-money cap (I'm going for it), SAFE, convertible notes, cap tables, liquidation preferences, anti-dilution, pro-rata, ratchets, most favoured nations, option pools...
Cheryl:I think that's it, board seats and observer rights. If any of those sound like jargon to you, I recommend you scroll down our list of podcasts. There's a bunch of 101s on the basics of deal construction, which hopefully will answer some of those questions.
Maxine:And then to make things more complicated, we then go and create silly versions of those words, where we shorten or completely make up a new word to represent that. So valuation, we go "val," and you're like, "Who the fuck is val?" Due diligence, we shorten that to "due dilly." And you're like, "Dill pickles?" No, no one calls it due dilly.
Cheryl:I have, yes. Seen people call it due dilly.
Maxine:What? Australia, you've gone too far. It's too far. No, no, I'm pretty sure that's in the US, I've heard, I have never...
Can you just, for a moment, picture a sweater vest saying "due dilly"? Like a very serious, earnest person wearing a plaid shirt, puffer vest with Patagonia, saying the words "due dilly", not ironically. I can't.
Cheryl:Yes, those two things are not connected in my mind.
There's even a podcast called The Due Dilly Podcast that helps financial advisors do due diligence on things.
Maxine:Oh god, give me strength.
Cheryl:And then there's another one for dilution that I can't remember at the moment.
Maxine:I'm trying to think, maybe I'm just too prim and proper to be using any of these jargons, but I've never come across anyone abbreviating in this way. Good to know: if it's "val," valuation; if it's "due dilly," small vomit in my mouth, what they mean is due diligence. Also, consider not working with that person. I mean, we use "val," true, we do use "val." "Due dilly," due dilly is the only thing I'm taking issue with.
One thing we forgot to talk about, though: information rights. This can be a little confusing, especially for angel investors. I think this is one worth calling out. When we talk about information rights, actually, it is a defined term in these contracts, and it usually only means information like financial reports, sometimes only yearly, and usually means kind of major changes in the business. Usually, it's only major investors who get it.
So most people, if you're investing in a company (and we talk about this a lot on this podcast and in Investing to Learn), just because a company is giving information rights, it doesn't necessarily mean you'll have them, and it's not the same thing as an investor update.
An investor update is much more nuanced; it usually has a lot more commentary, and you almost never see it contractually agreed to, in fact, I don't think I've ever seen it contractually agreed to in a SAFE or in a regular deal.
Cheryl:I would almost want to put in the investor updates, I would like that to be contractually obligated.
Maxine:Yeah, it's an interesting one. I think if you're a founder, it's a lot to pull together every single month. I think it's really valuable to do, but I respect on the founder side, monthly, no, but quarterly, that's doable. I think it's really valuable to do, even monthly, just a light investor update. If you're tracking your business closely (which hopefully you are), you should be able to report key updates.
But we do quarterly updates as a fund, and they are a time investment to put together and make sure the right information is flowing through. So, I don't know that I would encourage founders to contractually agree to doing investor updates.
Cheryl:No, we shouldn't, but I want it. But it would be great.
Maxine:It'd be great, yeah.
Cheryl:Alright, I got some more for you, Maxine. I asked the chatty, some others, ChatGPT, yeah. So some others, apparently we're calling them "foundy," baby talk for founders.
What.
"Cindy," which is syndicate; "bridge" for bridge round. This is only in Australia, right, where we put -ie at the end of every single sentence?
Maxine:Like, that's a thing we do. But I mean, what? I didn't filter for Australia, I just said, "What are some weird, silly VC jargon that we tend to use?"
I think what you're looking at is one giant hallucination and no one in their right mind would ever use any of these terms. I guarantee if I search on Twitter, I would find this.
Cheryl:Oh, you're probably right.
Maxine:I still would like to live in the bubble where we haven't descended to that depth yet. Okay, so that's in the round negotiation. Is there anything we haven't covered in round negotiation other than fairly complex legal terms? Oh, EIC, ESVCLP, both terms that can come up in round negotiation. What it means is, on the fund side, ESVCLP is a structure that funds use and they have a tax implication, and EIC is a tax beneficial categorisation that you get as an early stage company, which allows your angel investors, and investors through some funds, to get a certain amount of write-off.
We also have done an episode on this, so have a look at the one that's about the 101 on taxes, and then just skip to the bit on SB...
Cheryl:...CLP. Yeah, read that one.
We also cover a lot of these deal terms and fund structures in the Angel Academy course that we run through Aussie Angels. So if you want to go deep on any of these and really understand what it means when founders are talking about them as an angel investor, I would encourage you to check out Venture Academy.
One other thing we forgot to mention is, we do see this with VCs saying things like, "Let's just let the lawyers sort it out" in that negotiation phase. I think that either means we don't actually care about this term, or we think we have better lawyers than your lawyers.
Maxine:Yeah, we want to fight about it, but we don't want to fight with you about it. So I'm going to delegate this fight to my lawyer, I'm going to let them fight your lawyer, and then you are going to pay for it. That's what that means.
I would say, mostly, the important terms for investors are in your term sheet. So if they're saying that about a topic that doesn't appear in your term sheet, they probably don't care about it, it's in the category of, "Meh, we don't care, it's not material for us."
Cheryl:Yeah, let the lawyers sort it out.
Maxine:Yeah. If it is in your term sheet and they're saying, "Let the lawyers sort it out," it might be something that fits into that second category you talked about, which is: we're going to let them brawl so that we don't damage our relationship with you to try and line that up.
Cheryl:Yeah, and it's usually not a good idea to let the lawyers fight it out, because that just racks up fees.
Maxine:True. Well, I don't know. I think there are some that it's valuable to let the lawyers have that fight, because they can go at each other and push quite hard, and then you as a founder don't have to expend social capital with the investor. I will say, just as a side note, negotiating your round with investors, just to name it, is this weird moment where, ideally, most of the company's life, it's going to be you and the investor on the same side of the table, pushing, trying to grow the company.
And for this one two-week period, you're not on the same side. No, you're on either side. When they just said yes to you, too. It's weird. It's also right at the beginning of your relationship, so it can be thorny, you know? So as you are in that negotiation dynamic, make sure that you are fully educated, you feel like you have the information you need to make those calls. But also, remember in the grand scheme of things, a lot of these micro terms, the stuff that is not on the term sheet, probably isn't going to matter enormously, so it doesn't make sense to go to the mat to try and negotiate this stuff out. In those circumstances, great, if your lawyer wants to go to the mat, if they really want to, and they want to do it with the other side's lawyer, but not you.
Cheryl:Okay, you have now closed your round,
Maxine:you've negotiated terms, you're both somewhat happy with them.
Cheryl:Yeah, micro-happy with them. Now you're working with investors, what are some of the terminology that comes up, or the jargon?
Maxine:Oh, I mean, I think a lot of it is, investors want to know how you're doing, to a degree. Like, understand that they just invested and you want to put your best foot forward, and so there's this little bit of a conflict, I think, especially more so in Australia, where there are more conflict-averse people. Some of those tough conversations are harder to have. So I hear things like, you know, VCs will be like, "So, can we get an update?" which really means, "We haven't heard from you and we're worried your company's not doing well, and we just made an investment."
Cheryl:Right, yeah. Or, "You haven't talked to me for six to twelve months, what's going on?"
Maxine:What's going on?
Or, we've heard something about it around the traps and we're nervous. Or our LPs (if you're talking to a VC and they've got investors), "Our LPs are asking about this and we don't have a good answer."
So essentially: I feel out of the loop and I'm nervous about that, and so I'd like you to put me back in the loop, pretty please.
Cheryl:Yeah. Then there are the other ones, it's usually later in the relationship, but it's like they're trying to scope out whether they should write you down or not because you haven't been growing enough, or at all. So they're like, "Hey, can we get an update? What's your runway? Burn numbers?"
Maxine:Right. I think that's an important one. Investors are probably going to ask you along the journey, or you are going to be telling them by your investor updates, how much cash you have left in the bank, what your burn is. If they're asking questions about your financials, they are either really excited about how you're doing, or nervous. Mostly they're nervous.
So, especially if it's a situation where you are, VC or your investor, you are hoping they're going to follow on, right? Keeping them in the loop and keeping them excited about the business is super important, so making sure they have that information can be really valuable.
So if they're asking you questions like, "Can we get an update?" it's a great indication that there's more work for you to do to more proactively communicate.
Also, then you don't have to have awkward verbal conversations with them about the state of your business, you can just send them updates, and that will kind of update them along that journey.
Cheryl:See, another vote for regular updates.
Maxine:Yes. I mean, I was just about to make that point: I sometimes hear founders fall into the trap of only updating investors, or thinking they should only update investors, when they've got exciting news. So they don't want to write updates where what they're telling investors doesn't feel exciting or good enough, or doesn't feel like they hit the metrics they were supposed to hit, or they're pivoting, or it's not going in the direction they want.
For the vast majority of investors who are seasoned at this, that's not a surprise, right? For most early-stage investors, you fully expect 50% of the companies you invest in to go to zero. Actually, graduation rates from pre-seed to seed on average is about 50%. That means in that first two years, 50% of those companies are going to go to zero or thereabouts. We're expecting that, but we're also expecting to be kept in the loop along the way.
Cheryl:I've been asked all the time, "How do you feel when a company fails? That investment just went to zero." I'm like, I like, the fact that I lost the money is neither here nor there. What changes my perspective is how the founder communicated throughout the process. If they communicated throughout, put their best foot forward to try to find product-market fit, told me what was going on the whole time, then yeah, cool, if there's any money left, send it back; if not, wrap it up, go find something else, ping me when you're on the next one.
Maxine:100%. I think this is a misconception I hear from a lot of founders, so if you're listening and you're not communicating enough with your investors because you're nervous you don't have anything good to say, I'd encourage you to set a communication cadence, once a month, once a quarter, and just communicate where the business is at. Keep them in the loop. You might get a couple of tough questions, or ones that are curly to answer, but it will make you shed a new light on your business, and might help you solve a particular problem.
Ultimately, they're investors, they want to help, they want to accelerate you. Hopefully it also surfaces how they can accelerate you.
Cheryl:What about, what do they say when they don't want to lead your next round or follow on?
Maxine:Well, ideally, they just tell you, "We are not going to be investing," but often they don't. Come on, that would be silly, Maxine, if we just said what was true. That would be silly.
So often they want you to pitch them the way you pitched your first round with them. So you'll take them the investment, take them the thing that you're building and pitch them, and they'll go through that process. What you often see, especially if they're not on your board or you don't have regular touchpoints, is it'll be a more performative pitch process ahead of a more formal raise.
Ideally, you're stepping into market with a term sheet with your existing investor, but if that doesn't happen, you're running your process for others. But often they will say to you, "Great, looks like there's interesting traction. We'd love to learn more." What it means is it's not an obvious yes for us, we actually need to build conviction.
Or it might mean, "I have a big partnership that I need to bring on this journey for me, so I need to go through that process regardless of whether I'm really excited about this."
Cheryl:You'll also sometimes hear things like, "Oh, I'd like to see your revenue get to here." And then you're like, "Okay, yeah, cool," go back, get your revenue there, and then, "Yeah, but it's three months later now, so the revenue needs to be here now."
Maxine:I really hope this isn't happening as much as it was in the ZIRP era. It probably is still happening quite a lot. But I think that was particularly bad, a lot of what founders heard from investors was, "Grow, grow, grow! Money is free!" (Because it was, it's unlimited, because it kind of was.)
"Why aren't you growing? Grow faster, spend more money!"
And then somewhere between November 2021 and March 2022, it was, "Hey, where is your profit?" And you're like, "I reinvested it all because that's what you told me to do!"
Cheryl:"You wanted me to grow, right?" And they're like, "What? No, now you need to get profitable, like yesterday!"
Maxine:So I think a bunch of things you'll hear from investors in this category are: "Your revenue should be X," "Your growth metrics should be Y,"
Cheryl:"You should be close, you should be six to twelve months out from profitability."
Maxine:"Yeah, you should be stepping into market with twelve months of runway."
All of these are ballpark benchmarks they are hearing in the market for the rounds that they're seeing. But the reality is the distribution of revenues per round, the distribution of growth metrics per round, the distribution of LOIs signed by round, feature completeness by round, it's extremely wide. For every rule of thumb, very opaque.
There are a million counterexamples against those benchmarks. So what it often means is, you aren't currently sitting at the top of the pack of the companies that we are invested in. And as your company is growing, other companies are growing too, so those metrics are constantly moving.
So what can you do about it? I think you can ask them, "What do the best companies in your portfolio look like, revenue-wise, growth-wise, what makes them really exciting?" And then benchmark to that instead.
Cheryl:That makes sense. But as VCs, we're like, "No, no, we'll just set a line in the sand for you. We might change that line later, but here's the line."
Maxine:"Here's the line for now. This afternoon at 3:01pm, this is the line. If you want to raise at 3:02pm, it's moved. It's always, always moved again."
Oh, let's look at that. What about in terms of team dynamics? What do you hear from investors in terms of team dynamics, in terms of what you're seeing across the team?
Cheryl:That is a red herring. I don't understand the question.
Maxine:Okay, so, Java, and I hear from some investors, or questions I hear from some investors: "How's it going with X?"
Cheryl:What does that mean? X being a person? Team member?
Maxine:A team member, yeah.
Cheryl:Ooh. That probably means that I heard through the grapevine that X may not be happy, or that another company might be trying to poach X.
Maxine:Potentially also, "I'm not sure from my interactions with X, if they've had interactions, that they are the right talent bar for you, that they are solid enough for your team," or maybe they're picking up dynamics between you and that person (if it's a co-founder or senior team member), that they're pattern-matching to something that's not working.
So it's really valuable for you to ask why before answering that question. Well, I think you can, it depends how cagey you want to be about the information. I'd encourage you to answer truthfully, but recognise that doesn't always align to how people approach this. So yeah, it can be worthwhile to collect more information.
Cheryl:I think in those situations, though, if I've ever asked that question, I'm not cagey as an investor. I'm generally like, "How's it going with X?" Whatever your answer is, I'm going to tell you why I'm asking anyway, so you're going to find out immediately what I meant.
Maxine:Yeah, you are just about to learn why I care, but it can be really helpful to understand why that might be coming at you.
Cheryl:Yeah, yeah, yeah. What else?
Maxine:I think that's it for me. I'm trying to think if there's any other jargon. Please let us know if there's jargon that we say as investors that, as founders, you're like, "That doesn't make any sense, I don't know what that means," and we will try and answer it.
That was pure gibberish. That was pure gibberish. That was 100% incomprehensible,
Cheryl:, and as investors, I think we could do a better job of giving founders a break when they don't answer perfectly, because we just spoke gibberish.
Maxine:100%. So for any of the investors listening on this call, hopefully this is useful for you as a reminder to please explain what you mean, especially for folks that it's their first time raising, first time operating a startup. And for founders, hopefully this clarified a few of the ridiculous things we sometimes throw at you.
Cheryl:And hopefully it was, at least, quite a bit entertaining. Hopefully it made you laugh.