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In Your VC firm, how many seed deals fails post term sheet

• posted by: Taiko on 2016-09-16
• tagged: fundraising
• score: 0

In your firm (or in your personal experience as an entrepreneur)

Out of X seed stage term sheet issued, how many times does the fund finally changes its mind.

E.g. how many times the VC firm will change it’s mind post term sheet.

I know a deal can fail pre-term sheet for lots of reasons, and post term sheet because the entrepreneur decided to take someone else ‘s money, but my question is really about the VC fund changing it’s mind.

Some people told me it never happens, some told me it happens about 80% of the time.

What is your experience on that ?

Thanks !

Answer 11151

• posted by: Denis de Bernardy on 2016-09-16
• score: 1

For context I worked at one point with VCs who were doing LBOs. LBO VCs technically aren’t the same as startup VCs but I’d be surprised if the volumes are so different. I was providing them with VC fund-related accounting software, so it’s not first-hand knowledge, but I interacted enough with the partners to give a broad picture view.

The deal flow mostly came from two sources: one was people knocking at their door, the other was people referred to them but their networks.

The opportunities were initially filtered. Perhaps 10% went on to get studied by the partners. Of these, perhaps 10% actually got worked on. That is, the partners would take the meeting. Of this smaller group, perhaps 10% went all the way through due diligence and got a formal offer. Put another way, if you’ve a term sheet you’re a part of the 1 in 1,000 deals they found interesting, or something to that effect - only a tiny fraction of projects get to see an offer.

Beyond that I can’t recall what their ratio was, but I’d suggest it’s rather similar to what happens in sales. The main things that can go wrong upon sending an offer are:

• The prospect wasn’t properly qualified (i.e. the entrepreneur is not actually shopping for money, or doesn’t need it by yesterday). An experienced sales or VC would have very few of those because they’d sniff them out early and nurture them instead, but it can happen.
• The prospect gets a better offer from a competitor. Better doesn’t always mean cheaper, by the way. Sometimes a competitor is just… better.
• The prospect isn’t happy with the scope of the offer or with the price. This should never happen if you’ve qualified your lead properly, but some prospects widely overestimate their budget or valuation and lie to themselves.
• The one exception to the latter is when you run into a prospect that probably isn’t someone you’d like to work with - for any reason, really. You can often sense it. When you’re on the edge on whether to refuse the business upfront, you sometimes end up sending a non-negotiable offer with a so-called f*ck off price to see what happens.
• Legal discussions drag on to the point of introducing dubious conditions, guarantees and what have you that basically change the whole situation and get things back to square one. A lot of low-balling can happen at this stage. There’s no shortage of deals that collapse when Legal tries to get away with outrageous clauses that no sane person would normally accept.

In the end though it really depends on who you’re dealing with. The people you’ve interacted with are all correct IMO. Some sales close just about every deal they extend; others close a third of them or less. I’m pretty sure the same happens with VCs.

A good rule of thumb might be this: the more experienced the sales/VC, the more likely they’ve properly qualified you and spelt out key terms and set expectations properly before extending a formal offer. It then goes smoothly. Conversely, there’s a minefield awaiting you if you’re receiving an offer from an inexperienced sales/VC. Particularly if Legal gets involved with a heavy hand.

Under any circumstance, don’t forget the two basic rules of negotiation: have a BATNA, and always negotiate in bulk instead of agreeing to things step by step.

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