Here’s What I Look for When Evaluating a Startup As a VC
- Ben Narasin is the founder and general partner at Tenacity Venture Capital.
- He says lots of highs and lows — and being kept in the dark — are part of the nature of early stage investing.
- Narasin has lost “all of his money” on some deals, and made almost $1 billion on another.
What’s the real story behind those acquisitions where “deal terms were not disclosed?” Deals with no announced value are the Schrödinger’s cat of the early stage investing world — you don’t know whether you’ve made or lost money.
When the terms aren’t disclosed, and the founder didn’t bother to notify you the deal was coming — which happens more than I’d like when you were a small check in a long ago seed round — investors are just as likely to discover they lost all their money as to find they made a profit.
While there are legitimate reasons not to announce deal terms, the most common one is that they aren’t interesting enough to disclose.
Last year, within a four-week timeframe, I had four companies in my portfolio announce transactions, and in only one case was I given a heads up that it was coming — and even then, I wasn’t told the terms.
So, then one goes into financial purgatory, waiting to find out whether you’ve made or lost money.
It’s safest to assume you’ve lost money until you’re proven otherwise and gain a happy surprise, but of course I reach out to founders to ask.
Last October, one deal had a 10x outcome. In another, I got my money back. Another was a modest loss. And I’m still waiting to learn about the fourth. So overall, there were more positive outcomes than negative.
In one case, I had to follow up twice just to find out anything. When the first request got no response, I started to worry it was a talent acquisition with nothing for investors. I sent a note saying that (because maybe it would force a response), only to have my founder tell me to chill out. I felt bad that I pressured my founder instead of celebrating his victory, but it’s hard to be in the dark and wondering.
I know founders have a lot going on when they’re in
liquidity
mode, but I also know there are a fair number of VCs that can help and sometimes even optimize outcomes.
I’ve seen quite a few deals and I know most of the tricks the buyers will deploy.
That’s the other part of the equation. The investor gets a DocuSign and, sometimes, the supporting documents (the last one I got was 255 pages). There are sometimes assumptions of future liabilities and other things VCs sometimes agree to, that I know from experience private equity guys won’t agree to, and this makes it hard. And when the whole outcome is pennies on the dollar or even a refund on a small check, having to spend lawyer fees to figure it out isn’t palatable.
If the shareholder consent level (the percentage of shareholders that need to approve the deal for it to close) isn’t too high, one can often just abstain and be dragged along, in theory gaining dissenters rights or some protection to protest later in an impact scenario. (I’m not a lawyer — ask one if you want to know if this is true. It’s an opinion, not a fact.)
So when you see a “deal terms were not announced” deal, know it can be anywhere on the spectrum. I have lost all my money in some, and in one case made 60x on an almost $1 billion outcome — though the latter eventually got disclosed, the former never did.
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