We are witnessing entrepreneurs being excessively focussed on entry valuation with little consideration for other, softer aspects. In our experience, we have found that the quality of investors and the terms they offer can significantly enhance the probability of success for a startup. We believe that apart from valuations, an entrepreneur should also evaluate terms, gauge the chemistry between themselves and the investor, and verify the things that an investor can bring to the table that isn't cash!

Entry valuations are meaningless if not evaluated with the terms they came with. We have seen term sheets where Angel investors want a guaranteed exit in 5 years with a minimum guaranteed 15% IRR, and the right to sell founders shares (i.e. drag along) if this preposterous exit is not provided to them.

From an entrepreneurs perspective, these are crazy terms to expect. On one hand, investors want the entrepreneur to think big, and have a long term horizon, and on the other hand, they want venture investing to provide them sure-shot returns. Pretty sure, this is High-Risk Venture Financing, and not High Yield Debt Financing with an Equity kicker. Not to forget, 5 years is a short period in a company's lifetime to build a robust, and sustainable business.

So what should entrepreneurs do? If they do not accept the already scanty offer, they are sometimes left with no offer! It is like being caught between a rock and a hard place.

We believe an entrepreneur should take time to dig a bit deeper and do the following:

Request a sample term sheet

Understand the kind of rights and clauses does the investor have in their term sheet. Notice the swiftness in which they respond once you request this. Do they happily provide this to you, or do they refuse to share until a later time? These are all indicators of intent and the kind of investor they are.

Ref check the investors

Request to speak to at least four founders they have funded. Request the proverbial Good, Bad & Ugly. Do this with a special mention on Bad & Ugly, and make it a point to speak to founders where the relationship is not all hunky-dory! Notice if they provide you with the references happily or grudgingly. Or IF they do at all!

Dig deeper, and then some

During ref checks, stress on understanding the engagement. Does the investor proactively offer inputs and connections? How do they resolve conflicts among themselves? Does the investor think about their stake more than the benefit of the company?

What is their edge?

Ask around, even ask the investor themselves - what can you bring to the table that is not cash? Not in a demanding manner, but as a matter of fact - as an entrepreneur, you deserve to know this. The key is not to select the investor that gives the best answer, it is to select someone who is honest and trustworthy. You want to be on the same page regarding the contribution of people that have the privilege of sitting on your cap table.

Some softer guidelines

Too many cooks will spoil the broth

The fewer investors, the better. If investors come in as a group, please ensure you are dealing with just one nominee. It is very easy to run around like a headless chicken when there are multiple investors seeking your bandwidth in diverse and opposite directions. This is the shortest route to a catastrophe.

Familiarity is your best bet

Venture capitalists that have been former entrepreneurs will always be the better investor than a finance guy! Not only will you find more empathy from them, but they will also be more humble than a number-crunching excel gymnast that has not been in the trenches before!

Fund vs Individual

This is a personal choice. An individual investor or family office will be far more flexible and have a longer horizon than a VC fund. However, a VC fund "should" ideally be able to offer far more support.

Closing comments

People are investing to get a return. Do expect hard negotiation on entry valuations, and rights. But in all the cold hard numbers and facts, please remember to look for 'heart'. If the investor only desires to earn money from this engagement without the urge to create a long-lasting business, walk away. Entrepreneurship, like marriage, is a long and difficult journey with many ups and downs.

Find someone you also want to wake up to, not just someone you want to go to bed with.