Are all the good venture capital deals competitive?
A venture capitalist I know once told me that he only wants to do competitive deals (deals in which there are more than one firm bidding to lead a round).
On the other hand, a guy I know who does seed investing who says he never competes for deals. Just doesn’t happen and it doesn’t seem to bother him, either.
As a newcomer to this industry I’m trying to figure out my philosophy on this topic. Are the best deals always competitive?
On the one hand, if you are the only firm bidding on a deal, the options for the startup are to accept your bid, try to negotiate (having little leverage), or walk. This would seem to be a good thing for the VC since they should be able to get the best pricing and terms. The flip side is that if you are the only firm bidding, the implication is that all the other VCs the company has spoken with don’t think the company is investment-worthy.
If there are multiple firms bidding on a deal, then the startup has the negotiating leverage. The entrepreneur can play the firms off one another and strike a much better deal than they could have had if they just had one termsheet. This will usually result in the winning firm paying a higher price (higher pre-money valuation and less degree of control) than they would have expected had the deal not been competitive. This also implies that there is market demand for a company’s shares. In an early stage investment market where < 1% of companies are able to obtain funding, maybe you could argue a deal that has multiple bidders is a good deal.
However, deals often become competitve once the first firm “jumps”. In other words, there may be investors watching a company on the periphery and waiting to issue a termsheet once they see another firm issue a termsheet.
In this case, the deal certainly becomes competitive, but is it actually a good deal?
I don’t know where I net out on this topic yet as an investor, but I can certainly tell you one thing. If you are an entrepreneur, you’ll end up with much better investment terms if you create a market for your shares.
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