Time Kills All Deals
Be vigilant throughout the entire investment process until the money has been wired.
Uncertainty is abound working in venture capital, and I myself have experienced my fair share of shocks and surprises. An agreement that seems solid today may not exist tomorrow. A partnership you've worked on for months could unravel in mere hours. Along those lines, one vital lesson that has become clear to me through my experiences is this: an investment is not truly complete until the funds have been transferred. The longer an investment process drags on, the more chances there are for unexpected complications. Time, unfortunately, kills all deals.
To give you an idea of how fickle the investment process can be, consider a few situations from my career. Once negotiating a financing round with a consumer tech entrepreneur that stretched late into the night, we finally arriving at a mutual agreement. Excited, the entrepreneur promised to sign and return our term sheet first thing the following morning. Alas, when morning came, I was greeted not with a document, but news of a deal from a competing firm he'd instead chosen to take in the interim.
In another instance, a gaming infrastructure startup with whom we had signed a term sheet and invested legal time into creating the definitive documents decided to accept an unexpected acquisition offer, abandoning our agreement which was to close later that week. (Note that a few weeks later that acquisition fell apart.)
Similarly, a marketing technology company also chose to pursue acquisition offer over our fully negotiated and papered deal that was slated to close the very next day. (In this case, too, the acquisition offer wasn’t consummated.)
There was the time a blue-chip fund decided to withdraw a week before close from a $15M new follow-on round in one of our portfolio companies after term sheets had been signed and lawyers engaged. (This occurrence fatally crippled the company and it went out of business less than a year later.)
Lastly, I can think of two instances where my firm was co-leading with another firm a new investment into startup with a signed term sheet and the other investing party decided to change their mind and pull out. (I’m happy to report that in both cases we followed-through with our commitment and helped bolster the syndicate in the process.)
I must admit that in the first situation, I wasn't completely a victim. I lost the deal fair and square… he hadn’t signed the term sheet, merely verbally promised that he would. And sure, there are extenuating circumstances left out of the details in all of the cases above. But it’s kind of the point that circumstances arise when time allows.
These events have imprinted on me an indelible lesson: Never assume a deal is sealed until it's completed. The longer the process stretches, the more vulnerable the deal becomes to various potential hazards and changes. And so, the longer the time, the higher the risk.
There’s a corollary to the maxim that time kills all deals: deal processes should accelerate to the close. The more swiftly we close, the less time there is for something to go awry.
So, what strategies can we derive from these lessons?
Relentless Persistence: Never take your foot off the gas until money is wired. Persistence is not just about maintaining a steady pace but the process should just feel like it’s getting faster towards the finish.
Regular Engagement: Even after a term sheet is signed, it's important to stay engaged. Don't leave all the work to the lawyers. Set up a regular video call with the founders to check in and get a feel for any shifts in mood or perspective that may not be evident in email exchanges or official communication. It’s also helpful to check in with co-investors, both new and existing, while definitive docs are being negotiated just to ensure everyone is on the same page.
By remaining vigilant, persistent, and in constant communication with eventual partners, we can minimize the chances of our deals being swept away by the tides of time. These efforts will not eliminate deals from going off the rails entirely. Yet keep in mind: it’s time which is the enemy of all deals, so don't give it a chance to strike.