The deal that died

So the deal was looking good, term sheet issued, and in negotiation, and deep diligence happening. Then there was a long discussion between Chairman and VC and the deal fell apart.

I got a call from one of the entrepreneurs and was suddenly in the middle of a “he-said-she-said” scenario. Anyway, a group of us got together and tried to piece together what went wrong and whether or not it was fixable. And here’s the rub--VCs really want to invest their dollars (actually it's not even their dollars ... another topic). Their business is to help you build success, so when a deal blows up it means everyone is hurting because they invested a huge amount of time and emotion falling in love, and now both parties have been jilted at the altar.

There are a bunch of probable causes for this--another lover has come on the scene and stolen their hearts--either another VC has offered better terms, or the VCs have seen something scary in the potential partner and got cold feet. Enter the counselor. What killed the deal I am referring to was a syndrome that is very common in non-US startups, and to an extent in non-Silicon Valley startups.

What happened was that there was a CEO and a Chairman and it wasn’t clear who was really the CEO, because in non-US companies, the Chairman has far more control than he does in a US corporation where all he can do is call the board meeting to order--other than that he’s just another director. In non-US companies, he gets to use the Chairman’s lounge at the airport, and that’s not something that he’ll give up lightly, neither the control of the company. Often he became Chairman because he was the original investor, possibly even a founder. Sometimes he is a value-added Chairman, but usually he’s an experienced business guy but not experienced in the market that the company is targeting.

Now he will often bring in an advisor, read i-bank, who will really mess things up; these companies don’t often get through the door in Valley VC firms but are remarkably common outside the Valley and the US in general--this is a really bad combination because the banker is focused on a single transaction, while the VC is focused on building value from three or so rounds of investment and wants to reward only those people who will contribute to the business going forward. The banker is gone after this first transaction, the chairman will no longer have the power or prestige he has today, and so they are both at odds with the VCs.

VCs fall in love with the founders and their idea--young, driven entrepreneurs, particularly engineers, are the life blood of VCs. These young entrepreneurs often look for some grey hair to advise them, and this is a good thing, but the wrong kind of person in this role can be disastrous. Anyway, in the company in question, all the players were good, solid business people, but several of them wanted to be CEO, and as VCs we had trouble working out who was who. As things turned out, the counselor was able to save the situation, and get the deal back on track. To the company’s credit they listened to the VC's issues, understood them, and modified their approach accordingly. It was a stellar result to bring this deal back from over the precipice.

But it never happened. There is yet another problem that kills deals--time. Entrepreneurs frequently focus the negotiation on valuation, rather than on speed of getting the company funded so they can run with the business before someone else does. The negotiation had dragged on so long that everyone had deal fatigue, and in the end, the VCs looked at the other deals they had in the pipeline, and looked back at the original deal with different eyes. Now, six months later, the original deal was not as beautiful anymore, and they fell out of love as there eyes were drawn to other more alluring deals.

It's happened to me, too, all too frequently (with VCs ... and women). But don’t despair, a good team with a good idea will get funded, just don’t get wrapped around the axle on issues that will drag things out beyond the shelf life of a deal. A good friend who is one of the most successful M&A gurus in the US tells me that time kills all deals. Don’t waste time, get it funded, and run with it, show your VCs you are passionate to go, and they will go with you.

Next time: When to take a smaller piece of a larger pie; Femtocells a new wave?