The major lesson on term sheets and investments in general is that as Yogi Berra once said, “It ain’t over till it’s over.” My lesson learned from multiple rounds with four venture-backed startups was that it ain’t over till the check clears the bank.
Brock Blake, author of the Forbes article Beware of Early Venture Capital Term Sheets: No Due Diligence Means No Guarantee, had a term sheet pulled on him. He has several important lessons for founders dealing with term sheets. By way of background getting a term sheet is certainly a milestone on the way to securing funding. Getting a signed term sheet is an even more important milestone.
He estimates that about 90% of signed term sheets turn into funded deals, but doesn’t have a source on this statistic. It sounds about right to me from my experience. Unfortunately for Blake he was part of the 10% where the term sheet turned into wallpaper. You can get all the background on his experience from the article, I’m just going to deliver you his lessons learned:
- No matter the reputation of an investment firm there are no guarantees.
- You need to do your due diligence on their track record of funding signed term sheets. “How many times have you submitted a term sheet without the deal going through?”
- Ask the investor whether they’ve done due diligence around your business and your track record.
- Talk to other portfolio CEOs to find out if they’ve had a dropped term sheet with that venture fund.
This is why you should act like VCs, who try never to give a founder a hard “no” – do the same with other investors who may be interested in your deal. Don’t let any interested party walk away until your bank balance has gone up by the amount on that signed term sheet you have. And even then, treat them graciously, as who knows, you may need them on the next round!