That doesn’t sound good… Now think within the context of a withdrawn termsheet within weeks of a company’s end of cash, and panic comes to mind.
Venture capitalist termsheets are always nonbinding, subject to completion of due diligence, etc. What that means technically, is that for whatever reason, they may withdraw the termsheet. What can you do about it? Not much.
Before signing a termsheet with a venture capitalist, management (and board) contemplate which of the options to pursue. By proceeding down the path with venture capitalist A, you are turning down venture capitalist B or alternative C. If venture capitalist A withdraws the termsheet, it’s highly unlikely that any of the other alternatives remain a viable option. That leaves a company very vulnerable, and very dependent upon the support of the existing investors. That’s also the point where any additional funds that go into the company are very risky from the investors perspective. High risk, means high reward. Or from an entrepreneurs perspective, lots of dilution.
Ask again, what can you do? Well… for one, try and really understand the process of the VC, check their past reputation. See if they did a “serious” due diligence, and if they really understand the challenges and risks that your company is facing. If you have access to more than one partner, get separate perspectives. What part of the due diligence did they NOT complete? Don’t be tempted for the “best financial” deal you can get; go for the best partner. Of course, there’s always your gut to rely on…
And… if you did find yourself with a withdrawn termsheet, go to TheFunded.com and tell the world about it… others needs to know!
(Are you listening you 2… you know who you are!)