Fundraising

How seriously will angels/VCs take a Letter of Intent?

Greg Lipinski Patent Examiner at USPTO

July 1st, 2016

My startup is entering discussions with majot syndicated research firms about a distribution agreement to get our data in front of their CPG clients. The data we have is unlike anything else in the space; we know it's something CPG brands want, but it's tough to determine an appropriate price when there's no precedent, and it's not like these brands are failing without it. 

I hear an LOI can say anything as it's not legally binding, so how do investors make decisions based on this? What should I be pushing for to make the LOI more attractive? 

Martin Omansky Independent Venture Capital & Private Equity Professional

July 1st, 2016

I see several steps: (1) engaging intermediaries to ID and contact CPG companies on your behalf; (2) meeting with one or more CPGs to present your argument; (3) go-no go decision to evaluate and test your product; (4) wait for test period and analysis; (5) negotiate terms and conditions. Given these minimum requirements, I doubt angel investors would bite. The Letter of Intent would be influential after item 4, because nothing is known until then. Afterthought: sometimes angel investors do crazy things, so there is hope -scant hope- but not zero. Best bet is to ID an affinity investor - someone who understands products, markets, and decision-making in the relevant industry. Such an angel is more likely to look favorably upon you. But, don't count on it. Most investors are risk-averse. Sent from my iPhone

Christoph Ranaweera validate early, pivot and kill fast

July 1st, 2016

An LOI is not legally binding but still nobody with some level of reputation will give you one if that person is not sure of doing it.
Otherwise if they do it too often their reputation will suffer. 

Ideally the LOI should state commitment based on good arguments. 
So not something like "we want to look deeper into it" but more like "we see a certain high value of the product and believe there is a big untapped market and we will market it or buy it or whatever.
I think you get what I mean.
But this is just my opinion ;)

Rob G

July 1st, 2016

Greg, i don't know that there is any hard and fast rule.  The more LsOI you have from the right companies and the more teeth these LsOI have the better obviously.  Are you seeking the LOI from your distribution partner or from their customer (the CPG companies)? If you and your distribution partner can team up and get a commitment from the end customer (Big CPG Co, Inc.) perhaps your partner can cough up some funding? Your partner won't make any commitment with any teeth without an equally solid commitment from their customer so it sounds like you would want to stat there anyway, no? 

Hugues SEUREAU Market Analyst Specialist, Corporate Strategy

July 2nd, 2016

Hi Greg, in my opinion it is all about who is providing you with the letter of intent. Does your contact have enough power to influence a decision in your favor after the letter of intent is signed? If a senior VP signs the letter, it certainly has more effect than if an medium level manager does...
You are not saying that you will push your data directly to CPG firms but to syndicated research firms - your partners. But at the same time you do not have your financing in place. I would be surprised if your partners wanted to do this job of contacting and convincing a decider to give you a LOI before you have the financing. So in your case maybe the best option would be to sign a LOI with your partner who believes in you and that is known for selling to lots of large CPG firms, at the same time your partner advises you on a right price so you can fine tune your financial plan, then once everything is in order, go to your investor, sign a LOI for investment if a CPG firm buys, then have a contract with CPG customer and finaly unlock investment...

Robert Clegg

July 2nd, 2016

0, zero, nada. 

Set a price, get in the market. Stop wasting time machinating over the perfect spreadsheet. If you can't figure out how to adjust pricing after initial market entry you aren't worth investing in. Show you can close a deal.

Sidney Sclar SID the SECURITY PRO at sidthesecuritypro.com

July 3rd, 2016

The credibility of the Letter of Intent will be based on the preceived value of the source.  Remember this is a promise to pay not to play. 

Deepak Rao

July 5th, 2016

Lot of companies get LOI and VC's have a difficult time in evaluating the validity of LOI. Instead if you can get an advanced purchase order (with terms of delivery and payment defined), which covers more meat then an LOI, then you are in a better position to negotiate with a VC.

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

July 5th, 2016

The investor will look at how likely it is that the letter means that someone is going to put up real cash to buy the product, and a lot depends on the details of the letter and the industry you are in.  If you can you get a purchase order, that's really, really good.  On the other end of the spectrum, you have some industries where every day someone announces a strategic partnership that means nothing.  For example, if you have a letter of intent with a big name software vendor, it sometimes means that you are planning on paying them to use their services and in exchange you do free advertising for them.

The letter itself means nothing.  It's the relationship with the writer that's important, and the more you can set up the relationship so that it means actual hard cash coming in, the better it will be for an investor.  Ideally, you will have an investor that understand your industry enough to know what the LOI means, but if not, you may have to educate the investor as to what the letter means.

Martin Omansky Independent Venture Capital & Private Equity Professional

July 6th, 2016

We are considering a few projects that have LOI's or similar commitments. We view these as informative but not binding, because they are not enforceable contracts. Our due diligence process usually evaluates the strength of such commitments. We usually view the LOI's as possible contracts, We make our decisions, however, based mostly on other factors. Sent from my iPhone

Shawn Kalin Partner at RURALTY®

July 6th, 2016

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LOI's from major companies are useful.

 
Many LOI's are better.

Make sure there is a monetization event within these agreements, then you can close an investor on somewhat better terms than a pure risk investment.

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