It was great to get feedback from many of you regarding my post on getting VC funding. A great many of your stories were aligned with my own and one of the most common questions was “when you do get a VC how, do you get the best out of them?”.
In my experience VCs fall into two groups, the first are the true partners and throughout the life of their investment will seek to build value and provide both mentorship and business smarts. The second group are the ones that seemingly have a personality change once the deal has been signed, this largely consists of a desire to build a company solely via a spreadsheet. They will spend an inordinate amount of time focusing on that spreadsheet and will make business decisions based solely on whether the numbers have moved up or down, no matter the context.
As we all know businesses and especially young businesses are organic beasts. They change as much as they grow and there are many times when their experiments don’t work and market conditions change. Often this creates a situation where deviation from the plan is not only the reality it’s also desired because a lack of flexibility would sink the business. Ironically, words like pivot and market reaction time are exactly what attracts VCs in the first place.
Writing on Forbes.com Dileep Rao, an ex-VC, who made a study of VC funding in the US came to the conclusion that 99.95% of businesses that are started will never get VCfunding. That’s not surprising as many of these businesses do not seek venture capital funding. More interestingly, Rao goes on to say “hardly any businesses will actually get VCfunding, most of you [entrepreneurs] will never see the inside of the VCs office so if you want to build a major business learn to build up without VC that’s what most of the billion-dollar entrepreneurs did”.
That’s a really interesting point – why should chasing VC money actually be a priority?
Businesses have been around for thousands of years while the VC industry as we know it has only been going for the last 40 to 50. However, it’s very well organized and most entrepreneurs from a large city are able to tap into their local VC market.
However, I remember one of the core questions the founders at ChannelFlip had to grapple with was “at what cost” VC funding? I know that in the fierce desire to obtain funding sometimes achieving it at any cost seems like the only option. I would argue that sometimes all is not what it seems when it comes to getting funding from a 3rd party particularly given some of the VC operators out there
In most venture capital deals the firm requires an exchange for their investment, usually called preferred stock, which can be dangerous if you’re running a small company. Preferred stock gets paid out first from any liquidity event (usually a sale) and therefore locks in a rate of return for the firm. It also gives the firm the option to convert to a common stock and take advantage of the company’s value which if it has grown can be very expensive for the founders. Beware the deal you are signing! I know of many instances where founders have signed up to a venture capital company and upon the liquidity event realised nothing like the money they thought they were due.
Another factor to be aware of is that few VCs will convince you not to sell at the first the liquidity opportunity. If you get a VC who encourages you not to sell and keep building your company with their assistance that is the sort of partner you need. If you find somebody who has a record of playing the long game, jump on them as they are few and far between.
In my experience the most important element in getting venture capital funding is the chemistry between you and the team across the table. At least one of them will be sitting on your board, calling you weekly, and certainly setting targets and processes that you may not be used to. It’s important that you can work with them on a daily basis and see them as a value add to the business rather than a schoolmaster or drill sergeant whipping you into shape.
Another consideration to take into account is that most VCs are smart people. They have often been to good schools and come up through the ranks in large financial institutions and therefore will bring a lot of experience to the table. If your VC is well established they will also bring experience with similar companies that can help you avoid mistakes and focus on what is really going to grow your business and drive value. Most new businesses have a very qualitative approach in their early years, so a VC who brings a more analytical and data driven approach is a good asset to have.
My advice would be to look before you leap, know that the grass is always greener on the other side of the fence and any other metaphor you can think of. I would never advise someone against getting VC funding. There are many great VCs out there particularly ones that have been established for quite awhile, with a good track record of building businesses so don’t underestimate the value of a good partnership with the right VC. They can shed a light onto problems you never knew existed and to ignore their suggestions is foolhardy.
So take your time and don’t sign with the first company you meet with. Shop around, ask questions about working with them on a daily basis and invite them to your offices to see how they react in another environment. The good ones will self select.
You might even want to ask yourself whether you actually need VC funding at all? A lot of successful companies have bootstrapped their way to success, but sometimes it’s easier to say than do. There’s nothing like capital to make your business grow – and fast.