How to beat Venture Capitalists at their own Game Part 2

In the first post in this Series I introduced the issue of Fund Profile and its importance to the investee company.  In this second post in the series I want to discuss the relevance of the Venture Capitalist’s investment style to the issue.

 

 

Investment Style

Why is this important?  You need to ensure that you have a “cultural” fit with the VC otherwise you may be setting yourself up for several years of conflict.

Long Term Relationship

As already mentioned, the VC will probably hold their investment in your company for 3 to 5 years and possibly as long as 7 years.  If you are going to be working with this financial partner for this long you need to ensure that you have a similar approach to business and get on together.

Control

The VC is going to take a significant stake in your company. They may even be the largest single shareholder.  They are going to have a board seat or two and have a range of rights which will be set out in the shareholder agreement, even if they do not have a majority.  You are therefore sharing control of your company and ceding significant power over the running of the company to your new financial partner.  Understanding their investment style is therefore important

What do they do when things get tough?

When the going gets tough, the tough get rough!  There are many company founders who have been thrown out of their businesses by VCs when things do not go to plan.  It is worth investigating what the VC has done in the past when investments have not run to plan.  Have they supported the founders and incumbent management or have they replaced them.  You should definitely ask the VC what they would do and what they have done in the past.  As part of your due diligence on them, you should ask to speak to some of their existing and ex-CEOs to check.

Rapport and Trust

Can you establish a personal rapport – do you trust these guys?  People do business with People.  No matter how much you need the money, make sure that you are working with people that you get on with and feel that you can trust.  There is nothing worse than a  cuckoo in the nest and you will waste a huge amount of management time handling the politics of internal hostility and conflict.  If in any doubt, find another VC.

Vision

Do they share your vision and determination to build a great company or are they only in it for the money.  You need to understand that partners working in a VC firm (General Partners) have a personal financial interest in their funds.  Typically once they exceed a specific rate of return, the General Partners will take 20% of the surplus above this.  Consequently they will be very financially motivated to help your business be successful.

You need to evaluate whether they share your vision for the future of your business and your non-financial objectives.  Ask yourself, what happens when they get a low or mid range offer for your business 2 years down the road from a competitor who wants to acquire you?

Day to Day

How are you going to work together on a day to day basis – are they going to be hands off or interventionist?  The VC will sit on your board so you are going to see her at least once a month.  Is this going to be the extent of their involvement or are they going to take a closer interest, help you with business introductions, speak to you on a weekly basis.

Closer interest can be good but a VC who calls you every day telling you how to run your business is at best a distraction and at worst highly irritating and a significant waste of your time.  You should ask the VC what their management style is, who will sit on your board.  As a further due diligence step, discuss this point when speaking to present and previous CEOS.

In the next post in this series, tomorrow at the same time,  I will discuss the issues surrounding Deal Flow and its implications for the Entrepreneur.

What Next?

Take a look at my FREE video Tutorial “How to Turn Your Great Idea into a Business” which is all about Starting a Business and Raising Capital.

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