Managing Your Cash Flow

“Avoid VCs like the plague,” warns entrepreneur David Richards

5 min read

02 May 2012

Serial entrepreneur and software expert David Richards rues the day he signed a deal with venture capitalists. Here’s why.

My advice to budding entrepreneurs is this: avoid venture capitalists like the plague.

Don’t get me wrong, venture has an important role to play in certain sectors (if you’re bringing a silicon microchip to market, for example, you can easily chalk up $100m in development costs) or for super-charging growth in established businesses. But I don’t think venture capital has a place in early-stage companies.

You don’t need colossal amounts of money to start up a business these days. You don’t need to advertise on billboards, you don’t need a room full of servers. I remember launching Librados from my kitchen in 2004: we literally just placed an ad on Google and watched the leads trickling in.

If you take on venture capital, you risk losing control of the company you created. I should know: I’ve been there and made the mistakes.

I launched software firm Insevo with four other guys in 1998. We raised $1m of seed funding from angel investors and then, about a year later, we took $20m of venture capital from 3i. At the time, it was the “done thing” to get recognition. We were slap bang in the middle of the internet boom and you could get millions of dollars of financing simply by having a dotcom in your name.

The venture capitalists to whom we had signed over a controlling share of the company had little to no understanding of our product, our market or our business model. We should have focussed on execution; instead, we focused on marketing ourselves to look like a bigger company. The VCs made us change the logo, the colour of the carpet, and the company letterhead as part of an ill-advised rebrand that added nothing to our value and served only to hurt the balance sheet.

There’s a reason venture capital is nicknamed “vulture capital”. They swoop in and pick through the bones of your business.

The VCs got rid of three of the founders and parachuted their “friends” into operational roles: they were all senior managers from big blue-chip firms, accustomed to playing politics and holding endless meetings. Bringing that kind of person into a startup is like giving a pet lion to child. Completely inappropriate. They might seem cuddly and friendly but they’ll try to bite your head off as soon as your back is turned.

In 2003, the company was acquired for much less than it was worth. We’re talking tens or even hundreds of millions of dollars less than the true value. I exited. My ten per cent slice of the business didn’t add up to much. When you took into account all the complex clauses, “preferred stocks” and warrants, my shareholding looked more like 0.5 per cent.

My next move was to start up another software business, Librados (which means “the free men”), with some of the original Insevo founders This was all about proving that we could build a successful business without venture funding. We sold the business within a year to NetManage (Nasdaq:NETM) in a two-part earn-out ($5m followed by $5m). In many ways, that was our way of sticking two fingers up at the VC industry.

I now run California-based WANdisco. Our technology is used by half of the world’s software developers and our customers include the likes of Hewlett Packard, Intel, Walmart and Nokia. Sales are managed in the US, where we make 90 per cent of our revenues, and production takes place in South Yorkshire and Belfast.

We’ve grown WANdisco organically, without a dime of VC money, and we’re planning an AIM flotation for mid to late-May. The deal in the public markets is much better than the deal in the private markets: you end up with tradeable stock and you maintain control over the business.

It just goes to show that you can build a successful, profitable business without having to sell your soul to the venture capitalists.

David Richards is the co-founder and CEO of WANdisco

Do you agree? Tell us about your experiences with the venture capital industry in the comments box below.

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