Managing Your Cash Flow

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In your investor’s shoes

5 Mins

One of the readers of my book recently wrote: “Angels Dragons & Vultures has allowed me to understand the dynamics from the investor’s perspective in a way that I never have done before. Prior to reading it, I had always focused on my own reasons for raising money versus understanding the motivations of the investors.”

 

The good news is that this is one of the main objectives of my book. The bad news is that this reader is an entrepreneur that I backed.

So when I put money into his company, I clearly failed to communicate effectively what I was trying to achieve.

I get a little consolation from the fact that this is a common failing. Entrepreneurs are often not good at quizzing their potential investors about their objectives, but venture capital investors can be poor at volunteering the information that will explain the pressures that taking equity investment will place on the business. Yet a clear understanding is important to success.

So why don’t investors better explain their objectives and the pressures on them to the entrepreneurs they back? Well, clearly there is the worry about exposing too much and losing a hot deal to a competitor. There may be some embarrassment about talking openly about projected returns on individual deals and appearing excessively greedy.

And especially today, when many venture capital firms are under severe pressure, and when many will find it hard to raise their next fund, exposing the intricacies of the tricky relationships with fund investors and the disappointments of past returns may, the VC fears, give too negative an impression.

Nevertheless, it is important that the VC investor overcomes these reservations and explains frankly to the entrepreneur what he needs to achieve from his investment. If the result is that the entrepreneur decides not to raise money, or to go elsewhere, that will be no bad thing because it is a sign that the relationship probably would not have worked out in the long run.

Sometimes entrepreneurs overestimate the strength of venture capital investors. They have money to invest, or seem to, which is the key commodity the entrepreneur wants if he is doing the rounds. Sometimes they have glitzy offices in smart locations (but maybe they regret having signed that long-term lease in years gone by when times were easier). Because normally the entrepreneur is going to the investor to raise money, and raising money is hard, the balance of power seems to tip in the investor’s favour.

Evening this balance out can be a very smart thing for the investor to do. If the entrepreneur understands the pressures on the investor, those terms being proposed may seem rather less harsh. Openness can be a very effective negotiating tactic, and relative equality is a good starting point for a long-term relationship.

And maintaining that open, even relationship throughout the life of an investment will make success more likely. The investor rightly expects to receive clear and comprehensive information. It is right that he should reciprocate insofar as possible. He should keep his entrepreneur informed about how things are going in his firm, what successes there have been and what disappointments. It also helps if he keeps the entrepreneur abreast of how things are going for him personally in the firm, whether he is progressing, gaining influence, or slipping into a precarious position. You might be pleasantly surprised by the sympathy that spontaneous frankness can harvest, and the positive effect it can have.

Simon Acland worked in the venture capital industry for more than 20 years, most notably as managing director of Quester. He is the author of “Angels, Dragons and Vultures – How to tame your investors… and not lose your company”. This blog first appeared on Real Deals, our sister title.

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