By and large, venture capitalists – or by my preferred name ‘vulture capitalists’ – are a necessary evil.
Don’t get me wrong, venture capitalism can and does add a lot of value to companies. They can make deals fly and help make millions out of the ordinary person’s idea. They sometimes invest where angels fear to tread and make dreams happen. But the process can often seem like a nightmare.
Think of the VC-entrepreneur-relationship as a marriage: it has wonderful benefits, but they come at a cost.
A marriage needs to be nurtured and worked at. You have to know when to flirt and when to rage, when to stay silent and when to voice your opinion.
The venture capitalist will almost certainly have appointed a representative to your board. You may or may not have had a say in who this is. Either way their job is to represent the VC. They cannot give them any sort of priority – technically. Don’t be deluded.
If things are going well you will have little or no contact with your VC because they are too busy looking after all the other basket cases. Should matters go south, then they will be all over you like a rash.
If the fund invested in is off their own balance sheet the venture capitalists will perhaps have a more flexible approach, but if it’s a third party fund they will have made certain performance commitments. If you don’t hit them, god help you.
I remember being told by the VC who had invested in my business that I needed to increase my sales budget by 25 per cent. When I explained that increasing the numbers on the spreadsheet wouldn’t mean I’d hit the percentage increase required, I was met with stunned silence and little offer of help if targets were missed.
I was threatened with swamping the board and share dilution for non-performance.
Once the shareholders agreement signed at the midnight completion meeting is long forgotten, it will be the nasty small print that can come back to haunt you if you fail to deliver.
So choose your bride with care – divorce is expensive and sometimes even impossible.
Jo Haigh is head of FDS corporate finance services and the author of “The Financial Times Guide to Finance for Non Financial Managers.”
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