Get The Venture Capitalist That You Want
- By Rahul Varshneya
- February 5th, 2013
This one match is certainly not made in heaven. You’ve got to toil and woo several partners to finally arrive at one that best understands you and your business and is ready to commit to you on the long term.
I’m talking about your relationship with a venture capitalist. Often, you hear grieving entrepreneurs, who after signing the dotted line are quite unhappy through the relationship.
There’s nothing wrong with the venture capitalist (VC) per se. You just made the wrong decision. You’ve got to choose the right VC to work with. The right marriage will define how successful your business will be and how happy will you be running it.
Here are some pointers for a happy and long-lasting marriage with a VC.
1. Expertise: entrepreneurs choosing a VC is just like a marriage, a long-term commitment. You need to court to find out whether the VC is a right fit for you. Entrepreneurs must take the time out to research on whether the VC has funded companies in the domain they are operating. Research to find out what companies they have invested in and what has been their level of involvement in each of those. Do they have potential conflicts (is the expertise a by-product of an investment in a potential competitor)?
2. Adding Value: Look for investors who can add value to your business and not just give you funds. Best marriages between entrepreneurs and VCs happen when the latter can contribute to the growth of the former and when it isn’t purely transactional. Entrepreneurs need to find out when things get tough in their venture, will the VC be a part of the solution?
3. Pay attention to the term sheets: this is where you really find out what the intentions are of the person putting in the money. Look out for exit clauses, if not clearly defined, ask for them to be. Although they are not cast in stone (I know of one venture where the exit was clearly defined, but deferred as the company entered a new vertical and that added to their top line immensely, adding to a bigger valuation), but it helps to know what the person with the money is really looking for.
Term sheets are very carefully crafted to fool even the best of people into believing that they’ve struck a great deal, but in reality, for the entrepreneur, it is far from it. So if you’re at this stage, it wouldn’t hurt to have your term sheets validated by experienced entrepreneurs who’ve gone down this road and your lawyer who has the relevant experience.
Pay particular attention to the following:
- Preferred Stock: on sale of a company, VC would make much more than what entrepreneurs would think, if they have a preferred and participating stock option.
- Liquidation preferences: VCs always have a one up on this. Secure your interest up on liquidation.
4. Set expectations: most of the deals are left to ambiguity, either because of lack of clarity at the stage of getting into a deal or because of assumptions. It is very important to set expectations from both the ends and be clear about it. Entrepreneurs need to build trust with their VCs and vice versa. If you don’t have trust at the beginning of the relationship, it is bound to cause heartaches at the later stage.
Whatever you do, do not take this relationship for granted. You are in it for the long haul and giving up because of a failed marriage is the last thing that you want to do with your venture. So take caution before you enter into a contract.
And all the best with the pitch! If it has worked out well for you, I’d like to hear your experiences and what makes your marriage successful.