VC has a mantra – pay it forward. It’s the notion that, in this innovation gig, we are all in it together and therefore sharing what we know with others benefits the entire ecosystem.
For the most part, this philosophy is hugely generous and benefits both the entrepreneur and the investor. Many would go so far as to credit this philosophy as being the core differentiator that has made and continues to make Silicon Valley a great place for innovators and innovation to flourish. People are generous to a fault, with bits of advice filling the air up and down Sand Hill Road.
Investors, in particular, have embraced this philosophy so much so that there is an old adage: “If you want advice, ask for money. If you want money, ask for advice.” Unfortunately, what I have found over the years is that some of the advice shared with entrepreneurs, specifically by investors, amounts to nothing more than a sound bite.
I still recall from more than twenty years ago the first bit of advice I heard VCs consistently give entrepreneurs. Every panel it seemed had investors express some version of the sentiment, “raising VC is like a marriage.” Now, I love a good sound bite as much as the next investor. A well-phrased, brief statement can shortcut a shared language into a shared understanding. However, this particular sentiment has always proved problematic for me for the simple reason that marriage does not have a universal language nor does it have a shared experience across cultures, genders, and individual experiences.
So, let me give my take on what I think raising VC means for an entrepreneur and her business.
- Raising VC is a serious undertaking. Even when raising investment from friends and family or angel investors, entrepreneurs should go into it with eyes wide open. This should include consulting with and engaging professionals like lawyers who will ensure that the parts of your business you are selling do not end up killing the very business you intend to grow.
- Not all venture firms are created equal as it relates to your company. Entrepreneurs would be wise to target specific investors that will be a value add to the business, and conducting due diligence on the firm and individuals should be a fundamental part of the fundraising effort. Your diligence should include talking to a firm’s portfolio companies, getting to know the partner who will work with you and your company, and asking questions about the life of the fund to understand return targets and if there will be funds available for future investment in your company.
- Raising capital is not the same as creating good governance. Most, if not all, venture firms will require that a board of directors be formed and that they occupy board positions as a result of their investment. This does not ipso facto lead to good governance for a business. Entrepreneurs should build a board that will benefit the business, and while investors can be a part of that, they should not be the only people at the table, in my opinion. Make sure you are building your business when you build your board.
- There are both explicit and implicit promises when venture capital is raised. When the term sheet is signed, there is a promise to grow the business in order to eventually return capital to investors. Embedded within that statement are all sorts of promises that the entrepreneur would be wise to tease out and stay on top of as she grows her business. Examples include reporting requirements, decision-making processes, annual plan and budgets, and other core business functions that an investor will expect to have visibility to and at times, input into. Open lines of communication are key to navigating and managing the back and forth of these promises.
- Raising VC is not for every business. Venture capital has specific return targets including exit value and time horizon, which implies a certain pace and scale of growth. I am often telling entrepreneurs that they have the potential for a very successful business – but the company may not be a fit for VC funding. This is not a failure for a business, this is a reality of the math.
All of this is to say, I don’t have a pithy sound bite for raising venture capital, primarily because of #1 on my list. This is serious stuff and cannot be – nor should it be – boiled down to a cute phase that ultimately leads to confusion, frustration and broken promises.
