For most entrepreneurs finding an investor is a major challenge and the pressure to jump into bed with the first venture capitalist to make an offer is intense.
However, finding the right venture capital (VC) partner will take time. It’s important not to accept an offer without doing extensive research to make sure you fit. Building a close relationship with your investor is essential to building a successful business.
Prior to an investment, expect lots of meetings to discuss your company’s business plan and market potential. You should also meet with potential partners informally to get to know them outside work – this will help to build trust. Remember it is a two-way relationship, so be passionate about your business and look for evidence that you share the same vision and values.
Don’t be afraid to ask potential investors difficult questions: How do they view the drivers of equity value – are they concerned about profitability, revenue growth or the cost of acquiring new users? What happens if things don’t go to plan? What if you need more funds?
Make sure you get a detailed picture of the fund’s actual results and speak to companies funded by the same VC firm to find out how they work with founders on a day-to-day basis, and in a crisis. Did the VC help during tough times? Did they feel pressure from the VC to make decisions they didn’t feel were right for their business? Were they in it for the long-term? Are they easily accessible?
On board
Investors will usually take at least one position on your board, so make sure that person has something to offer. Look at their career history and speak to CEOs who have worked with them. It’s crucial that partners participate in their portfolios. They will expect a significant return on their investment, so you want to benefit from their experience of what creates value.
Find out if they have worked with similar businesses and how much time they can give your company. Your investor should offer advice on running your business and be able to introduce you to potential partners, hires and customers. Ultimately, they will help you secure the best exit. So ask yourself: Can you work closely with that person for years? Do you trust and respect them? What assets do they bring to your company?
Get the balance right
Don’t agree to your investor taking too many positions on your board, as directors or observers. If a board is too big it will be difficult to work together and will complicate decision making. For a young company, five board members are usually enough. Board members should offer different strengths and experience and should be balanced with founders, investors and independent professionals. Ask to modify deal terms if the VC firm’s positions on the board are disproportionate to their investment.
Cultural fit
Make sure the VC firm’s approach fits your company’s culture. Things can go wrong because personalities clash. As an entrepreneur and investor, I understand both sides of the coin.
It is important that your management style is compatible with your new VC board member’s. If your approach is informal and laid back you are unlikely to work well with autocrats from aggressive corporate backgrounds.
It is also important to accept feedback from investors, especially as their knowledge can identify flaws in your business model. First time entrepreneurs are often more successful than those who are experienced, as they have more enthusiasm and don’t see failure as an option. However, blind passion can mean you are too precious about your business. It is likely that your business plan will need to change and you should be prepared to adapt.
Maximum company value
An investor’s job is to maximize the outcome for all shareholders, not just themselves. Some don’t think this way, and see their investment like a loan and want to augment its value, independent of what the company is worth. In these circumstances they will be more focused on dividing the pie, rather than figuring out how to make it bigger. They may even look to sell their share or force the sale of a company before it has reached its true potential.
You want an investor who will help find solutions to problems and opportunities to grow your business, in order to create the highest possible value for your business.
Cramer Systems is a great example of a European telecoms technology company that became a world leader. Kennet was the first institutional investor in Cramer, and despite a severe downturn in the telecoms market we helped them manage the key challenges of growth and expansion in the US. As a Kennet partner, I joined Cramer’s board of directors and worked closely with its founders to expand the sales and marketing activities, using my own operational experience in selling software solutions. Cramer Systems was successfully sold to Amdocs for $425 million.
It’s true that people make a business. As a crucial part of your team the right VC partner will support you and help maximize growth and company value for the benefit of all.
At Vie Carratt we recognise great internet and technology companies in the making and work with them to help solve their business challenges and set them apart at exit. We provide marketing and communication services to enable businesses to develop their equity story and promote it to analysts, potential investors and buyers.
David Carratt, Founder and Director, Vie Carratt.