Most start-ups dream of getting outside investors to either help them start or scale. As entrepreneurs, we are encouraged to first bootstrap or get an angel investors to start you off. However, there comes a time when you need to sell some equity to venture capitalists for some capital.
Not many entrepreneurs understand how VCs work. So let me share some truths abut VCs.
They are not your friends
Most VCs invest in the team first before the idea. Don’t get me wrong, if two of you have the same great idea, a VC will look at the team to decide whether he will invest or not. They will look at the passion and the strength of each depending on their ability to grow the business.
What entrepreneurs think is that if the VC selected them, they are now buddies. They can go play golf together, call at wee hours of the morning and even catch a drink with the team every so often.
They will add little value
Fundamentally, what you need from a VC is their money ad at least 2 – 3 hours of their time every month. Some entrepreneurs think that a VC is part of the team and will assume he will take on some roles. An average VC sits on more than 3 boards and is always traveling, and will have little or no time for your start-up. However, when it comes to returns, a VC will come down on you hard, expecting to see a growth in numbers.
This means that you and your tea need to do all the heavy lifting, beating deadlines, signing up new customers, increasing sales and hiring.
They will do fine whether you succeed or not
Most VCs take risks with startups but they risk very little of their own money. They take huge amounts from successful exits or when companies go public, and plus they have a safety net from interests earned from their funds. So for them, whether you succeed or not, their lives will go on and they will invest in the next start up.
Of course, they root for the success of your company, but that does not mean that their focus will be on your startup.
They will control you
Some entrepreneurs think that when they own 51% of the company, they control the company and the board. The truth is, whoever is financing you has the most say. In many Board meetings, it rarely comes down to a vote, where your 51% will have more say. If the financier is not happy with your progress, they can pull the plug on you a anytime.
For entrepreneurs wanting to take in VC funds, check out our pros and cons of a VC article later