“The best things in life are free,
But you can keep ’em for the birds and bees;
Now give me money, (that’s what I want) that’s what I want.”
– Barrett Strong
Lets see. First time entrepreneur… or you’ve already taken the brave leap, but suddenly hit a roadblock for lack of additional funds to scale up to even qualify for an order… or banks wont help because your services or IT firm doesn’t fit into their way of doing things … or even better, you have a crazy idea that could as well be the next big thing, only if someone would see the potential growth and the guts…
If you sniggered after reading any of the above, you’ve probably already had your share of knocking on doors in a bid to expand your business, or even just set sail…
I’ll give you a lil overview on venture capital, hopefully answering some of those questions you had about it…
- VCs invest in ideas, businesses with a high amount of perceivable risk but also a potential upside
- VCs invest towards buying a stake in your company (they buy shares of your company, without any collateral or pledge. That however, doesn’t mean that you don’t take their money or them seriously coz it appears to be tension-free capital unlike a bank loan.
- Not wanting to alarm you, but generally the legal agreements with a VC are made in such a way that the VC has a significant powers where the company is concerned.
- The powers and rights should be seen as a trade off for the risk the VC takes, and the collateral-free funds they bring into the company, and their time and effort.
- And while certain clauses in these legal agreements might give some of you sleepless nights, many extreme measures are almost never exercised by the VC. They’re sometimes just there so that promoters don’t think of playing any tricks on the VC or the company.
Yeah I know this is a very basic and simple way of putting it. There is much more to it, but if I were to put it all here, you’d be fast asleep before I’d expect you to scroll down…
Anyway, I’d just like to elaborate a bit on the last point in the image above, that I think is crucial for you entrepreneurs to know for when you plan to raise some money from professional investors:
(ok, now I usually get extreme reactions to my comparisons/ examples, so even if you find the comparison absolutely insane, don’t miss the underlying message)
The relationship between a VC and the promoter/ management team…it should be looked at like a serious relationship, a marriage of sorts or even as though you were looking for your next best friend if you’d like. And as we all know, everything long term cant be based on something trivial, like ‘I love the way she looks n dresses’, or, ‘I think she’s my soul mate coz we look great together’, or ‘she just has the most amazing expression when she’s trying to work the microwave while reading thru the manual’ or some similar balderdash.
The long haul asks for bigger and more important factors to be considered.
Venture funding, in any form, is not so much about the money as it is about the connect the promoter, the top team and the VC share. You could probably raise capital from four different sources, but it isn’t going to be so much about the money as it is about the magic the team of promoter and VC can create.
And unlike relatives whom we don’t get to choose, promoters can and must take time to see if her or his visions, objectives and spirit matches are clearly understood and appreciated by the VC they’re in talks with. Coz otherwise, like good ol’ Axl Rose says, ‘nothing lasts forever…’ Things sure can get nasty between promoter and VC if they don’t understand and share a similar vision of the company, and they are bound to lock horns; in which case, they both suffer, along with the business and all the employees, customers, …
You wouldn’t really want a tug-of-war with the promoter trying to go global next year, and the VC ranting for a quicker exit.
So while you may be strapped for cash, still choose your VC very carefully. And raise only the money you need. Gone are the days when VCs funded the Lamborghini’s of dotcom promoters.
I’m still just four years n learning in this industry, but if you do have any queries about venture capital, fire away. I’d be more than happy to try and help you out with it.