This is one match that’s 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 in the long term.
I’m talking, of course, about your relationship with a venture capitalist. You’ve probably heard grieving entrepreneurs who, after signing the dotted line, are quite unhappy throughout the relationship with their investors.
But there’s nothing wrong with the venture capitalist (VC) per se. You just made the wrong decision. As an entrepreneur, you’ve got to choose the right VC to work with because the right marriage can help define how successful your business will be and how happy you will be running it.
Here are 4 key points to consider for a happy and long-lasting marriage with a VC.
1. Expertise: Choosing a VC is just like a marriage — it’s a long-term commitment. You need to court first to find out if the VC is a right fit for you. Take the time to research whether or not the VC has funded companies in the domain they are operating. Research what companies they have invested in and what their level of involvement has been in each of those businesses. Do they have potential conflicts (e.g. is the expertise a byproduct 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. The 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 ask themselves, “When things get tough in my venture, will this VC be a part of the solution?”
3. 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, which added to their top line immensely, adding to a bigger valuation), it helps to know what the person with the money is really looking for in the investment.
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, that’s not always the case for the entrepreneur. 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/or a lawyer who has the relevant experience.
4. Set Expectations: Many deals are left to ambiguity, either because of a lack of clarity at the stage of getting into a deal or because of assumptions made by either party. It is very important to set expectations from both 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 heartache 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. Take caution before you enter into a contract.
That being said, all the best with your pitch! If it has worked out well for you, I’d like to hear your experiences and what makes your marriage successful.
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.