Raising capital from a VC is an evolving journey with many potential outcomes and it pays to understand what you’re committing to and how to achieve a reasonable outcome.
The journey usually begins with an unequal relationship, because Australia has long been an investor’s market where demand far outstrips the supply of capital. So as an early stage company, you will have been subjected to a “beauty contest”, then grueling due diligence, followed by a tough legal negotiation before you receive your funding. You will be grateful that it’s over and you have the money, but now the real work begins…
It’s rare to find a successful entrepreneur operating a VC, so more likely than not the people who will become the masters of your destiny have less than comprehensive experience of your world. Equally, it’s rare to find a founder who has had previous success managing a fast growth business to a successful outcome, so also likely that you will get some things wrong, with adverse consequences to shareholder value.
Such is the setting for a three-part melodrama, which I’ll characterise as follows:
- The Honeymoon
You have some millions in the bank, new people to recruit and new markets to pursue. It’s a heady experience; you’re working 100 hours a week and loving every minute. Your VC encourages you to think big, they want big achievements, fast growth and lots of profile for you and your company. There is upside everywhere you look and the risk of failure seems fantastically remote.
- The Marriage
The first significant commercial milestones of your business plan are approaching. Not all the people you hired are living up to expectations. Customers are proving harder and slower than planned to get over the line. There are unexpected competitors, unexpected go-to-market problems. Perhaps you’re hitting the revenue objectives, but the margins are weak and the cash burn too high. Your board, which includes at least one person nominated by the VC, is good at many things but not really helping with the specific challenges you face.
Behind your back, they’re having their own conversation…
- The Separation
One way or another, it ends badly for the founders. Pushed aside, significantly diluted or wound up altogether. How did it come to this?
How can you manage the expectations of your VCs while staying true to your vision? I would argue there is an even money risk you simply can’t. Your vision is secondary to the commercial interests of the VC, that’s part of the deal when you take other people’s money.
But there are some things you should be doing from the outset to improve the odds for everyone.
Firstly, over-communicate. Provide an investor update email every month, write a trip report every time you travel and above all, be scrupulously honest and impartial in the reports you give to your board. Don’t dress up bad news or overstate good news. A turd is a turd, no matter how much you polish it!
Secondly, manage expectations. Under-promise and over-deliver by having a backup deal or contingency plan for every objective. If you have concerns about the targets from your original business plan, downgrade them at the first opportunity, preferably while you’re still in the Honeymoon stage! Wherever the targets end up, focus your and the team’s energy on making them happen. Every employee needs to know what the investors expect and what their share of the task involves.
Finally, be honest with yourself. Accept that you may be part of the problem. If a director quietly suggests considering a new CEO, listen to the message and leave your pride and ego out of it. As entrepreneurs, we all have massive passion and massive self-belief. You won’t get to first base without a lot of confidence, but most companies need different leadership skills at different stages and a smart founder knows when it’s time to hand over.
As a final word, I raised money from a VC in an earlier venture. My honeymoon lasted about 20 months, culminating in a successful IPO. A few months later, the board fired me. I spent some time feeling sorry for myself, and then got busy with another startup. Two years later, I bought back control of the company and achieved a successful exit for the VC, returning them 6 times their investment. Few journeys are perfect, but most of them are a “long game”, so embrace the experience – it’s a privilege that only a very few are awarded.
Ian Buddery is the founder of multiple companies including eServGlobal in 1991 (ASX:ESV). During his career he has successfully obtained Venture Capital and Angel funding, performed two IPOs, six acquisitions and one major trade sale. Ian holds a number of positions, including Executive Chairman of Maestrano. He is also President of the Asthma Foundation of NSW.