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As Printed in American Venture, April 2004
How VCs Help Their Investees
By Richard Dumler
What’s different after you’ve raised your company’s first round of venture capital from professional investors? The first change is the biggest; it’s no longer just your company! You have acquired a partner or partners, whether you have realized this or not. You are still the managing partner with ultimate responsibility for the success or failure of the enterprise, but the concerns, advice, opinions and in some cases, the consent, of your new partners must now be taken into account.
If you’ve been at all smart, you will have realized this from the beginning of your search for venture capital and not have had the reality of the situation dawn on you as you negotiated the detailed terms and covenants of the venture capitalist’s investment. If you’ve been diligent and a little lucky, you will have had the opportunity to discuss your company with several firms which were prepared to make an investment. In other words, you will have had the opportunity, though perhaps in a limited way, to choose your partner(s).
Choosing the right partner is crucial to the success of the new enterprise. No real explanation of why this is so is necessary if one focuses on the meaning and implications of the word partner. Just as the venture capitalist is evaluating you and your business, you need to evaluate him and his firm. Is he smart? The answer to this question will almost certainly be yes, even if you don’t think so! Has he had experience in businesses similar to my own? Do his (and his firm’s) goals match mine? Can I work with this guy (a uni-sex word)? Especially if times get tough? Does he or she have time for my company? The list above is only a beginning, and please note that none of these are questions about who will give you the best deal. The reality is that the valuations offered by most venture capitalists will normally be in the same range (though the minimum investment size offered may be considerably different.) Thus, valuation should not be the primary criterion in choosing among competing investment proposals. Choosing the right partner will generally compensate for minor differences in valuation and structure. Choosing the wrong partner can be disastrous.
Even if you think you are only getting money from a venture capitalist, you are not. First, venture capitalists invariably get at least one seat on the Board of Directors and generally more. Few things can be more frustrating than attending a Board meeting where nothing of substance gets discussed during a six or seven hour marathon devoted to corporate minutiae or slick and very well rehearsed Power Point presentations designed to obfuscate rather than elucidate.
As you may infer, both management and investors can waste valuable time and energy if they are not focused on the right issues and goals. Unwavering concentration on the key factors for success is the first thing you should expect from the venture capitalist. This is also probably the way in which he or she can
help the most. Handling the day-to-day issues and crises in a new business consume an enormous percentage of an entrepreneur’s time, energy and share of mind. This effort is invariably accompanied by a strong emotional commitment to the people and underlying ideas involved.
The venture capitalist should not be caught up in the quotidian issues of running the business (if he is, both of you have a real problem!). What the venture capitalist should bring to the Boardroom table is perspective and experience. It is his job to ask, is the strategy right, is what the Company is doing working, will it accomplish the goals of the Company, and are the right people in the right spots? These questions are not criticisms!! They are questions you should continually be asking yourself. You may be, but let’s admit that we all can still get very annoyed when others ask them of us. Still the questions are valid and answering them honestly is key.
At this point you may be asking yourself, “yeh, all this is very nice, but what about all the help the venture capitalist is going to provide? Telling me I’ve got the wrong person running sales is not very helpful.” Au contraire! And even so if the VC is wrong. Objectively evaluating the performance of people who may be our friends and who may have made invaluable contributions to the Company is not easy, and making the tough decision that they need to be replaced (no matter how euphemistically phrased) is even harder. A continuous and understanding dialogue on personnel matters with somebody who’s seen a lot is nothing but helpful. These are the types of conversations that the entrepreneur can often only have with some one who knows the company intimately but is not employed there.
When a change is made the venture capitalist can be equally helpful, though perhaps not in the most obvious way. It is unlikely that the venture capitalist will have the perfect candidate for your VP of Sales opening in his back pocket; and anyway there are probably competing openings in the rest of his portfolio for that position. He may have suggestions for a good recruiter in which case both of you are lucky. He may be able to pass along some relevant resumes from the torrent that crosses his desk. But in the end, even though you have to fill the slot with your person (which is the way you really want it anyway), the venture capitalist will still insist on being involved.
Again, this is not bad though it may seem like interference at the time; after all you have to live with the guy. But again, an objective, experienced, outside opinion can be invaluable. At Milestone we were able to provide one of our portfolio companies with what looked to us to be a perfect candidate for VP sales from a resume we received. Management rejected him, saying that he didn’t fit the culture of the company or its customers. “He was too salesy.” Both the candidate and we persisted. In the end, the CEO, to his great credit, understood that he was the right hire precisely because he didn’t fit the company’s culture, that the culture needed to change to be more sales driven!
Of course, it is entirely possible to write a laundry list of ways that VCs can be helpful to their portfolio companies besides the money they provide. In recruiting key hires, the best people sometimes need persuasion and reassurance that the venture has high probability of success and the financial backing necessary. The same is true of customers, especially the very first customers and the later, larger and more risk-adverse (read smarter) of them. Introductions to potential providers of the next round of financing, investment bankers for the IPO, lawyers, doctors and potential strategic partners, the venture capitalist can help with all of these. But frankly, if you’re successful, so can lots of other people who will be only too happy to help (often for a fee, of course.)
If I give the by no means exhaustive list of “VC benefits” above short shrift, it is not because in certain instances they aren’t invaluable; it is because they aren’t the meat of the added value that the venture capitalist can provide. I’ve used the partner analogy. One could also use the parent or coach analogy. The venture capitalist’s success is bound intrinsically to the success of the entrepreneur’s company and so he desperately wants you to succeed. He can offer experience, advice, an understanding ear and an occasional salutary trip to the woodshed, if necessary. It will be up to you to succeed in the world, but how many of us can say that we did it without help from our parents, or our partners.
Mark Ain, the founder and CEO of Kronos, a very successful public software company, likes to tell a story that sums up the value that good investors and a good Board can bring to an entrepreneur. Kronos was installing a personality profiling system to better understand relationships among employees (hint: the good ones are surprisingly accurate and useful), and, of course, everyone took the test including the CEO. When his results came back, the tester exclaimed, “You have the classic entrepreneurial profile” but then had a question, “How have you succeeded? Everyone else with this profile failed.” Mark said that he listened to the advice of his investors and Board. I can attest that he didn’t always take them, but was always soliciting their opinions. As he might have said, (but didn’t), “As long as you’re stuck with these people, you might as well use them!”
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