What to Consider Before Getting into Bed with Venture Capital

Talar Demirdjian, Jun 22 2017

Aligning your company with a venture capital firm seems like an exciting step, and one many startups consider a sign of success. It is often one of the most significant steps for a startup company as it grows its business and forms a financial stronghold for itself.

Venture capital firms have the distinctive capability to propel start-up companies into new growth territory, giving them the opportunity to start thinking about their future in a whole new way.

Choosing a venture capital firm is a two way street; they choose you, but you also have to choose them. For as much research as a venture capital firm does when deciding whether to invest in a start-up company, it’s equally, if not more, important for the CEO of the startup to do the same amount of research in choosing who they want to be partners with for a long time.

After all, these firms usually have input in company decisions, and a portion of the equity to boot. So, even though the opportunity of an influx in capital to your startup is exciting, make sure to know who you’re dealing with. 

Here are a few things to keep in mind before you get into bed with a venture capital firm:

Have a Steady Team
There’s nothing worse than receiving huge amounts of funding, or having the potential to, to only face internal issues, and have weak links. Hiring people for the sake of creating a team and launching, is detrimental. Each hired individual has to be highly qualified, and possess the ability to take the business to the next level. A CMO, for example, with limited marketing experience is a severe disadvantage, a CFO with limited financial experience is a catastrophe waiting to happen.

The more appealing the team appears to the venture capitalists and the more applicable skills and knowledge they have, the higher the probability of them reaching their goals within the startup. A good and steady team guiding the sailboat will make it easier for them to reach the shore.

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Search for the Ideal Match
A harmonious partnership between a venture capital firm and a startup is multi-faceted. It’s vested in finding an investor who has relevant expertise and has had success in your market. So, working with established firms in your field who have already experienced success in your specific market, will pay off in the end.

It’s also necessary to find a venture capital firm who shares the same business philosophy and company development standpoint. It’s essential for an investor to mesh well with the startup’s executive management team. Your fundamental ideologies have to align. If you don’t have this, the investment firm may bring in capital but it will also bring with it a different set of problems.

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Timeline Trajectory 
Contrary to popular belief, venture capitalists don’t necessarily take big risks and support innovation.

A Venture capital fund has a limited life cycle, and their timeframe for return doesn’t often meet that of an entrepreneur concentrated on long-term innovation. Venture funds look for investments that can generate revenues in two to four years and break even soon after. Their best outcome is one in which they sell the company for a lot of money, or go public within the fund’s lifetime.

There are negative consequences for innovation due to this short life cycle for venture funds, particularly for innovation that concentrates on solving difficult issues. Most investors won’t look positively on funding startups that take many years of research. Innovation that takes a long time, just isn’t something venture capitalists can get behind.

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Consider Other Options
Sometimes a company just isn’t ready to work with a venture capital firm, or isn’t willing to divulge that much power to an outside firm, so looking into alternative forms of funding before jumping into a relationship with a venture capital firm is best.

If you already have a pre-existing investor base or angel investors, and they are happy with your company’s progress and your future prospects, they can provide additional capital. If not, searching for these types of funding at first, can be better aligned with your needs.

An alternative option to consider is venture debt, which is particularly prevalent in the software industry. Venture debt can provide important capital growth with a reasonable interest rate that may be more favorable to your current shareholders by removing the reduction of company ownership that would come with investment from a venture capital firm. Venture debt is a form of debt financing for emerging venture-backed companies. This type of financing has emerged as a means of financing startups that are "in between" more traditional venture capital financing rounds.

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There is no straightforward answer on how to solve your funding needs. However, if you are building a company with outside capital, one of the most important decisions you will make is the investor you are getting in bed with.

Ultimately, the most successful businesses are a result of their founders and investors having a shared and unique vision, determination, synergy and common goals so that they can overcome all the complications they will meet along the way.

 

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