How to Avoid a VC Shotgun Wedding
As a former entrepreneur, I can empathize with the intense pressure surrounding financing for a new venture. In the current market, where the future is less certain than the recent past, many entrepreneurs may find themselves ready to jump at the first term sheet, or the best valuation.
To all those entrepreneurs, I offer my advice: Don’t do it. Shotgun weddings don’t work in romance, and they don’t work in venture capital, either.
Solutions that offer the best valuations, without the close-knit partnerships required to build successful long-term businesses, are never going to be sustainable solutions.
In my experience, a lack of shared understanding between the parties upfront can lead to bigger problems down the line.
I recently read a statement from Founders Fund boldly declaring that VCs impose “value-destroying distractions” with the “intrusion of adult supervision.” As I reflected on this thought, I began to wonder — if any entrepreneur shares these feelings, why then would he ever enter into an arrangement with a venture firm?
The fact is, a VC’s value can vary widely. Just like you’d be better off not going under the knife of a neurosurgeon who graduated med school with a C- average, you’d be wise not to choose a sub-par venture investor who doesn’t share your values. Take the time to find the right one.
If both enterprise and investor don’t understand each other upfront, there is going to be a lot of dissatisfaction about where — and how — the relationship ends. When you look at the start-up and venture capital sectors separately, it seems they both understand this principle. For each, building relationships is a prerequisite to building up businesses.
In the start-up world, founders take a long-term approach when searching for co-founders. Larry Page and Sergey Brin met at Stanford on Larry’s first day of class before founding Google; Steve Jobs and Steve Wozniak were friends in high school and spent every day together before founding Apple.
Similarly, while you probably won’t find a VC partner after a single meeting, there are a few things to keep in mind that can increase your chances of success over the long run.
First and foremost, do your homework. It’s shocking to me how few entrepreneurs actually make due diligence calls to other portfolio CEOs. At Foundation Capital, we provide contacts for every company we have ever funded. Use those kinds of resources. Ask for references beyond what is on the Web site. Don’t expect glowing reviews from every single reference, but weigh the feedback carefully and decide if you like what you hear overall.
Second, dig deeply into how the firm works with founders on a day-to-day basis. Consider how much — and in what capacity — partners participate in their portfolios. Think about the proposed value-add, and if it will complement the existing capabilities of your executive team. Decide if the VC firm’s approach fits your style.
Third, don’t get seduced by the name of the firm. This isn’t choosing a college or buying a car. Set the prestige factor aside. Frankly, a firm’s name counts for little when it comes to predicting the success of your venture. It’s really about the individual partner who will be working with you. Decide if you want to work with that particular person.
Finally, ask the tough questions:
- How will this investor help out during difficult times?
- Will he or she understand the process and need for more funds if or when that time comes?
- Is the investor’s approach to the venture truly collaborative — one in which both parties are dependent on each other to succeed?
- Are your prospective investors passive-aggressive, or do they come out and tell you what they’re thinking?
Strong entrepreneur/VC partnerships are based on mutual respect and a true drive to succeed. You don’t want an investor who simply hands you a check and pushes you out the door with nothing more than an expectation of flawless execution — and, of course, a significant return on that investment.
At the end of the day, accepting an investment is like committing to a relationship — there will be ups and downs and disappointments, and even a few failures along the way. But the best partnerships — like the strongest relationships — are lasting ones. Granted, we’re talking about a decade and not a lifetime, but it is still critical to understand the people you are bringing into your business and whether you can work with them over the long haul — through thick and thin.
Understanding a prospective partner takes time. So do yourself a favor: Play it smart. Take your time. Do your homework.
Charles Moldow is a general partner at Foundation Capital, where he primarily focuses on consumer Internet companies. A former entrepreneur, Charles was a member of the founding executive team at TellMe Networks and on the founding team of @Home, and has a background in general management, sales, marketing, product management and business development.