Like at a breakfast buffet, startup founders face a dilemma: Which VC to work with? Is now the right time to take the money? What kind of deal should we try to strike? Often the draw of quick cash from a VC is too alluring, and it’s hard to turn down a bird in the hand when a startup founder wants to move their company forward. This leads to founders taking VC offers before thoroughly thinking things through.
Startups lucky enough to fall in with a good VC find the support they need to make their way in the tech world, but too often, founders find taking the money was a mistake – selling their ideas, technology, and even ideals for a greenback mess of pottage. With money comes all sorts of strings; some investors will raid startups’ intellectual property, require them to go to market too early, or impose limitations on what to develop.
VC money can be a boon or a burden. So what can founders do to ensure they end up with the best VC for them? Here are some tips:
Build a relationship: Get to know your VC
Startups have their own personalities depending on what they’re developing, and so do VCs. Some VCs are active and insist that a startup incorporate their ideas and methods, while others are more passive. Neither approach is better than the other; some startups need the firm direction of an active VC, while others thrive in a less restrictive atmosphere. Founders need to be self-aware enough to understand how to best work with a VC.
Before entering into a financial relationship, founders should develop a personal relationship with their suitors, including a “courting” period where both sides get to know each other to get an idea of who they’re working with. That includes ensuring significant others – like board members and other investors – get to know the VC as well.
Do the due diligence
At the same time, founders should conduct due diligence on the VC; find out what startups they’ve invested in, what the VC’s success rate is, and what the working relationship was like for others. Sources can include people who worked with the VC, lawyers who represented other startups, and industry mentors who know the VC’s strategy
It’ll take some digging – people may be hesitant because they don’t want to “get involved,” and founders may need to muster all their social skills to convince people to speak up. Yet asking these questions better positions founders when deciding whether a VC matches their needs. Don’t worry, this investigation isn’t nefarious – VCs conduct the same background investigations on startups!
Know thyself
VCs come in three styles: helpful, neutral, and harmful. Taking money from the first two may work, but beware a VC in the latter category. For founders with strong personalities and firm ideas, working with a neutral investor with deep pockets can be great. However, a VC that doesn’t get involved may not help find follow-up funding as they don’t view that as their responsibility. Founders should try to work with helpful VCs who will assist in building relationships with other financial players and mentors who can help them grow and advance.
But even with all the due diligence and relationship-building, founders must realize they’re entering a relationship with financial and business repercussions. Those repercussions will be written into the contract, but words on a page and actions in the real world don’t always match. For example, you may want to change course, or go down a path you strongly believe in, and your VC’s board member could think differently – making for an uncomfortable situation for all involved.
Founders need to decide to deal with scenarios with the potential to upset or change their plans and direction, and realize that in the end, it’s not about the money – it’s about trust. Do you trust the VC, and yourself, to make this relationship work? If the answer is yes, then call the lawyers and draw up papers. But if the answer is no, that VC money may be more trouble than it’s worth. Make sure you know what you’re getting yourself – and your company – into before signing on the dotted line.
