You have been dreaming of starting your own company since you were in college. Now you have a business concept that is differentiated and scalable and serves a large untapped market. You also have a co-founder, who is as competent and passionate as you are. Maybe you have even test-marketed your concept. You are now ready to conquer the world. Before you can launch the next Google, someone needs to provide funding for further service/product development and marketing. Other than your family and friends, a good source of financing can be a venture capital fund.
Alas, all venture investors are not the same. You will need to do some homework before you embark on attracting the needed funding for your dream company. This homework will undoubtedly earn rich dividends. A well conceived plan could land you the right partner in short order. On the other hand a poorly planned foray can lead to an unending series of discussions or worse an investor, who is more a hindrance than help. You never want to end up with an investor who does not share your vision and is either too intrusive or too detached.
While every situation is somewhat different, there are some common things that all entrepreneurs should expect from a venture investor:
1. Knowledge and Understanding of your Proposed Business: Your financial partner should be willing to dive into your proposed business plan and fully understand and appreciate the opportunities and risks. He/she should be able to articulate key decisions you are likely to face and what might go wrong as you work to realize your dream.
2. Willingness to Share Risks and Rewards: Creating a flourishing business requires considerable efforts and the path to success is not linear. The investor should show willingness to support the team if you hit bumps on the road. This support requires deep market understanding and a willingness to share risks. Of course, you should not expect investor support if there are fundamental problems that cannot be fixed. Investors who have run companies in their prior life are more likely to be able to differentiate between temporary setbacks versus fatal flaws. For example, I was the Chairman of a company that almost went bankrupt three years prior to being sold for more than $500 million.
3. Timely Responses: Post the investment; you are going to call upon your investor for help with strategy, customer contacts, recruitment or just plain brainstorming. You have the right to expect clear and timely responses to your request for help. If the investor is not sufficiently responsive during the fund raising process, it is unlikely to get better after the investment. Pass on an investor who does not give a clear yes/no answer in a reasonably short time frame.
4. Independent Thinking: You should look for a partner who can think outside the box. Entrepreneurs are generally too close to the business and can miss opportunities and hazards that are not directly in the line of sight. A strong investor will act as your eyes and ears into developments in and around the industry that may affect your business. Ask questions during the initial engagement to test the capability of your partner to think independently. Investors who invest because someone else is investing should be red flags.
5. Fair Valuation: Valuation discussions should be based around a win-win philosophy. Too low a valuation can reduce the ownership of the management team to a point where their motivation is compromised, while excessive valuation can put pressure on the management team to do things that are inappropriate for long-term business success and leads to an unhealthy relationship. Most entrepreneurs who focus on valuation to the exclusion of everything else live to repent the decision, because the final outcome is often sub-optimal.
6. Trust: The most important element of any relationship is trust. You should be able to trust your investor and the investor should have trust that you are a competent and passionate leader. This starts with initial engagement on both sides. Trust is what is going to carry the relationship when the chips are down – and they surely are at times during any remarkable journey.
The venture industry is there to be of service to world-class entrepreneurs and not the other way round. Remember that as you look for partners in building your dream company.
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