Young companies around the world now eagerly—and sometimes successfully—reach out to VCs in other countries. If you are a budding entrepreneur thinking about going the VC route to fund your business, it’s important to learn more about the industry and community. At the end of the day, money is what matters—it’s business for VCs. This is a harsh point of view for entrepreneurs, who are often quite emotional about their product or service. It can be hard to know just how to evaluate VCs. Here are some tips to follow no matter where in the world the entrepreneur or VCs are located.Sanjyot P. Dunung, Starting Your Business (New York: Business Expert Press, 2010).
Understand the nature of a VC. They are basically fund managers looking for high returns for their investors. Understand the VC’s portfolio’s mission and goals. Most have multiple funds in their portfolio each with different investment parameters based in part on the various investors. VC is an industry, and the VCs are your “customer.” You need to understand how the industry operates, how to get your “product” (i.e., your company) noticed, and how to close the sale (i.e., get your funding). While there are certainly nuances, treat it like a sales process from start to finish. Remember that VCs run a business, one that they are held accountable to by their investors. More often than not, the people you meet at a VC firm are not the actual investors (although the senior principals may have some of their own money in the fund); they just work for the VC firm.
VCs focus on market trends, whether it’s green technology, social networking websites, or the current perceived “hot” industry. While it’s still possible to get funding if you are not in a current trend, it’s certainly harder. VCs typically look at groups of investments and generally like to have funds with three or four companies out of ten providing exceptional returns. They expect the rest of the businesses in the portfolio to either be weak performers or to fail. Sounds harsh, perhaps, but this is purely statistical to the VC industry. It’s important to ask VCs about their expected returns. When VCs market their funds to potential global institutional and wealthy investors, they have to indicate a vision, strategy, and target range for returns to these potential “buyers”—that is, investors. If you’re beginning to think that a VC sounds suspiciously like an entrepreneur, you’re correct. You need to realize that in the same way you’re raising money from a VC, the VC is raising money from someone else.
Act the part. Be prepared. Conduct yourself professionally at all times. Dress and act like you’re going to a job interview—it’s quite similar. Don’t drop names or promise too much. Don’t make claims about your product or service that can’t be substantiated.
Again, your credibility will suffer even if you actually have a solid product or service. Go to any VC meeting with a clear presentation and detailed business plan. If you can’t answer a specific question, say so and promise to get back to them within a specified time frame with further information. Even if you don’t have an answer, be sure to get back to them later with a follow-up that indicates you are still researching the answer. Don’t act like you’re entitled to funding for any reason. You may think your idea is great, but VCs see many “great” ideas. Support your request for funding with clear business rationale and facts. Lose any attitude.
Look for mutual respect. Sure, you need money, but the VC needs to also be aware that they need good companies with solid ideas in order to be successful and profitable.
Is there a mutual acknowledgment of respect and that you both need each other to succeed? Many VCs appear to operate as if this isn’t the case. Just as you will likely turn to your VC for creative financing and exit strategies, the VC should respect your industry and management experiences. Success can only be achieved if there’s mutual respect and a focus on creating a win for all involved.
VCs who are undeservedly full of themselves may be more interested in satisfying their egos than partnering to grow strong companies. Some VCs will show such characteristics by playing mind games at early meetings. Others may try to intimidate you or be unconstructively condescending—for example, creating a hostile environment by aggressively and rudely demanding that you close your PowerPoint presentation and answer obtuse questions. You may find yourself the target of a barrage of foul language. While every industry has its share of egomaniacs, what you really need to focus on is how you can build a level of professional trust that will enable you and the VC to work together during challenging periods. Some VCs can forget that it’s a partnership and that the entrepreneur is likely to have an equity interest in the company as well. The VC may seek to treat the entrepreneur as a subordinate or an employee—and not a co-owner as well. Without a sense of cooperative teamwork, you may not have the VC and board support you need at critical junctures. Interestingly enough, the code of conduct that most professionals are expected to follow in the corporate world is not always standard in the VC world. Stay above any questionable behavior and stay professional. Despite the allure of money, you probably wouldn’t want to do business with these types of people in any circumstance.Sanjyot P. Dunung, Starting Your Business (New York: Business Expert Press, 2010).