How to Work Together on A Venture Capital Deal
If you get investment, the venture capitalist becomes your business partner. As with all business partners, the relationship between founder and VC is an intimate one. You must trust your VC, and she must trust you. This trust is often built during the early stages of the relationship, before the investment is closed.
When you align your desires with your VC’s desires, the whole process of working with venture capital goes more smoothly.
Find a VC you can trust and work with
When you are seeking investment from a VC, do the following:
Determine whether you can trust this person. Find out who she has invested in and contact those companies. Make sure you get in contact with those who are in business as well as those that are not. Ask around about the VC. It’s a small community, and VCs’ reputations tend to be well known.
Interview the VC. The VC isn’t the only one who gets to make decisions about whether or not to pursue the relationship. You do, too. Ask questions of the VC about the size of her fund, how much is invested, and what funds are remaining for investment.
Note: If the VC is raising a new fund, it may be a year or more before she can actually make an investment in your company. Although this is okay, you want to be able to set your expectations accordingly and spend your time approaching other funds that are actively investing.
Also ask whether the VC has a fund. Many people who seem like VCs are actually finders, brokers, and other service providers. Just because they have capital in their name doesn’t mean they have capital to invest. Look for telltale signs: exclusive contracts, up-front fees, or requiring you to pay a percentage of the raise amount, for example.
A venture capitalist is not king of the financial world. Instead, she’s more like a middle manager who has to answer to a board, partners, and public opinion. This notion may help you get the VC off the pedestal in your mind so you can work with her as an equal and a business partner.
Also, when you’re going into the pitch and throughout due diligence, think of the VC as a business partner that you can choose to work with or walk away from. Then you’ll be more comfortable and more in control going into the pitch and the negotiation.
You may know of a venture capital fund that is local to you that’s fully invested but, for some reason, agrees to see you and have you pitch. Although this is great practice for you, it can be frustrating because a fully invested fund can’t invest in your company under any circumstances.
However, this VC can give you a very valuable referral to another VC if she thinks your business is appropriate for another fund. The only way you can get money out of this interaction is through such a referral, or if the VC invests her own money as an angel.
Know what to expect in a VC deal
VCs have their own rules of engagement that are based on managing their own time constraints and serving the needs of their limited partners. Although they do need good companies in order to be successful in their business, don’t expect the red carpet treatment:
Don’t expect easy access: If you think getting an appointment with your dermatologist is hard, try to get an hour alone with a venture capitalist! VCs are known to be difficult to corner. They have so many demands on their time that they have to fly under the radar sometimes.
Don’t expect advice: VCs rarely give feedback after they reject your deal. First, they don’t have the time. Second, they may not have any particular reason for rejecting you; when your job is to screen through hundreds of applications looking for a gem, you are bound to overlook a few rough diamonds now and again.
Third, the VC just might not get it, in which case she’s unlikely to tell you something specific is wrong with your deal; in fact, your deal may be fine. Finally, because VCs don’t have time to look into your company very closely before they pass it up, they wouldn’t presume to come back to you with deep feedback after only giving your company a glance.
If you want to know why you were rejected, you’ll need to figure it out without the VC’s help: Ask around. Read up on the VC firm (which you should have done before applying in the first place). Reevaluate whether you are truly a good fit; you may discover that you were just really hoping the VC would think you were.