Are VCs visionaries, or dictators?
by Nadine Torbey
Nadine Torbey, Investment Associate
Since I started working in this industry, I have been asking myself the question: as VCs are we visionaries or are we dictators?
Are we so great at spotting the right companies and winning business models? Or do we make them winners by the mere fact that we are backing them versus other start-ups competing in the same space? After all, we are adding to their current position: cash to execute their vision, additional perspective on their conversation, expertise, a valuable network… but also major funding rounds give a positive signal to the market, be it other investors, customers, partners and even the media … that’s surely not a bad way to start the race … And if that’s the case no wonder these days the route to market has become the route to getting VC, no longer a means to an end but rather the destination of the journey. Which makes me wonder, are we the ultimate stamp?
Ironically, if you were to ask most VCs if they would raise VC money they would answer: No — as little and as late as possible.
The fact remains, VC money is probably the most expensive, most constraining type of financing you will ever get. And very much like marriage, if done for the wrong reason or at a wrong timing raising VC money may very well be a recipe for disaster and a direct route to a nasty divorce, a custody fight and bankruptcy … Which makes me wonder about the dating dynamics between VCs and start-ups — just when should you take the plunge? As a founder a good way to go about it is answering two questions: Why are you raising? When is the best time to raise?
First, why are you raising?
Cash, value add, network, validation …? Do you actually need it? In truth, you might get all of these, but there are risks too. So in evaluating what your business needs some things worth considering:
The cash you don’t need: cash is king, yes … but quite often having an excess of it induces companies to overspend, clouds their ability to focus and prioritize and be efficient and lean.
The additional shareholder — the ‘new’ Ball and Chain /the piece of YOUR pie: you are quite literally giving up part of your company to someone new and completely external to its genesis and who will probably be external to its day to day operations or hurdles. And here we are talking in terms of value, in term of decision making. Exit the nice midnight chats with your co-founder enter the tricky boardroom discussions.
Conditions and expectations — for better (or for worse?): VCs are duty bound to make returns for their investors. So get ready for the conditions that can come with investment — structured instruments, detailed reporting, getting squeezed and pressured in directions that will maximize the returns. While you always expect the best you also need to be prepared for the worst. If you set expectations too high and make promises that you can’t keep, as a founder you could be at risk of being side-lined in your own company.
Ideally, fundraising should be triggered by a milestone, a project — any cash raised should be the required budget to deliver it. Before deciding to raise VC founders should consider all other financing alternatives: grants, Kickstarter campaigns, friends and family, banks etc. VC money is only right when the project you are financing is the enabler of exponential scale and growth at some point in the future — and this can mean different things at different stages (investing in the technology, replicating the model for different countries). If not, then it is not worth paying such steep a price or accepting potentially demanding conditions. Validation, network, advice etc. should only be the icing on the cake.
Second, when is the best time to raise?
It is also a matter of timing. Much like everything in life, the optimal timing will depend on the space, the industry stage, the team, the technology involved … but a general rule would be:
If you are funding your company to go from A to B:
- A needs to be solid and attractive on its own
- B needs to be realistic and defensible
The route from A to B must be clearly identified, achievable as shown by current status in A
Never raise your funds when you are ‘bleeding’ Always start your conversations with VCs when the company is in a stable place (for a start up!) but also when you still have enough cash in the bank to survive during the process, the negotiations, potential delays and I would go as far as saying you should have enough for contingency or a change in plans. Sometimes VCs will want to see something more or wait for a couple more proof points etc. and you should be able to not only survive but actually get there. That’s also why, when budgeting for your fundraise always leave a cushion for unknowns and unforeseen bumps in the road.
Building a company is hard and there is certainly no ‘one’ way to do it or to go about financing it. VCs should both be demystified and de-villainized. If done in the right conditions a VC/start-up partnership can be extremely successful. As an illustration, in the last Sunday Times Techtrack (a list of the 100 fastest-growing private tech companies in the UK) 2/3 of the companies had raised VC funding. My advice to founders would be, remain focused on the company and its growth path, do your research on VCs, know what you need and be ready for what you are giving up.
And most importantly pick the right partner…