Venture capital funding is a relationship, not a transaction, argues Nat Goldhaber
Nat Goldhaber is co-founder and managing director of Claremont Creek Ventures, a seed and early stage venture firm. This column first appeared in VentureBeat.
Thanks to the most devastating recession in decades and dramatic shifts in the venture industry, finding investors to write those first checks is a frustrating, time-sucking process for entrepreneurs – but that doesn’t mean they can’t be particular.
If you’re startup owner, it’s important to remember that you don’t need to take money from just any VC. Venture capital, at its core, is the business world’s equivalent of a long-term, nearly inseparable, relationship. You are marrying your investor.
Like any good relationship, it’s best if the two parties have a lot in common. They should have experience in the same areas. They should be good communicators. There should also have good give-and-take skills, as well as mutual tolerance, because periodic disagreements are inevitable. What counts when that happens is whether those disagreements can be resolved amicably and successfully. If these situations aren’t met, the venture capital you attract is just fool’s gold.
Here are four tips to keep in mind before you take any venture capital:
1. Pick your investors strategically: Venture firms range widely by industry expertise, business experience and approach. The process of selecting one is more analogous to the selection of cofounders or early employees than it is to the selection of a bank for a loan. The most important consideration is not how much money you can raise and at what valuation, but whether the venture firm will help you grow your business. What do they know? Who do they know? How will they work with you?
2. Communicate honestly and openly: Expect your venture firm to reciprocate in the relationship with candor and transparency towards you. During the due diligence process, ask for their opinions about things such as product strategy and distribution channels. How do they approach your business?
Don’t just say what you believe investors want to hear – how constructive is the conversation when you encounter conflicting points of view? Honesty breeds honesty, and it would be unusual if there aren’t disagreements. How you work through those differences may foreshadow how you and your VC partner work through the inevitable challenges ahead in building a business.
3. Background check and get to know the firm: Your due diligence should be extensive and more complete than a perusal of the firm’s web site and portfolio companies. At what stage did they fund other companies and with how much capital? Did they support their companies in future rounds?
Make sure there’s dry powder. Some firms may act as if they can invest when they haven’t funded a new investment in over a year. Reach out to the CEOs of portfolio companies to learn about the firm and its partners. Use LinkedIn or other means to find independent references. Your assertiveness in reaching these people speaks to the type of entrepreneur you will be.
4. Begin working together right away: There are significant risks in building a new business, and any good investor should want to help you overcome those as soon as they invest. But why wait? At CCV we invest exclusively in seed and series A rounds, so we often work with entrepreneurs to overcome challenges while still working through our investment process or even before entrepreneurs decide they are ready to take an investment.
It’s an approach we call Life Cycle Venturing (LCV) in which we invest time working with promising companies and establishing relationships with entrepreneurs, often well in advance of a funding event. This early involvement allows us to lay the foundation for a successful working relationship with the entrepreneurial team.
The specific engagement depends on the needs of the business and the entrepreneur’s talents but can include recruiting candidates for key roles, introducing customers or key advisors, providing space in our office, negotiating IP licenses, or simply fostering a constructive dialogue to challenge key assumptions and refine the company’s plan.
Entrepreneurs should expect their potential investors to bring clarity to key questions and aid their company’s progress even before they take a VCs investment dollars.
It’s instrumental to remember that this is a relationship and a process, not just a fundraising event. Making an effort to follow these tips will help you make better decisions about your investors and select partners who you are happy to make part of your business family.