Even these days, in The Best of Times for SaaS, many founders are wary of Venture Capital.
Don’t they all just fire founders? Well, not really, not usually. But sometimes, if you give away control and screw it all up, then yes. More on that here. But often times they simply can’t. One board seat doesn’t give VCs the right to do much of anything. And most earlier stage and smaller VCs don’t think in these terms.
Aren’t they all just trying to steal the company away from you? Sometimes, in a sense — but not really. VCs can only buy what you are willing to sell. And VCs usually are investing in you, in the CEO, as much as the start-up, at least in the early days. But it is possible to sell 90%+ of the company away. Then it’s not stolen, but certainly, it’s sold. Try to avoid having to do so many venture rounds you could end up in this scenario.
No, all VCs are really trying to do is invest in potential Unicorns and make a lot of money.
And no one forces you to take millions of dollars in investment to help grow your company faster.
Still … I’ve had some both negative and positive VC experiences as a founder, and I’m a VC now, and while I don’t think you can really be “screwed” by VCs … because dude it’s a financial transaction, and it’s a negotiation … there are some key things to try not to do, I think in venture rounds.
Here are some basic things I’d avoid:
- Be wary of low-priced secondary liquidity. Getting cash out can sound so great when you’ve worked so hard. But if you sell some of your hard-earned common stock at say a $40m valuation, and the company does the next round at $400m, you really will feel like an idiot. You’ll never get that stock back.
- Be wary of boards that don’t proportionately reflect ownership. I’ve gotten zen about boards of directors and my view is they should roughly reflect ownership. If you sell 20% of the company, the VC can have 1 seat, you keep 4. If you sell 40%, VCs get 2, you get 3. Etc. etc. You can tweak this, but anything that creates more seats than are “earned” by ownership … don’t do it. Also don’t do the “outside director that is a friend of the VC” thing, unless it’s someone you really want also.
- Be wary of VCs that have invested in your direct, or very adjacent competitors that want to meet with you. This isn’t really that big of a deal, but 9 times out of 10, they’re just fishing for information and will share it back to your competitors. And though nothing is all that secret on the internet these days, it is a huge waste of your time.
- Be just a little skeptical of The Guy They Bring In (but sometimes it can be great). Be wary of some ‘consultant’ or VP that’s been working at a VC firm that they want to bring into your company. Sometimes, this is really great. If they happen to have a great VP for you that is hanging out at the VC firm — grab her or him. But sometimes, that Guy Down The Hall is really someone put in to potentially take over the company. Really only an issue with Big VC firms when you sell a lot of the company. Not an issue if you’ve only sold a small portion of the company, still control the board, etc. More on that here.
- Ultimately, you want someone that has your back. It’s not about you, it’s about the company, true. But it’s your company. Pick the best VC for you. But pick someone that has your back. If you don’t feel it … even if the brand is right, the background is right, the smiles go on for miles … pass. Find another. Even at a substantially lower price. ‘Cause you’ll be stuck with this dude forever.