First off, I know diddley about venture capital and the entire VC industry. However, I have been in a few organisations now which have sought VC-assisted growth, and the ensuing fallout each time has got me wondering if:
1) it’s truly inevitable that things go pear-shaped after VC (if so why does anyone get on the VC gravy train at all?), and
2) someone can tell me what goes on in a VC’s head (are they really all a little nuts? Or am I missing something?)
It’s been a mini-mission of mine now to come to an understanding of these things. While scraping about for a bit of confidence to do the requisite mingling at a recent new biz / startup mixer, I somehow managed to fall into conversation with a seemingly-successful entrepreneur. Before you knew it we were on to the topic of venture capital and he tried to put me straight. This is my adjusted understanding of things:
The VC mindset
VCs don’t mess about. They may laugh and chat and pat you on the back and even encourage you, but they really did not arrive at your fledgling organisation to play games. They have a mandate.
First off, venture capitalists are mainly playing with other peoples’ money (think pension funds etc). Even where it’s their own money, the majority of that money is allocated safely, elsewhere. The small balance left over for use by the VC is essentially marked as risk-able. This is the money that seeks astronomical (eg 50%) returns, in a VC’s hopefully-capable hands.
The point is that the conservative, safe investing is already taken care of by the time money hits a VC’s pot. It is therefore pointless for them to seek decent or better than-average returns. Somebody already did that before they came along. Their singular focus is to achieve astronomical returns.
At this point, the lay person wants to raise a feeble hand and ask, “but surely, there’s no point if that growth is not sustainable?”
True, but since a VC has to *demonstrate* astronomical growth in order to get more money to play with, this little nugget of common-sense wisdom presents a problem.
Your business, with go-faster stripes
A year is about as long as a financial reporting period gets. Which means that’s the longest interval you can “buy time” for, before you have to relent and let everyone interpret your business results to date as “a pattern”. If that pattern isn’t astronomical growth, don’t expect people to hand over their risky money year after year so that your VC can hand it over to you.
So imagine that it would take the Widgetbiz company an easy 5 years to provide a 50% return to its investors, especially now that its gotten an injection of cash from a VC.
That VC doesn’t have a luxurious 5 years to prove that such growth is possible: Unfortunately for everyone, we usually give our money a year or two max in which to perform. So the VC immediately sets about to compactify several years’ worth of growth into 1 or 2 years. The result? Our VC puts a rocket under WidgetBiz and lights it.
So it is not the astronomical return per se, but the speed with which it must be manifested, that can spoil things for an:
Unprepared fledgling biz
An unprepared fledgling biz / UFB / Unidentifed failing biz / whatever… is not ready for venture capital. But they will feel that they are. They tend to be amongst those companies for whom:
1) growth has plateau-ed (no inbuilt scalability)
2) ownership is, quite simply, tired of running the business but don’t know how to stop yet and don’t know how to scale… there may be a prevailing sense of wanting to be ‘rescued’ (oh, if someone would just give us a million dollars, think what we could do!)
3) there is little understanding of, and therefore scant preparation for, the potential impact of venture capital on the company (people, goals, culture, etc).
Every UFB is destined to falter under the steady lash of the VC’s whip.
Prepping for VC
First off, VC is not the answer to every type of business situation, and it takes careful analysis to decided whether to actually take on venture capital.
The second thing is to not have any presumptions that your company will continue on with the same ethos. Forget it. You are about to rupture the very fabric of your company’s value system. It’s culture will be warped by the coming (ad)ventures at warp-speed, and it’s leadership will, 10-to-1, be entirely dismantled / replaced with people who will claim to (and actually might) know what they’re doing. Sucks for you, Miss original-owner-and-leader.
Also prepare to adjust to the idea that venture capitalists are not particularly attached to what you were doing before or why you were doing it. They are interested only in astronomical returns, and if there’s any resemblance between your pre- and post- VC situations, call it a good day and be happy… cos they don’t have to have a whole lot to do with each other. Sometimes the new gameplan requires that your company be reconstituted and reclassified as an entirely different species of animal. Don’t be surprised when you go up to pet the creature that once lovingly wagged its tail at you and you get hands bitten off before you’ve even had a chance to notice the brand new fangs and the menacing growl behind them.
In short, the best way to return the loving, crushing embrace of VC cash is to think like a VC yourself. Have you had a good run from your business so far? Can you step away from it now and look at it objectively the way a VC would? Can you detach yourself completely from the past, or failing that, the outcome?
Not for everyone
I learned that consulting companies never need, and never should, take on venture capital – I unfortunately didn’t get round to asking why, but I did find this vid online:
Guy Kawaski breaks VC down in a simple way and I encourage you to have a watch of the video below:
All in all, I think the whirlwind that VC brings with it needs something solid at its core to focus and anchor all that energy: engines, machinery, solid applications, factories, vehicles, specialised workforces, proprietary technology, and novel processes or methodologies.
I would think that companies that evolve from a trades / craft- / skill-based seed probably do well on VC, and companies with intangible / abstract products and services might not fare so well: vagueness at lightspeed is not only pointless, but can bring about catastrophe.