Raising capital: The top 10 lies told by venture capitalists
Monday, August 6, 2007/
On the other side of the table in the capital raising stakes is the venture capitalist – and they lie too! Here are their top 10. We know entrepreneurs tell lies. See my last blog). Now to balance the books, here are the top 10 lies told by VCs based on things I have seen in the market and Guy Kawasaki (Garage Technology Ventures).
Why do they lie? Well no one likes giving bad news, not even VCs. And besides, maybe they want to keep the door open and invest later on… but none of that helps if you are hanging on their every word, waiting for the money to roll in.
#1 ‘We can make a quick decision.’
This is the biggest porker of all. Go and talk to colleagues who have tried to raise capital. They’ll set you straight.
One VC mentioned to me that they deliberately hold up negotiations to see how the executives handle the delays. Not to mention the impact on cash flow. And your CEO’s time (work on 50%) will be tied up in discussions and getting paperwork ready for the VC investment team. So his eye is off the ball in terms of managing the business.
Looking for a quick decision can have very serious implications for your business. Plan on these timeframes – three months is very good and 12 months is a long time.
#2 ‘I like your company but my partners didn’t’
We all know about this one. ‘It’s not me it’s the others’. Oh yeah!
You simply did not convince him that your opportunity was a good investment proposition for them.
#3 ‘If you get a lead, we will follow.’
One of the reasons to get VC is to tap into their networks and get the introductions. Again, the answer to investment is really a ‘no’. If they really believed, they would jump in and get those leads and introductions for you.
#4 ‘Show me some traction and we will invest.’
In other words ‘get more revenue’. Well, the reason that you’re in front of a VC is that you need more capital to get into better and bigger markets to increase your revenue. This is just another way of saying ‘NO’.
#5 ‘We love to co-invest with other VCs.’
You know how long and hard you worked to get in front of these guys. Well, just think how hard is will be to get VCs talking together about co-investment. If they organise the co-investment, that’s another matter. But if they send you away to find other VCs then forget it. They are not believers.
#6 ‘We’re investing in your team.’
Don’t get too comfortable with this one. Unfortunately, what a lot of entrepreneurs think is that they are pretty safe as the CEO, etc.
Not so. If you stuff up (don’t meet your milestones as stated by you in your plan) then you will be fired. The VCs may own less than 50% but the paperwork (most probably the shareholders’ agreement) will give them the power to decide who stays and who goes.
#7 ‘I have lots of bandwidth to dedicate to your company.’
You may think that they will give you lots of time. Remember that they are working on quite a few companies. They know that not everyone will succeed and some will be buried.
Be realistic. Respect their time and make good use of the time they give you (perhaps a board meeting each month and some discussion). Prepare for meetings, set the agenda and send paperwork to the VC before the meeting.
#8 ‘This is a vanilla term sheet.’
There is no such thing!
When the muck hits the fan, and it will, then all roads lead back to the term sheet. Make sure that your interests are protected. Get a solicitor (and be prepared to pay lots of money) who has experience with term sheets. Whatever you do don’t get your friendly suburban solicitor to do this job. No matter how well he handled selling your house.
#9 ‘We can open up doors for you at our client companies.’
As I mentioned in the last lie, things will go wrong between you and the VC. So they will have both good and bad relationships with their investee companies. So you may not want a referral in some cases.
Be realistic about exactly what you will get from the VC’s investee companies. No CEO worth her salt will take on products/services if it is not in the best interests of the company.
#10 ‘We like early stage investing.’
Use some common sense on this one. Ask yourself ‘Why do so many early stage companies have so much trouble getting funded?’
Venture capitalists want to invest in proven teams (read, the founders of CISCO) with proven technology (in other words you have won the Nobel Prize) in a proven market (you already dominate your segment).