In Defense of Equity Investors
Entrepreneuring
December 2010 / January 2011
Volume 8 Number 6
Vulture Capitalists! Idea Pirates! Heartless Killers of Entrepreneurial Dreams! I think venture vapitalists have an undeserved reputation. Admittedly there may be some bad ones out there but I have yet to meet an equity investor who is truly a soulless villain. I have found, however, that there are many misconceptions that are based largely on lack of information, so I interviewed some venture capitalists to get their side of the story.
“The VCs are going to steal my idea/company.”
The VC viewpoint: venture capitalists are in the business of finding investments that will create a return for their shareholders. That is their business. Most VCs are so busy trying to manage the expectations of their fund investors that they don’t have the time to manage or steal anyone’s company.
Many VCs consider it a failure or a last-ditch option if they do have to step in and manage a company. If they have to concern themselves with management then they are not focused on the primary objective of their business, returning a profit to their shareholders. It also means that they were wrong about their decision to invest in a management team that would execute on a business strategy. As long as the founder of the company is successfully executing the business plan that the venture capital fund invested in, there should be no reason to change managers.
“VCs are only in it for the money.”
The VC viewpoint: Why else would you be in it? The money that VCs invest is rarely their own. They are investing other people’s money into companies that have a high probability of generating returns that are greater than that available in other investments like stocks and treasuries. The success of a fund is based on the returns that the fund achieves. If the fund does not return a profit the VC is likely out of a job.
This can be a source of friction with entrepreneurs who start businesses with more altruistic goals in mind. Social good, increased employment and green technologies are all noble goals but if they cannot be achieved while making a profit then venture funding may not be the best fit.
“They will sell my company out from under me.”
The VC viewpoint: When you agree to take venture money there is an expectation of a return on the investment. The return occurs when the investors can get their money out through some sort of liquidity event like the sale of the company. Therefore the VCs will work to maximize this return on their investment. Factors such as timing, valuation and fund life all play into the decision to sell.
Equity investors provide capital to the company in exchange for ownership of the stock of the company. Depending on this percentage ownership and the voting rights the investor may indeed be able to sell the company against the will of the founding entrepreneur but this is a rare occurrence. Most entrepreneurs who take venture money recognize that this sale is the end goal of their relationship.
“The VCs just don’t get it (usually referring to technology).”
The VC viewpoint: Most venture capitalists are pretty smart people. Many are MBAs from prestigious universities who have achieved substantial technical training in an undergraduate discipline. If they do not understand the technical merits of an idea they are usually smart enough to ask for help. The misunderstanding is usually due to the entrepreneur’s inability to explain the business case associated with the technology.
The best technology rarely wins in the marketplace. The goal of the venture capitalist is to find the best executed idea in a marketplace because that will be the one that makes the most money. Don’t lecture the VC on why your technology is the best, help them understand how your go-to-market strategy is superior to all others.
So it turns out the venture capitalist really isn’t that bad. Most of the stereotypes come from a lack of understanding of their goals and motivations. Understanding how investors think is critical when dealing with the equity community.
I think that John Chavez, president of the New Mexico Angels, summed up the mindset of the equity investor the best when he said, “We invest in people and our belief that they have the ability to execute on a plan. We invest in people who can identify the risks and articulate why they are the best person to mitigate them. We invest in people who can focus on the plan and perform despite all of the distractions around them. There are lots of great ideas but very few great people who are willing to see them through. That’s why we invest in people.” Now that doesn’t sound soulless at all.
John Freisinger is a project manager at Technology Ventures Corporation.
More
Copyright © 2012 | Innovation America