Montreal Start Up

So, consider this - as an entrepreneur, who has accepted external money, your responsibility is to provide a good return to your investors - likewise, your VC investor has accepted “external” money and the VC has the responsibility to provide a good return to it’s investors.

With this simplistic view it would appear that, as long as the business is moving in the right direction, everyone’s interests are aligned and everyone will benefit from it’s success.

So why then do conflicts still arise even when things are going well?

The majority of conflicts arise from three main areas - personalities, perceptions of success and timing.

Personalities

Personality conflicts can occur in all walks of life and require patience and maturity to overcome. These conflicts and their resolution are however a major drain on the business and as such my advice is that you endeavour to ensure that as an entrepreneur you choose a VC who you like and/or respect.

Perceptions of Success

A VC has fundementally the same business pressures as an entrepreneur - in generating an income a VC will inccur costs. These cost include salaries, office expenses, travel, general overheads and - very importantly - the cost of money. A $20 M Fund may well go through $500K a year in expenses and will be “loosing” value on the uninvested money it has drawn down from it’s investors. Thus a Fund might need to be making in excess of 7% per annum just to tread water. And of course, not every company a VC Fund invests in will succeed!

What does this mean for an entrepreneur? It means that a VC Fund expects a very high return on it’s money and each entrepreneur in whom the Fund invests will be expected to be successful enough not only for themselves, but also for all the other failed investments and operating costs incurred in making all the Funds investments.

For this reason an entrepreneur may feel that a VC is never satisified, however it is important to understand that a good business in an investment portfolio is sometimes used like a star quarterback that has to make up for a week defensive line.

Timing

The VC has an objective - to provide the best possible return on investment for it’s Limited Partners (investors) in a given period of time. A VC fund will typically have a life of 7-10 years and needs to plan on liquidating the Fund’s portfolio of investments within this time frame.

Should the VC make it’s investment later in the life-cycle of the Fund they will be more inclined to sell out of the company early, which may not suit the Founders of the company - or even other shareholders - but they have the expectations of the Fund’s investors to meet. The contrary situation may occur when the Founders believe that they have been presented with a good offer for the company but the VC believes that a better exit will be offered sometime later (this may often be related to the “perception of success” issue raised above).

Having read over this post before publishing, I realised that it might sound like I was trying to justify some of the attitudes and actions that VC’s might take (and the same might be said for the first post on this subject). That however is not the intent. The intent is to present to entrepreneurs some background to the VC’s motivations and in doing so provide the entrepreneur with insights that might allow them to choose their investors wisely and avoid conflicts with these investors once you become partners. I hope it helps!