Montreal Start Up

As we speak to first time entrepreneurs a common theme that comes through is that VC’s are not to be trusted. Most people have a horror story that has been handed down to them about the VC who …. (fill in your own story).

I have my own hard luck story - in 1999 I was part of a small team that raised $US30 M for an internet start-up. Following disagreements over “strategy and personnel” I found myself on the outside of “the circle of trust” (as in “Meet the Fockers”) and so decided that I would rather leave than follow what I believed was a half-baked plan being driven by a bunch of inexperienced MBA up-starts (I still sound bitter - but i’m honestly not - I let it go after I was given the opportunity to buy the company back for $US1.3M after they had invested over $70M !).

It was this experience that actually caused me to establish my own investment business as a way of trying to bridge the gap between VC’s and entrepreneurs.

So does that mean I’m now on the “dark-side”?

I hope not - but what I hope it means is that I can now reflect on the motivations of VC’s and entrepreneurs with mutual degrees of empathy.

So here is my double take on how the VC/entrepreneur dance goes:

VC’s view

You came to me with a vision and a requirement for some money to help you realize that vision. I gave you feedback and input that helped you to refine the vision and then gave you the money you said you needed to execute that vision - and …

a) … you delivered ! Please let me fund your next vision!

or

b) … you didn’t deliver on your plan ! Now I have to do whatever I think is right to try and save this company and along with that, restore my reputation with the people who trusted in my ability to pick good ideas and good people in which to invest. There is the door and have a good life.

Entrepreneur’s view

I came to you with a vision and a requirement for some money to help me realize that vision. You gave me feedback and imposed conditions that caused me to refine my original vision and then you gave me the money you said I needed to execute our new vision - and …

a) … I still made you rich ! I’ll let you fund my next vision - but on better terms for me !

or

b) … things have not worked out as planned but remember that I had to change my original vision, which would probably have worked, to implement things based on what you told me was best - we were wrong and now that I have worked out a new vision, that i’m sure is going to be successful, you are going to get all the upside and I, who has worked so hard for so long, will be left with very little for my efforts! No thanks, i’m leaving .. have a good life - not! (phew says the VC - I thought we were going to have to fire him/her).

Now these might sound like extreme scenarios and in reality the situation might fall somewhere along the continuum between these outcomes, but these scenarios can be used to highlight a key principle that all entrepreneurs should remember when dealing with VC’s:

It doesn’t matter how much input a VC has in the development of a business plan or it’s implementation strategy, the business plan always belongs to the entrepreneur ! Even if an entrepreneur accepts the input of the VC and changes the business plan accordingly, it never becomes a shared plan with shared responsibility for failure. Why ? Because you’re the CEO !

Perhaps you don’t completely agree with the plan but feel obliged to execute it? Then you have three choices -

STOP AND EDUCATE the VC why the plan is wrong.

EXPLAIN your concerns and agree CONTINGENCY strategies prior to initiating the plan, then FULLY COMMIT to executing the plan - that way everyone understands the process for monitoring progress and adjusting appropriately.

RESIGN on the basis that your time is valuable and you don’t want to waste it on proving that the strategy won’t work.

If you ever get to the stage where you feel you are implementing someone else’s plan (ie the VC’s) - watch out ! This means that you are probably not the right person to be running the company and something’s going to change pretty soon.

What does all this mean when you are negotiating with a VC ? Don’t over-promise anything and be conservative in your predictions - even if it effects your company’s valuation - because once you take someone’s money your credibility as a business person is on the line. Losing that credibility is akin to losing your right to lead the company.