Finding a venture capitalist (VC) is often one match that’s certainly not made in startup heaven. As an entrepreneur, raising capital, you’ve got to toil and woo a multitude of potential partners to finally arrive at “the one” — a VC that truly understands you and your business. Most importantly, your new match must be ready to commit to you for the long-term.
When it comes to VC and entrepreneur relationships, you’ve probably heard grieving entrepreneurs who, after signing the dotted line, ended up quite unhappy with their fundraising nuptials. While there’s nothing wrong with venture capitalist’s, per se, many simply make the wrong decision.
As an entrepreneur, it is essential to choose the right VC, because the right “marriage” can define the future success of your business and how happy you will be while running it.
Here are four key considerations every entrepreneur should keep in mind for a happy and long-lasting VC marriage:
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Expertise
Selecting a VC is just like choosing a mate and walking down the aisle — it is a long-term commitment. You will need to court a VC first in order to find out whether they’re a good fit. Take time to research a VC’s background to decipher whether or not he or she has funded companies in the domain they are operating within. Also research prospective VC’s to find out which companies they have invested in and what their level of involvement has been, respectively. Lastly, find out if their portfolio presents potential conflicts (e.g., is their expertise a by-product of an investment made in a potential competitor?).
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Value Creation
Seek out investors who can add value to your business and not just give you funding. The best entrepreneurs and VC marriages happen when the latter can contribute to the growth of the former in lieu of being purely transactional. Entrepreneurs need to ask, “When things get tough in my business will this VC be a part of the solution?”
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Term Sheets
This is where an entrepreneur will really find out the intentions of a VC looking to invest in their company. Remain on high alert for exit clauses; if not clearly defined, ask for them to be. Although they are not cast in stone, it helps to know what a VC really wants. For example, I know of one venture where the exit was clearly defined, but deferred as the company entered a new vertical which added to their top line; adding to a larger valuation. Term sheets can be carefully crafted to fool even the best of entrepreneurs into believing that they have struck a great deal, but in reality, that’s not always the case. So, it wouldn’t hurt to have your term sheets validated by experienced entrepreneurs who have gone down a similar road or a lawyer who has relevant experience.
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Unclear Expectations
Many venture capital deals are left to ambiguity, either because of a lack of clarity or due to assumptions made by either party. It is very important to set expectations from both ends and be clear. Entrepreneurs need to build trust with VCs and vice versa. If you don’t have trust at the beginning of the relationship, it is bound to cause heartache.
Whatever you do, do not take the VC-entrepreneur relationship for granted. You are in it for the long haul, and giving up due to a failed “marriage” is the last thing that you want to do with your business. So take caution before you enter into a contract.
Rahul Varshneya is a startup coach and the co-founder of Arkenea, an enterprise mobility and cloud solutions provider. He writes on starting up and mobile strategy at http://rahulvarshneya.com/blog. This post originally appeared on the author’s blog.
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