The idea of getting into a partnership with a venture capital firm could be very exciting for a young entrepreneur as it advances their dream and is an important step towards expanding their business and develop a financial stronghold. However, it is not prudent to rush into a partnership keeping only a devoted eye on the cash flow that would follow.
Just as a man needs to hire a lawyer after being wrongly accused, who would trust him to be right more than anything, choosing a capital firm is exactly the same. There needs to be mutual respect between the VC firm and the entrepreneur for when things don’t go accordingly, they both stand together believing in each other. It is no less than a marriage uniting two partners.
Given the above point, an entrepreneur should consider many things before committing to such a deal. Here are 5 points every entrepreneur should make sure before choosing a venture capital firm.
1. Approach- Either you all out trust the firm fully, giving them representation on the board, which generally involves active interaction and revealing all plans. Or a cautioned step, where the board appointee would only perform a role of a financial watchdog. He will not take part in active management decisions, except major decisions like changes in top management, large expansion plans or major acquisition.
The first involves the role of an advisory in matters like marketing, recruitment and searching financial collaborators. One should always be careful about it. It has happened that start-ups with the full board of directors and positive cash flow, have not benefitted from the new collaboration. It may find itself well suited to go forward and achieve growth on their own.
2. Do your homework before taking the plunge- One must always seek established capital venture firms, who have already experienced success in their specific market. Though this will take some research but finding a firm with in-depth industry knowledge in their market will pay off in the end. A good chemistry between the two will help in the long run.
A good background check and research also help in making the business proposal effective and efficient. Most venture capital companies are interested in good investments and not in social contacts or introductions. A detailed and well-organized business plan is the only way to gain a venture capitalists attention and obtain funding.
3. The Exit Plan- As Hollywood a phrase as it sounds, it is always essential to have a proper and clear knowledge of a VC’s exit aspirations. Whether it is buying back, or quotation or trade sale, it might result in conflict if it’s not clarified beforehand. The entrepreneur should make sure that exit aspirations do not compromise his or her interest.
4. Fund Viability and Liquidity- This is perhaps the most important thing to consider before going into a partnership with a VC firm. The entrepreneur must be sure that the fund has committed backers and not someone interested in just a quick realisation of capital gains.
Experts also recommend considering other funding options as VC is not always the best first option. When it comes to funding capital for startups, having an existing investor base or angel investors, who are pleased with your company’s progress, can often be a major source of additional capital.
Another viable option could be venture debt. It can provide important capital growth with a reasonable interest rate, which may be more favourable to existing shareholders by eliminating the reduction of company ownership that comes with VC firm investment.
5. Build a partnership- The last and most important thing in any VC firm and entrepreneur relationship. Once that perfect match is found, one should be ready with confidence and trust. One will be spending the next five to eight years with these people as a team, hence, it is important to make sure both are willing to go the long journey after first few weeks. Set the tone early on for a strong partnership.