JOIN USAn entrepreneur asks: There appear to be various pros and cons of engaging with a Venture Capitalist (VC). Besides the financial aspect, what are the areas that VCs can assist a business? What does the business owner need to understand before finalising on a VC?
MentorSquare response: The most obvious reason why a business looks to a venture capital company is for funding. This can be either seed fund for starting off a business, or growth capital, for businesses that have had successful operations and are looking for break-out growth. It is also a mindset shift to understand that VCs bring more to the table than just funding, and businesses often benefit from what the VC can offer them.
Some of these additional expertise areas include:
- Management consulting: While a business plan may meet with acceptance for a VC to fund, the management of the business may find themselves and their processes being scrutinised more closely by the VC. Considering the experience that VCs typically have with businesses in their focus sectors, the level of guidance that the business receives could actually set a start-up on the right path, or prepare an established business for the next level of growth. As the VC is primarily concerned with monitoring and growing their investment, a management team with a great business idea but no skills or expertise to actually run the business could find themselves out of the door, while the VC brings in a team or person most suited to run the business.
- Network: Again by virtue of their business, VCs tend to be well-networked individuals and organisations, and may often be able to activate their connections for the benefit of the business they have invested in. This may not be an upfront offer by the VC in the early discussions, nor will it even be in the agreement text, but is something that a business with a good plan or idea could expect.
- Culture of Enquiry: The most prudent way of safe-guarding one’s investment would be to review all business processes, and question all spends to ensure that only business-critical and beneficial expenses are made. On the more positive side, the VC can also help create a culture wherein accepted wisdom within the organization is challenged, which in many cases could lead to out-of-the-box thinking that can drive business growth. This culture can actually help expand the business, and the team’s outlook.
- Perspective of Time: Business owners are most often an eternally positive lot, and left to themselves, will steadfastly continue to believe that marked success is just around the corner, or assured. A VC, however, has a very practical eye on the clock at all times, and can step in as the voice of reason when the effort required for success is not being seen, or if the management team seems to be allowing the business to take a purely organic route. Beginning with a ‘time horizon’ by which the VC expects returns on his investment, to more drastic measures like forcing a premature sale or cutting-off funds, the VC will keep the management team on its toes working towards business success and returns on investments for all.
While this provides a very heartening scenario with the VC as a true business partner, reality, however, is that VCs have to objectively assess their portfolio regularly, and at such times have to make the choice of which companies to continue supporting, and which ones to let go. The VC may keep an eye on how the companies pan out, but he is also evaluating new companies and trying to put a new fund together. A lot of VCs are highly connected and experienced businessmen or entrepreneurs themselves, but may not have much time to contribute.
The most significant help from a Venture Capitalist is that they would take an objective view of the progress of the company and keep moving it in the direction of creating value.
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