Do VCs short change you?

July 15th, 20101:36 pm @ Will


I recently came across a commentary that goes along the lines of VCs know what to do with engineers but engineers don’t know how to deal with VCs. As with all good lists, and entrepreneurs like making lists, it centres around recurring issues for the inventor when dealing with a VC. Issues that are worth refreshing in this author’s opinion:

VC’s don’t sign non disclosure agreements – it affords them protection if they like your ideas, but they want to fund someone else to do them. How do you legislate against that when they have all the financial muscle and contatcts? The answer is it is not just about NDAs and patents but core competencies and brand, so approach with caution.

VC’s are sheep – they will either all fund something or none of them will, so if you have an idea that’s too new and too different you may struggle to find funding. Too right! It’s not just about self promotion, you have to promote your sector and hang a big sign over the exit..

VC’s aren’t technical – they dismiss what they don’t understand, your novel ideas, and they focus on what they know, usually irrelevant marketing terms or growth predictions. If your idea’s too new and different for the expert to understand then you may not get funding. BUT isn’t there much more to achieving commercial growth than building a great product? Have you considered treating your VC as your target customer? Maybe engineers should run the world but they don’t – Deepwater Horizon anyone?

VC’s don’t take risks – VC’s have a reputation as risk takers – they are not. They collect money from rich people to build investment funds. The rich investors take some risk, though their risk is spread across the fund’s investment and is often a tax benefit. Are they solely interested in making blockbusters and sequels? They certainly have a formula and like to stick with it, this is why you need to know A LOT about your investors and choose them carefully. You wouldn’t sell a Ferrarri in a Wal-mart, place your investment just as you place your product and pray you can find some like-minded people with influence and some discretion over the capital in play.

Venture funds are big – If your idea needs a lot of money, then you have a better chance of getting money than an idea that promises the same rate of return for much lower investment. This is because it’s easier for the VC to manage fewer big investments than many smaller ones. True, but most are transparent on deal size, the important thing isn’t how much your company is worth or how much you can spend, but that you spend it well and with purpose.

VCs collude – They price fix by discussing among themselves funding and pricing for candidate start-ups. They will probably between them only fund between two or three companies in an industry – this limits competition and makes success of the few more likely. Absolutely, they hate competition to fund good ideas and the worst thing is they are spoilt, so spoilt they invest next to nothing in enhancing dealflow, how many sponsor or educate & participate in conferences freely? Are they trying to innovate or harvest ideas?

With thanks to Nick Tredennick, Brian Shimamoto and Alan Barrell. To be continued…