VC investment cannot guarantee you success. Here are four reasons why you need to think (more than) twice before picking the right VC partner

Editor’s Note: Here’s a story from our archives we feel is relevant even today and deserves your attention.

Venture Capital (VC) is often regarded as Vulture, Vapour and Vampire Capital. Although VC investment is a great startup tool, it can become a real pain at times. Things will go fine as long as your company is growing steadily. But when you start differing with your VC’s views on your product, hiring, market, etc., that’s when the bubble bursts.

The VCs may not agree with you when you take an unconventional route (but this scenario is fast changing, and now VCs encourage entrepreneurs to take the unorthodox path). This is why experts say that you should not take VC funding unless and until you really need it and are ready for it.

Few entrepreneurs I interviewed in the past told me that VC investments can be a ‘pain in the **s’. However, a majority of them believe VC funding is their path to success. Maybe, this is because they don’t understand the implications of venture funding. And maybe, there is something to studies that says only one out of 10 VC-funded companies succeeds.

Here, we list four key things that every startup entrepreneur needs to know before receiving fat cheques from investors.

VC investment cannot guarantee success
A majority of entrepreneurs feel that VC investment can guarantee them success, but statistics tell otherwise. According to Micah Rosenbloom, a venture partner at Founders Collective, historically only one out of 10 companies getting investments succeed; whereas some others like Tomasz Tunguz, Partner at Redpoint Ventures, feel that typical portfolio company failure rates across the industry — defined as either shutdowns or returning capital — are roughly 40 per cent to 50 per cent.

Also Read: Andreessen Horowitz’s lessons for Asian VCs and founders

So, the success of your startup depends on a lot of things. You may have a great product, but if you don’t have a market to sell it, what is the point? Hence, the startup life is a roller-coaster ride where you may have to go through ups and downs, and pivot the product multiple times before it becomes a hit.

For instance, India-based Seedfund invested in Bangalore-based Innoz Technologies, which provided offline Q&A services to feature phone users, in 2012. But as the smartphone penetration grew, the product lost its relevance and eventually became obsolete. Innoz later pivoted to Quest, a people-powered answering app that enables mobile phone users to ask a question via a text message and Android app, post which other users can reply to the same. The startup eventually shut down and the founders started a new product.

You can fire your co-founder, but not the VC!
There are many examples for startups firing their co-founders for disagreement with the Board, malpractices, mismanagement or misbehaviour. Steve Jobs, who once got fired from his own company Apple, is the best example. In yet another instance, Gurbaksh Chahal, Founder and CEO of US-based RadiumOne, was fired from the company after he pleaded guilty to domestic violence charges for assaulting his girlfriend, in April last year. So firing your partner is simple, but you can never fire your VC.

Also Read: E-commerce is passé. Yes, you read that right!

Indeed, as an entrepreneur, you need to think of your VC firm as another partner in your business. This leads to one of the single-most important aspects of your startup — VC relationship. Make sure your goals for your company line up with your VC’s goals for his or her investment, or at least convince them when you have a completely opposite view. By aligning your goals with those of your VC, you can help potentially avoid a disaster scenario.

The disaster scenario is that the founding team wants to do something different than the Board, Tunguz says.

The risk/reward curves are different for entrepreneurs than they are for VCs, and Board members (including your VC) have a legal responsibility to take into account the goals of the investors. So, if your company is losing steam and an acquisition opportunity comes along that is in the best interest of your investors, they might push you to take it, even if it means you don’t get paid.

But, of course, you can avoid all that potential heartache by not taking funding to begin with (Source: TechRepublic).

VCs may end up owning more than you do in your business
Do you know that Co-founders Sachin and Binny Bansal together own less than 10 per cent of Flipkart?  Here, VC investment means that you will have to dilute your stake in the company.

According to Jason M Lemkin, Managing Director of Storm Ventures, VCs often try to own 20 per cent of each portfolio company as a firm. But as individuals, they own a lot too. If the firm owns 20 per cent of each company, and the VC takes 20 per cent of the gains, that’s four per cent effective ownership in your company. Multiply that by say eight investments per VC per fund, that’s 32 per cent effective ownership of one composite company. That’s more than you. Plus, those management fees. (Source: Quora)

VC = Vulture Capital
Vultures come when they smell blood. Likewise, many VCs descend into a company or even a vertical industry just when the first signs of success seem to be clear.

Alok Kejriwal, Founder of online gaming company Games2win, recounts his ‘vulture’ experience with a VC investor. The story goes like this: VC fund Clearstone India gave him a term sheet to invest in the firm. Around the same time, he had a meeting with another VC. The VC asked him,

Alok, what will it take to over turn Clearstone’s term sheet and replace it with ours?

In his view, this is classic vulture behaviour. While the real VCs do the hard work, sniff out deals and get to the bottom of an industry, the vultures who have been sitting lazily, wake up and pile on. They try and bribe their ways into deals.

He advises that startups need to look at the term sheets carefully and figure out who is genuinely taking a bet on him/her and who is just circling above you — the prey. It is very important that startups do extensive research before picking the right VC partner. Otherwise, they end up being a bane and not a boon (Source: Quora)

Also Read: Here’s a Qyk way to find your nearest local service provider in India

Image Credit: Jeff Cameron Collingwood/Shutterstock

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