There is no such thing as free money. Even the most benevolent investors will impose some conditions prior to agreeing to an investment of their hard-earned venture capital. However, most investors are far more likely to have certain expectations and even specific demands before they part with large sums of money. In light of this, startup founders need to tread with caution when it comes to accepting loads of cash irrespective of its source. It is important to consider where the money is coming from and whether the furnisher of those funds is the right fit for the particular business seeking the capital infusion.
After all, VC firms usually serve as so much more than mere check writers. The right VC should open new doors and help guide startups down a path to success. Here are a few things to consider when deciding whether to accept an investment:
Respect and Appreciation for the Business
Hopefully, if investors are interested in funding a business it is because they wholeheartedly believe in it. Unfortunately, some investors will offer up their capital, along with a long list of ways that the business must change. Now, there may be some legitimate suggestions contained within that list. But, if the fundamental nature of a business has to change in order to appease a prospective investor, then it may just be the wrong match. Companies need to believe in their product or endeavor and have the confidence to expect investors’ to respect and appreciate what they have to offer.
Belief in the Company’s Vision and Future
To have an amicable relationship and successful partnership, the leadership teams of a VC firm and the companies in which the firm has invested must see eye to eye on many matters. Obviously, it is helpful for there to be differing ideas and opinions in order to foster healthy debate and critical thinking, but there is a vast difference between unique perspectives and constant bickering. Companies need investors who believe in their vision and trust them to fulfill it, without micromanaging every decision and detail.
Relevant Business Connections
The right VC should offer more than money and management advice. Just as investors conduct due diligence prior to making a financial commitment, companies seeking capital must research potential investors. A few important items to consider are the reputation of the firm within the relevant industry and the existing relationships that the firm has with industry players (or perhaps the lack of such relationships). Companies need investors who are well-known and respected within the pertinent community and can serve as a conduit to connect them to additional opportunities.
Past Performance, Current Portfolio, and/or Evident Knowledge that Supports Their Involvement
In addition to finding out what sort of connections a VC has to offer, companies should not be afraid to ask for concrete data that demonstrates the firm’s past performance or current portfolio. For example, a company focusing on biotechnology should ensure that the prospective VC has some level of experience within this sector. In the event that the VC is new to the game or has a limited background, companies should inquire as to the experience, skills, and knowledge of the VC firm’s leadership team to ensure that they are the right fit.
Ultimately, VC funding has been crucial to the success of countless startups, but company leaders must ensure that the firm behind the dollars is a suitable counterpart.