Is Your VC A Vulture Capitalist?
Entrepreneurs should do their homework before signing with a financier
appear jittery about the investment. “This type of young angel investor is likely to run during hard times when new to the market and may not have the stomach for the ups and downs of doing business,” says Robertson, adding that investors typically suffer or prosper along with their portfolio companies. During a financial crisis, however, the investor may be concerned about limiting losses and may — through special rights negotiated before the investment is made — force a company to liquidate or sell its assets at a price for which only the investor receives any distribution.
Seek Out a Compatible Partner: Like a marriage, compatibility is important when it comes to venture capital. Steve Dines, president and CEO at Sunnyvale, California-based semiconductor design and marketing firm Azanda Network Devices, says he interviewed 100 venture capital firms for his company’s Series B round. From June 2001 to October 2001, he interviewed the various venture firms and has so far raised $33 million in venture funding. Dines was after investors with experience in the semiconductor industry — the kind who understood how his company worked and what its challenges were. To find them, Dines found a business broker (for some investments and used existing investors for others) who specialized in creating relationships between investors and companies. “When a storm comes, you need people on deck who know what they’re doing,” he says. The 50-employee company won’t post revenues until mid-2003, and received a $10 million Series A round of financing in June 2000.
Do the Due Diligence: Just as VCs review all of the information about a business, its founders, and management, Robertson advises entrepreneurs to do the same on their investors. “The VC industry is relatively small and a few phone calls can result in useful information,” she says, noting that most funds have Websites, which list the company’s portfolio of firms, investment strategy, and general partners.
Know It’s Not All Bad: Bartlett, co-author of Raising Capital for Dummies, (John Wiley & Sons Inc., $24.99), has seen a lot of venture capital lately that is heavily weighted against the founding entrepreneur. Valuations, which are the monetary values put on the business, are much lower than they were three years ago, he adds, making venture money “very expensive for the business owner.” On a positive note, a good VC with a long track record can bring great advice, new customers, future funding rounds, and lucrative exit strategies to business owners who play their cards right. “If you choose the trophy investor names, they can also add enormous prestige,” says Bartlett.
They’ll continue to do so in the years to come, says Robertson, who even in this challenging capital environment has watched venture capitalists make first time and subsequent investments in small companies. What these investors are looking for, she says, are good management teams, a willingness to be versatile with business strategies, and for companies to stay lean, mean, and focused. Particularly attractive are entrepreneurs who have put their own money into the business and who can