an off-topic post on raising Venture Capital -
Jeff Nolan at SAP Ventures has put together a good post on picking your VC carefully which makes some good points on how entreprenuers should be careful in selecting who they get their money from, and who from the particular VC fund they allow to be on their board.
When we were funding FeedBurner with a VC round (after really funding the first round ourselves) we had a couple different term sheets at different times in front of us - when something curious happened - both VC firms pulled a "bait and switch" as to who they wanted to be on our board. That is, we had gotten to know one partner well, and in the middle of discussing terms, both VC firms decided they needed to put in other partners for what are still unknown reasons (explanations were given, I'm not confident in the genuineness of those explanations).
That was okay, but at that point, I absolutely called up CEOs of the companies in which these candidates particpated on their boards and asked what they thought. In one case, the candidate got nothing but bad recommendations from multiple sources. In the other case, I called up a ex-CEO that had been unwillingly pushed out by his board (including this VC) but got glowing reviews of the VC partner.
Weighing all the terms, we had to back to one of the VCs and say "no thanks" - it was only one of the factors for turning down the deal, but we didn't need any dead weight on our board.
Needless to say, entreprenuers, you don't really want any investors on your board if you can help it. Investors will give you tons of reasons why it will benefit you, but please remember they are selling something here, and their number one obligation is to their LPs, not you. Try to get away with giving your investors "Board Observation Rights" - which allows them full access to the goings on, without a vote. You probably won't get that from VCs but it can definitely be done with "angel investors." There's no reason to give an angel investor a board seat, but everything is negotiable.
When we sold spyonit.com we were lucky enough to have no investors on our board, and it really made doing deals and selling the company a lot easier.
In this build-and-flip economy, you have to keep that in mind. Some large companies will try to push you around and demand warrants to do deals with you (and it can't always be avoided, and you have to weigh each situation individually) but again - every outside party who has their hooks in your company will just slow things down when it comes time to exit. It will slow down the due diligence process of the company that wants to acquire your team and/or technology, not to mention dilute your equity! For every legal document you have on file, you can tick off a day of some first or second year attorney's time to look for that one term in every standard NDA you signed that could cause a problem with the deal.
In general, take the cheapest money on the best terms.
This may seem obvious, but it's easy to get wowed by the big names and all the promises people will make you who are selling something to you. It's easy to forget VCs are salespeople too.
Like who you work with. It will make things a lot easier when things go south if you have good personal relationships with everyone involved, including your investors and board members - so do take the time to investigate references, perform your own due-diligence, and get to know them.
It will become important later, whether things go extremely right, or extremely wrong.
Posted by Steve at September 30, 2004 09:24 AM | TrackBack