Too Much made of Venture Capital

Make Sure VC's Don't Waste Your Time
If you are an entrepreneur wanting to launch or expand your business, the hurdles that you will need to cross in order to obtain venture capital are much higher now than they were some years ago. Many VC firms are still feeling the damage done by the dot com crash and many of them are staggering from heavy losses because of that disaster. The dot com crash has made many VC firms careful and sensitive when choosing investments.
" In general,up to 99% of business owners who seek funding through a VC will end up wasting their time and money ..."

Even though the dot com is dead, VC's are still moving into investment involving technology and software companies. This area is still bubbling along well. Software, for some reason, has claimed the top spot for 10 of the past 12 years so the lure is still there.

Nevertheless, it is a lot more difficult now to obtain VC funding and the truth of the matter is that probably 99% of those that seek a loan through VC's generally end up wasting their time and money.

The moral of the story is this - If you are approaching VC's be prepared for minimum success because the odds are stacked against you.  As you could be one of many that will fall by the wayside, make sure you have a reserve to fall back on. VC's should only be one of the options that you are investigating so don't throw all your irons in the one VC basket otherwise you may be terribly disappointed.

This is not a "put down" or criticism of VCs. This is a reality check. VCs  have only a certain amount of funds in the money chest and cannot hope to lend to every applicant. They basically receive 90-100 times more applications for money than they can ever hope to satisfy.

With the limited money available for investment it is inevitable that most business applicants will miss out. Be positive by all means when you see a VC but at the same time be real and keep your head out of the clouds. Look to other funding options as well as VC - just in case.

Many companies have learnt from experience and have advised other associates to scratch Venture Capital off their list of investment funding possibilities. It's just one of those things unfortunately.

Warning - The Reality May Be Totally Different

Venture Capital firms are people that are very busy. They have to assess 100's of proposals all day long. Unfortunately in order to let some candidates down gently, VC firms sometimes say things that don't have the same meaning as the candidates think they mean.

Often what the VC firm says bears little resemblance to the actual truth. Beware!

It is important to clarify this now so if you are approaching a VC firm, bear in mind that you should take what they say with a pinch of salt. A large pinch preferably.

Here are what many companies have experienced and made generally known around the marketplace. They are some common remarks and representations made by VC's that do not always line up with the truth:

  • VC - “If we contact you then this means that we are interested in investing”.
    Reality - Business owners are generally over the moon to receive a follow up call from a VC after they have had their initial meeting. Beware, more often than not, the VC has already committed to another company who may be a competitor, and all they are looking for is further information. Get the VC firm to sign an NDA (a non-disclosure agreement) in every case before you reveal all your secrets. Remember, you do not know where your information is going.

  • VC - “Let us have your business plan and we will review it to see if it interests us”.
    Reality - Business plans that come over the desk personally are almost never funded. To even have a chance of being considered seriously, business plans will need to come through the suggestions of a top referral source such as a lawyer, banker or other respected company or director. Even then, funding is a long shot.

  • VC - “We want to negotiate a win-win deal and if we cannot do this we will let you know”.
    Reality - The reality is that Venture Capitalists will not bend over backwards to help you find your funding. They are in business and they will go with the line of least resistance that makes them the biggest profit.

  • VC - “The financing process can be completed in a few weeks”.
    Reality - If the deal is good, the VC will generally delay things so as to wear you down. They are then in a position to make a proposal which you will gladly accept just to obtain the cash and start the business running.

  • VC - “Don't worry about the fine print in the agreements, as we want you to grow and we are going to be there right behind you”.
    Reality - You will find that the Venture Capital documentation is heavy and covered in fine print. The VC needs to ensure that they have sufficient control over the next round of funding as well as how your company is going to run.

The message is clear; you have to take whatever a VC company says with a pinch of salt and don't get too carried away if they give you a favourable response. Sadly many start up companies often go through the whole process only to find that they were given the run around. What came through from many shell-shocked companies was - “All we wanted was a straight answer - Were they interested and could they help or not. How hard was that?”