Venture capital is often seen as the holy grail for start-ups. Very few companies manage to secure it, but everyone wants it. Entrepreneur chats to attorney Adrian Dommisse about the truth behind VC, and cautions those looking for funding: Is VC really the answer for you?
Is venture capital the answer to every start-up’s dream?
In some cases it is, but it’s very dependant on your appetite for risk as a business owner, and how much equity you are willing to give away. Your VC investor is taking on a lot of risk for the potential promise of high returns, but the earlier they come in, the bigger the risk and the higher the reward they will expect — which means more equity.
What mistakes do start-ups who secure VC funding often make?
Imagine how you would feel if you suddenly had R20 million in the bank. Many entrepreneurs become very starry eyed. They find the big offices, get settled and forget the rules of being a lean start-up. They don’t pay attention to their cash flow and start losing money without even realising where it went. The number one rule of VC finance is to remember that it comes at a cost.
What is that cost?
You need to deliver. You’ve secured the funding based on an idea or a prototype. Now you need to prove it works. VCs don’t just give start-ups cash and walk away. They have a timeline and strict deliverables, and you need to understand that they may even sell your company to recoup as much cash as possible if you don’t deliver.
You aren’t working from your garage anymore. You need board meetings, a strong management team, auditors and lawyers. You can’t just shoot from the hip anymore — you become a structured business almost overnight.
Is this always the case?
VCs are not in the business of breaking up companies. They do want you to succeed, and they will be very involved in the overall management of the business to give their investment every advantage. They understand that they are taking a big risk, and that if it works they will make five, even ten times their investment.
But this is still a business deal for them. It’s not a dream they have been nurturing for years and years. They are realistic in all their decisions, and you need to be too.
What kind of deliverables are in place?
The deal will include certain growth projections and markers. For example, certain goals will be agreed upon and if those goals are not met in the allotted time, as the founder you will need to answer to your investors. You will need very good reasons why your objectives were not met. When you accept VC funding you accept all the responsibilities that come with that funding.
How does this affect second round funding?
It’s particularly important in this case. If you have met and exceeded every goal post, and worked well with your investors, you are far more likely to secure second round funding than if you have consistently missed your mark. Remember, at some point your investors will cut their losses as well.
What are the two most important things to consider before approaching a VC?
First, make sure VC and equity funding is for you. Do you really need the cash, or is it a nice to have? Many businesses can be bootstrapped. If you fall into this category, think carefully before approaching an investor. Second, choose the right investor.
You won’t be given cash and then ignored, free to do as you please. You will be answerable to your investor, who will be involved in your business. They will bring business acumen and a lot of experience with them, which can be a huge plus in growing the business, but if you don’t want outside involvement, think carefully before taking this route.
Finally, make sure you get along with your investor and your goals and values align – you’re going to be spending a lot of time with each other.
Player: Adrian Dommisse
Company: Dommisse Attorneys
Expertise: Corporate finance and acquisitions, structured finance and commercial law
Contact: www.dommisseattorneys.co.za; +27 (0)21 671 1550
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