The Truth About Venture Capital

Don't Be Myth-Led

1. Venture capitalists want to take control of my company. Not true. Most VCs want a fair portion of the company in return for their capital, but don't consider control unless your management team fails.

2. Venture capitalists load their deals with unfair terms. Some terms may seem unusual or unfair to an entrepreneur. For example, there may be a provision requiring the company to redeem investors' stock at a certain price after a certain period. Keep in mind that such a redemption represents a failure on the part of the VC, which will do everything possible to avoid taking this step.

3. Venture capitalists are only interested in numbers. VCs with finance backgrounds may want to dig into numbers. Those with technology backgrounds want to understand the technology. Management-oriented VCs want to spend time with key staffers. Overall, venture capitalists focus more on market, technology and people than on pure numbers.

4. Venture capitalists have unrealistic performance expectations. Our limited partners are making high-risk investments and expect high rewards. We must provide an overall return significantly better that the S&P 500. Top-quality, venture-backed start-ups have proven it is possible to achieve 40 to 50 percent annual growth.

5. Venture capitalists harp on "exit strategy." Limited partners expect a return on their investment in the form of cash or securities. Without an exit strategy, there is no return to investors.

6. Venture capitalists give me a lower valuation than a private placement. Sometimes. Venture capitalists, especially early-stage investors, spend significant time with entrepreneurs. We participate in business planning, sales strategy, key hiring decisions and links to the larger capital markets for additional investments or an IPO. In contrast, private investors tend to be less involved and offer less value in the long run.

7. Venture capitalists won't invest in small deals. The growth of venture capital "megafunds" that lean toward deals of $5 million or more has opened up opportunities for smaller funds to specialize. Smaller venture deals can get financed; you just have to look in the right places.

8. Venture capitalists are too quick to pull the plug. Almost never. That drags down the overall performance of the portfolio. Most VCs do their best to keep a company afloat.

9. Venture capitalists don't like signing nondisclosure agreements. True. Good ideas often arise in more than one place. If we sign overlapping nondisclosure agreements, it can become impossible to work with a company without violating covenants with someone else.

10. Venture capitalists are impossible to get on the phone. Guilty. In the early stages, it's far more effective to communicate electronically. After the investment, the VC will return your call. It's our money, too.

Stephen Fleming is general partner of Alliance Technology Ventures, an early-stage venture capital firm specializing in life sciences and IT startups.

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This article was originally published in the February 2000 print edition of Entrepreneur with the headline: The Truth About Venture Capital.

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