The relationship between entrepreneurs and venture capitalists
often seems almost mystical, one in which business owners feel
compelled to yield without question to the wisdom-and wallets-of
financiers. But in truth, you should evaluate potential investors
as you do any other professional service provider, says Stever
Robbins, owner of Cambridge, Massachusetts-based VentureCoach.com
Inc., which coaches executives on, among other things, pitching to
investors.
"One of the biggest myths is that all the power is on the
venture capitalists' side," says Robbins. "It's
true that they have a lot of power, but remember that venture
capitalists compete with each other for good ideas."
When you're evaluating investors, says Robbins, talk to
other companies they've funded to find out the following:
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Are the VCs helpful and easy to work with?
What kind of responses do they give when the company runs
into problems? Are they cooperative or adversarial?
When the entrepreneurs need the venture capitalists'
help, do they get the attention of a partner or just an
associate?
In addition, Robbins suggests obtaining a referral to one of a
venture firm's former portfolio companies that didn't work
out. "First, you want to know if the VC is willing to disclose
its imperfections," says Robbins. "Then ask the departed
company how the venture company dealt with the firm when it ran
into trouble."
For 31-year-old Jonathan Bush, finding a good fit with VCs was
all about his company's growth strategy. "We wanted to
build a national institution and needed a good boss. We wanted
someone whose advice was worth listening to," says Bush,
co-founder of Waltham, Massachusetts-based athenahealth.com, which
uses the Internet to help doctors process insurance claims. Bush
researched the venture companies he was interested in and talked
with other entrepreneurs who had been funded by those companies to
learn more about their working relationships.
"The due diligence was also understanding who had the
brand-name recognition that would help us when we went for
strategic partnerships," adds Bush.
So as you search for a venture backer, keep in mind you're
really looking for a partner-a company that can help your company
grow and succeed, not just write checks.