Venture Capitalists Can Be a Blessing or a Curse When entrepreneurs opt for this type of investment, they run the risk of losing control.
By David Richards •
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Some people like to portray venture capitalists as the only investors with enough swagger to put their money where their mouth is and gamble on the future success of unproven companies: Where others balk, venture capitalists show their backbone, and without their vision, the world would be worse off.
This is certainly true to a degree and I'm not about to dismiss outright the role of venture capital in helping businesses scale. Established firms need it to take their businesses to the next level. In certain sectors it's essential: If an entrepreneur is bringing a silicon microchip to market, this can easily run up costs in the hundreds of millions.
But my advice to budding entrepreneurs and early-stage businesses is this: Venture capitalists can be a blessing or a curse.
Related: Your Startup Can Thrive Without VC That it Will Probably Never Get Anyway
Silicon Valley is a unique environment where venture capital firms line the streets, share expertise and are unafraid of investing in the dreams of imaginative entrepreneurs. Elsewhere, this is not always the case and many venture capitalists simply do not understand the digital world of today. Some venture capitalists will never understand that sometimes user numbers really are more important than profitability.
Ignorance is one problem, but the real curse is micromanagement.
Founders are used to having full creative control over their business and in many cases it's precisely this that motivates them to go it alone.
In the early days, when the cash is tight, the founders' character holds the company together. Success is reliant on a shared vision of where the firm is heading and a full overview of what matters most.
Maintaining this perspective is always a challenge, particularly as the company grows, but add venture capitalists to the mix and it becomes a much more difficult undertaking. I should know: I've been there and made that mistake.
In 1998 I launched Insevo, which helped connect enterprise systems to the Internet, and soon decided to take about $20 million in venture capital to help the company grow faster. Back then it was the thing one would do to gain recognition. This was right in the middle of the Internet boom, when it was possible to raise millions simply by having a dotcom in the company's name.
It soon became clear that the venture capitalists (to whom I had signed over a controlling share) were not on the same page as Insevo's founders. Instead of focusing on moving the business forward, my time was spent elsewhere, trying to make the firm look like a bigger entity than it actually was.
Related: Why You Need to Think Twice About Seeking Venture Capital
We had sought out investment for a specific reason, to develop new products and take them to market, but it didn't take long to see that the focus of our new "partners" lay elsewhere. Rather than follow our lead, they decided where the money should be spent. As a result there was nothing we could do: Cash was ploughed into renovating our office and updating our company logo as our production line grew stale.
In time, three of the founders were gone, replaced by "friends" of the venture capitalists. They had been senior managers from blue-chip firms, accustomed to playing politics and holding endless meetings. Bringing that kind of person into a startup is like giving a pet lion to child. It might seem cuddly and friendly but will try to bite the kid's head off as soon as a back is turned.
The problem with venture capital is that having the extra cash can lead to lazy thinking. The safety net it provides can dilute the need to think critically about where the money is going, drawing the focus away from developing better products and better serving the needs of clients. This certainly ended up happening at Insevo.
It's the pressure of needing to make ends meet that results in the development of better products -- and with it better businesses. My company, or rather the management that was forced upon us, had too much money to know how and where to spend it.
When I started WANdisco, my co-founders and I were adamant about trying to avoid venture capital at all costs. We knew that growth had to remain organic if we were to retain our control and continue building a company that catered to the needs of the market.
To this day WANdisco has not taken a cent of venture capital funds and it's now listed on the London Stock Exchange. The deal in the public markets is much better than the one in private markets: An entrepreneur ends up with tradeable stock and maintains control over the business.
Going public gave us the cash to make an acquisition that ultimately paved the way for WANdisco's expansion into the big-data marketplace, a decision made by the founders rather than imposed by an external influence.
No one denies that life at a startup is a challenge, but my advice to entrepreneurs on both sides of the Atlantic is always the same: Look to other forms of capital but think long and hard about getting into bed with vulture capitalists. It's possible to build a successful business without having to selling one's soul.
Related: Want Angel Investors? Here's What You Need to Know Right Now. (Infographic)
