Starting a Business

No Beggars Here

Don't jump at any VC who waves a checkbook in your direction-do your research first.
Magazine Contributor
2 min read

This story appears in the October 2000 issue of Entrepreneur. Subscribe »

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 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:

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, 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.

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