With billions of dollars shelled out each year by venture-capital funds and angel investors, it's easy for entrepreneurs to get caught up in the frenzy. Eager to have access to much-needed growth capital — and to have their ideas validated — founders often feel intense pressure to jump at the first financing offer, sometimes sacrificing control of the concept they worked so hard to develop.
I know first-hand that building a strong relationship with investors is the most important factor for success. If you're on the hunt for funding, be cautious and thorough before you leap to make sure your strategies and goals align.
- Look for investors with experience in your space. It might seem obvious, but some VCs actively seek to invest outside their typical realm as a way to expand their portfolio. That might be great for them, but not so much for you. Start by searching for a fund that has already invested in a similar business, maybe in another well-developed market, such as Germany, Japan or China. These investors are typically U.S. companies that already know what works, which saves time. They’ll want to see strong sales trends and proven scalability, so be prepared to present some good, real numbers, not just a concept.
- The network is just as valuable as the cash. A broad investment portfolio is a powerful asset, providing a deep knowledge base you can tap into for expertise on everything from business strategy and marketing to staffing and other needs. Through our relationships with Insight Venture Partners, Georgian Partners and the Ontario Venture Capital Fund, I can pick up the phone any time and get an introduction to a trusted expert I know can help, which translates into huge savings of time and money.
- Be prepared to spend on lawyers. Find the best attorney with solid experience negotiating VC contracts or you could find yourself penny wise and pound foolish. The contract you sign today could impact the future of the business in perpetuity, so find a lawyer who can skillfully negotiate the terms that are in your best interests over the long haul and be wary of restrictive negative covenants.
- Don’t relinquish control. Some VCs try to strong-arm founders by capping their salaries, dictating board seats and even prohibiting future sale of the business. A smart fund wouldn’t want the founders worrying more about paying their bills than growing the company, and it shouldn’t feel like you’re making a deal with the devil. Make sure you are comfortable with the terms and don’t be afraid to walk away. I guarantee that if you’re not comfortable with the relationship during the negotiation process, it will only get worse once the deal is signed.
- Don’t make an emotional decision. A lot of entrepreneurs have a personal attachment to their “baby.” Remember, this is not just about you — it’s also about the people who work for you. Don’t walk away from an offer because it’s a bit less than what you think it should be. Consider your responsibility to your employees, your family and other stakeholders and make the best decision for the business and everyone involved. Consider the long-term potential impact for the company and its people, versus just the short-term framework.
Securing VC funding is like a courtship: it can be an exciting, tantalizing process. But like any good relationship, it must also be built on mutual respect, trust and a shared vision for the future rather than the promise of a quick payday. No amount of money is going to fix a bad romance from the start, so be smart and don't be afraid to ask for insight from those of us who have played the game and won, not just for themselves but to create value for all stakeholders in the long run.
Gary Lipovetsky is co-founder and president of DealFind.com, an online daily deal site that delivers savings in cities throughout Canada and North America. The company recently secured a $31-million investment from three leading Canadian and global venture-capital investors within a year of its inception.
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