Lesson #1: there are times when raising venture capital is a bad idea.
Lesson # 2: there are times when it makes sense to raise venture capital.
Lesson #3: raise your venture funding as late as possible.
Lesson #4: pick your VCs well.
Lesson #5: ask VCs about their firm’s “exit strategy”.
Lesson #6: look for VCs who can and do distribute.
When the time comes for a VC to liquidate some or all of its position in your company, it can usually either sell the stock outright or distribute it to its LPs. I believe that distribution is better for the company than an outside sale. For one thing, it doesn’t send the same signal to the market as a huge sale by an initial investor which may have to be reported publicly depending on how recent your last equity event and the size of the VCs stake.
More important, all of the stock doesn’t hit the market at once in a distribution. Some of the LPs will not sell immediately. This is not a panacea. Many LPs do have a policy of selling every distribution automatically and immediately; it is just a cushion.
Some venture funds can’t distribute either because of something in their charter or because they don’t have limited partners. Intel Ventures, for example, is a subsidiary of Intel. When they decide to move out of a position, they don’t have LPs to distribute to. They can only sell. They are good investors to have in other ways so this doesn’t mean to avoid them but it is something that we didn’t know to take into account.
Lesson #7: check VC references.
Lesson #8: Choose VCs you’d trust with your own money
Lesson #9: use your VCs relentlessly.
..There are many vendors you deal with who will care much more about the good will of your VCs then they care about your company.
For example, if you go public (it’s not “when” any more), the bankers look for continued deal flows from the VC firms. They’re only going to take you public once, maybe do a secondary or occasional other financing. A call from one of your VCs not only helps you get initial attention from investment banks, it can also be very useful in making sure the bank continues to give you the attention you need during the IPO process. Ditto your financial printer – the specialist you need to print your prospectus! Executive search firms are best approached through VCs. You won’t look for that many CFOs or COOs (or CEOs to replace yourself) over the course of a career. The VC firms will be part of hundreds of searches.
Lesson #10: push to speak to the Limited Partners.
Every VC firm I know has an annual meeting of the LPs and usually invites some of the portfolio companies to present or at least mingle. These LPs may become (or may already be) direct investors in your company. Most important: if the VC distributes your stock to the LPs, you want to have convinced them that yours is a stock worth holding in their own portfolios. You won’t convince them all but, if you do a good job, there won’t be quite the same rush to sell on distribution as there would be otherwise.
February 24, 2005
An "Been There, Done That" Entrepreneur's view of Venture Capitalists
Tom Evslin, Co-Founder & CEO of ITXC (acquired by Teleglobe in 2004), blogs on the ten lessons he learned about dealing with VCs. Some of the lessons have been featured quite a bit on other blogs: