The success of any relationship, be it personal or professional, depends heavily on the shared expectations of the people involved. Relationships get strained when there is a divergence in expectations out of the gate or even over time so this is not something to be established once and never revisited.
I have learned this lesson repeatedly both in personal and professional settings over time. This is as mundane as what a group of friends expects out of an evening out – low key dinner vs. loud bar setting or situations where the stakes are much higher like raising capital for your business from outside investors.
There is a New York Times article “More Start-Ups Have an Unfamiliar Message for Venture Capitalists: Get Lost” making the rounds that has caused quite a bit of conversation about venture capital, who it is right for, and that it is but one mechanism to fund the growth of a business.
Any capital you receive that is not yours comes with expectations. This could be in the form of a financial return and/or some say over the decisions you make. Venture capital has very high expectations or as Josh Kopelman of First Round Capital shared via Twitter “VCs sell jet fuel…”
I have the privilege of interacting with many entrepreneurs these days and do my best to demystify the venture funding process, what to expect, and how decisions are made.
I am fond of saying “you have a business if you can sell it for more than it costs you to make it.” If you’ve nailed that, you are a business and no one is questioning that.
The thing that gets lost often is that an external source of capital like a venture capital firm is working to build the investment case around your business. Smaller funds like ours have a lower hurdle rate because the size of the fund is small and return expectations are not to “return the fund” with just one investment. That means I would only invest in you if I think I can get $3 million in distribution (total size of our current fund) from that investment. If you are talking to a $100 million dollar venture capital fund, that is your hurdle to build the investment case around.
The other dimension of taking on venture capital is that there is an expectation that you will (most likely) sell your business within a 10 year time horizon at that significant return. Don’t want to think about selling the business you started and love? Don’t take venture funding. Period.
When you raise money, you sell part of your business to someone else and surrender rights in that process – information rights, decision rights, rights about future opportunities, an obligation to provide frequent reports and updates. So often in the urgency to get capital to fund the business, those considerations are lost while setting the foundation of the expectations of the relationship.
Focus on shared expectations as you create new personal or professional relationships and take inventory of your current ones, especially those that are strained, and have an open and direct conversation to level set the expectations going forward.
Venture Vice 