Did you know? Venture Capitalists get paid to manage others’ money.
If someone is investing directly in your startup, and they know and love the space, having more supportive than capital based intentions, call them an Angel Investor.
If someone is directly investing in your business and they want to see customers and focus on their return, call them an investor. A plain vanilla investor… don’t give them the courtesy of adding “Angel,” bundling them with venture capital when they behave like someone looking to diversify their retirement savings in business investments beyond the stock market, nor mincing the notion of a loan with venture funding.
A Venture Capitalist manages a Fund comprised of Limited Partners’ investment in the fund.
As such, they have understandable expectations that differ from other sources of capital:
- You must exit (generally). They have to deliver a return to their portfolio and they can only do that, with a private company, when they can sell their position. That happens when a private company gets acquired or goes public. You MUST exit. At some point. If you can’t or won’t, it doesn’t mean you don’t have a good business; VCs won’t invest.
- You must be capable of delivering a substantial return. Their portfolio absorbs losses and to overcome those losses, they bet bigger and need those bigger outcomes. You’ll hear VCs say anything between 15 and 25x. If they invest $1MM, will you exit returning them $20MM? Extrapolate that to appreciate why VC funded companies always seem big… if they invest $10MM, will you return $200MM?? Keep in mind, that means being worth MORE so you can return their portion. Obviously, this isn’t required, who knows what you’ll exit for, but CAN you? If you can’t, get an Angel or bank loan.
- VCs RAISE money. Yep. Mind-blowing for some. They raise it. They manage it. They allocate (invest) it. And just as you are raising money, so too must they. So while that ever import ROI is critical, there are many other things you might provide that enables them to raise money. Do you have a great vision, team, PR, or amazing product? Maybe that won’t massively exit but their investment in you is clearly wise… helping them raise more. You have to know where in the life of their fund they are; as their reaction to you is tainted by where they are in their process as a business.
VCs seem to be getting a bad rap lately for nothing more than behaving the way their supposed to. Many are referring to themselves as venture capitalists, misleading entrepreneurs and misdirecting startups. Be an investor, be an Angel, be a limited partner, or offer a loan; if in “Venture Capital” it’s valid to conclude that you’re responsible for investing in risky new ventures and delivering a substantial return on other people’s money.
Now this is the brutal truth. Lol!
Well said and as always I truly appreciate your sense of humor. I liked your opening about how VC invest other peoples’ money and then, depending on the type of business chosen, they in turn invest said funds somewhere else.
I have seen your article on investing and ROI. No ROI no investor period. I have not finished reading all of your blog entries yet but I will ask you to elaborate above and beyond what I was able to in my entry on private lenders, https://www.linkedin.com/pulse/private-lending-what-ed-dooley/, as you did not mention private lending in bullet number 2.
My last concern, as an entrepreneur, how do I know what stage of the fund cycle a VC firm is in? I have found Score to also be a tremendous resource in many of these matters but I seem to be learning more from my counterparts here on LinkedIn such as yourself. Thank you for sharing so freely.
I’ll give it a read Ed Dooley and share a thought thought it will become clear, if not already, that I tend to shy from perspective on lending. I’m not as familiar, not a fan in general, and at the end of the day, really just found myself always getting fired up by others’ misperceptions of investment in startups.
As to your concern, how do you know? You ask. Truly. A venture capital firm (capably so and not just in name) will have a team – EIRs, Principals, Associates, etc. Their job is as the go between to the partners and their responsibility is not merely hearing your pitch, it’s teaching, guiding, and communicating with you/us.
When you get familiar enough with venture funding (or have a capable advisor to whom you can turn), it’s not terribly hard to figure it out. They’ll announce (somewhere) when the fund was established and available. Funds last about 7 years. % of that goes to paying everyone. The rest is meted out over the life so in uncovering investments made, you can get a sense for what’s left and what they might expect given that stage.
Appreciate the gratitude! I’m big proponent of freely educating. No one should be a disadvantage because they don’t know; and no one should have to pay for knowledge.
Thank you on all accounts. I have learned, as you wisely stated, ask and generally you shall find out. I did not realize the education portion of working with a VC firm. Something new every day! I try to do the same in my own way.
Great post Paul. One question from a non marketing person ( aka me). At it’s core online and offline are not different you are trying to achieve the same result. However, doesn’t it affect strategy given the tools you have online? It seems like you are able to engage quicker, and at a deeper level with prospects online given the capabilities.
I would need to understand an organizations objective when advertising. Then there is more I can apply in reading this post .. 1. If it’s brand recognition by a market leader (in your example Coke) then I understand seen and continue to be seen. 2. If it is disruption of a market through a message then again I think it is smart .. but I don’t think anyone could argue the buyers now have a very different journey , one that is far more online (through research and peer reviews) then any ad placement or advertising so if it is actual revenue the organization is after advertising no longer gets it done
Indeed, agree with you very much. My point, my goal, was less encouragement that all businesses should be advertising, more admonishment that most businesses have shifted from understanding what marketing really means to relegating it to merely generating leads… hence, often disregarding advertising because it isn’t measurable or doesn’t easily/immediately convert.
David Lee great question. Is strategy based on the tools you have and how you convert customers OR should it be driven by what the market expects, wants, and offers by way of competitive advantage? Yes, it affects strategy, but don’t let the tools/business drive what you should do. End of the day, you have to create a customer (if you intend to compete)…. if you’re merely serving the demand that exists, as it exists, you’ll never be any bigger than every other provider in your market.
Think of it this way, perhaps. My Shiner photo as an example. What is their “toolset”?
They’re at HEB, Specs, etc. You can go to the brewery. You can order it at a bar. That’s where people convert, no?
If we let their tools and their business drive my decision to buy Shiner, they’d put up a bigger sign at HEB or merely offer drink specials at the bar.
That billboard is up because they want to influence behavior. It associates their brand with a place, with a look and feel. I associate Shiner with Texas. I’m not buying nor even shopping for one but I’ve been influenced and my impression changed. Thing is, I don’t even drink beer… but what have they created? An influencer. I now associate Shiner with Austin and our lifestyle.
The mistake most online/tech oriented businesses make is the very point of this article. I’m not saying you should put up billboards; I’m saying you can’t let what you *think* drive what you need/should do to actually create a competitive advantage in your market.
Shiner also uses Instagram. I can’t buy there. They are online. Why? Same impact; even though that Instagram photo I like doesn’t enable me to click through a buy a beer.
So our business is online, people convert online, we need to email them, they need to download… whatever the reason is (the tool), we tend to jump to an easier conclusion that we should be promoting there *because* that’s where people engage, But is it where you garner awareness, influence, and favor? Marketing’s job is NOT promoting the business and getting you customers – it’s to drive the business to do what it needs to do based on what will establish you in the market. That might mean billboards… it might mean radio commercials… it might mean a superbowl ad… it might mean doing nothing more than Adwords. No one can say; it’s their job to figure that out, not just execute things.