On a previous post, I spoke about Crowed Funding and discussed the possibilities for small innovative start-ups to go for Crowed Funding. Yes, we Entrepreneurs always have a quench for trying different sources of funding for our ideas. As to the current trend, Venture Capitalists (VCs) seem to be in a risen demand nowadays, and most entrepreneurs prefer to go for these VCs. Some others claim that VCs are not good, not logical, not loyal, cheating, and stealing our ideas.
Let us first look at who a VC is. A VC can be an individual (or a firm) that is willing to fund our ideas, and they similarly work like banks while expecting greatest ROIs for their funds. Now why should entrepreneurs go for VCs as they can get funded by some local banks for a minimum ROI that can be returned to them back. The first reason is that, it is not that easy to always get funded by banks as they keep some strict lines for the money that they are willing to outsource. Second, banks always work on some thresholds, and they always seek practical and tangible evidences for Risk avoidance such as banks are always willing to give loans against to FDs, lands, or any tangible properties. Hence, it becomes a difficult task for a small entrepreneur to get big funds for his/her big ideas.
Contrarily, VCs work with big amounts, and they expect some glamour Returns for the money that they are willing to invest with an entrepreneur. If A VC lends $50,000 to an entrepreneur, he/she would expect a ROI of $25,000 per year (Goforfunding.com, 2012), and a VC generally signs-up a legal agreement for five accounting years. Even though, a much is going to go out of the entrepreneurs’ pockets, VCs still remain to be powerful means of funding a business. Because VCs are not bothered about the amount of money that they are going to invest for an idea if they sense that the business idea would give them a sexy ROI.
However, convincing a VC to fund an idea becomes the most challengeable job for an entrepreneur. VCs work on their own rules and stick lines. As not as banks, VCs assess an entrepreneur based on his/her business idea and the risk associated together. Innovativeness, payback period, liquidity of the idea, exist strategy, competitive advantage, team associated with the idea, barriers of entry for the competitors are the key grounds where an entrepreneur will have to convince a VC to make him fund. VCs also look at the entrepreneurial spirit, credibility, and aptitude of leadership, guts during recessions, and the overall achievement spirit of an entrepreneur whom they are planning to fund. So, an entrepreneur becomes halfway successful when he/she manages to convince a VC to fund, as VCs ONLY fund for ideas that can be converted into lucrative real business opportunities.
Now is that all? There are areas we as entrepreneurs should keep an eye with these VCs after we get funded. Well, some VCs may try to enter into our room and may want to share our bed. Yes, we must be confident to decide saying whether YES OR NO when a VC wants to decide on our business. What we must understand is that VCs are there to fund our innovative ideas and to profit themselves with the bigger portion of ROIs that they are going to get from us. When our business goes on the right track, it means it goes good for our VC also. When situation get worsens to us, our VCs may become ghosts and they may frighten us in our dreams too. I recently came across an article by Karan Darby who listed down reasons for why VCs are evil. As to his view, VCs are not loyal to people and they are loyal to the money, and we can’t expect them to hold our hands and to direct us a better position when things start going wrong for us. Honestly speaking, VCs will become vampires and will try to hang on our necks when they sense that something is going on the wrong track with our business. So, we should never get such a disaster in our lives.
As a strategy, we should not keep everything that happens to our business transparent to them though they MAY WANT to know everything. We should decide what to tell and what not to tell. We can listen to their advices for some big decisions that we are going to take on our business, since VCs are the best stakeholders in our business and they have more reasons to worry about our profitability than we do. Google is the best example for that a business can do great with VCs. However, we should never forget a logic that our business is owned by us, we started it for our dreams and for our own independence, and so we have reasons to be independent there and we know we can make some smart decisions. We should only let a VC to be an advicer and not a decision maker, if so probabilities will become lower for a VC to become a vampire and to hang on us.
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BY
Mathangie
