I wrote this article for CEO Communications, May 2010.
As a venture capital company, Here be Dragons (HBD) is always searching for the next big thing, which for us means businesses with huge growth potential that we can purchase shares in these businesses and become active shareholders. We specialise in helping entrepreneurs realise this potential so that we can eventually sell our shares at a higher value.
And therein lies the conundrum: entrepreneurs and VCs becoming partners. Sharing the same vision, working together, its not impossible but let me tell you it ain’t no easy feat either. The process starts off with both parties on opposite sides of the table with HBD usually having the upper hand given that has the funds. The entrepreneurs will do their best to sell their pitch and be convincing of a high company value, all with the goal of gaining investment in their business. HBD are very critical about each business that it evaluates. If we do decide to invest in a business the value we place on the business will more than likely be lower than that of what the entrepreneur believes it to be.
After the deal is made, we are pronounced partners (for a limited period) and it is important that we start working together. In the world of business, we think there should not be any problems in getting this right. What is the big deal? We have a common goal and all should be fine. Unfortunately, its not that simple. Without spending the time to work through the changes in the relationship and making a conscious effort to change the dynamics of the partnership, both parties go back to being on different sides of the table, and instead of working towards a common goal, try to convince each other of their opposing views.
1. The entrepreneur and VC are initially on opposing sides
2. The negotiation is built on this
3. The VC normally holds all the power as they have the money that the entrepreneur needs
4. A deal is signed
5. Post-investment the entrepreneur and VC need to shift their relationship and work together.
The result is often that nothing is done to facilitate the change in relationship. Sadly, I have witnessed too many occasions where the relationships between the staff, directors or shareholders have had a negative impact on the company’s results.
The ultimate challenge would be to prevent the issues in these relationships ever occuring while second prize would be the ability to fix the issues before there is a lasting impact on the company.
The solution is in acknowledging the human side of the relationship and the importance of this on company performance as one will then be unable to ignore the importance of being proactive and preventing problems before they occur. This can be achieved by a couple of extra steps in the process which involve both parties sitting down and working out what their common goal is, what there opposing goals are and how they plan to work together. This I believe, will go a long way to achieving greater success for companies.