Post Funding: What Entrepreneurs Must Ask and Tell Investor about the Business

[Guest Post by Sanjay Anandaram, entrepreneur-turned-investor. In this post, he discusses few important aspects of relationship between an Entrepreneur and a VC, post funding] The relationship between a venture capitalist…

[Guest Post by Sanjay Anandaram, entrepreneur-turned-investor. In this post, he discusses few important aspects of relationship between an Entrepreneur and a VC, post funding]

The relationship between a venture capitalist (VC) and an entrepreneur is a strange one. On one hand, prior to the investment there is intense negotiation and even perhaps gamesmanship. And post-investment “partnership” on the other. Both parties are focused on improving the value of the company and have to perforce work together. While reams have been written about “good-smart VCs”, “VCs who bring value” and the like, a fact that is often glossed over is that the relationship between the VC and the entrepreneur has to be at many times driven by the entrepreneur. The value extraction out of the relationship is primarily the entrepreneur’s job.

What does this mean?

First, the relationship between the two should not be viewed by the entrepreneur as adversarial. It’s a partnership. The VC has serious money and reputation at stake in the venture while the entrepreneur has passion, sweat, and a reputation at stake.

Second, the VC should be viewed, especially in early stage companies, as a counselor rather than just as a source of capital. They usually have experience of dealing with many entrepreneurs and have been in many unhappy situations (having lost a lot of money!). The entrepreneur should actively seek out the VC’s opinion and inputs. It is the entrepreneur’s responsibility to get the best out of his VC. The business is run by the entrepreneur. The VC is not being paid to run the business!

And cardinal rule # 1: Keep the VC totally informed of the goings-on in your company. Especially the bad news!

And cardinal rule # 2: Tell the bad news sooner than later.

If you as the entrepreneur are serious about deriving value from your VC, you have to be brutally honest about your business. This means you have to take a cold hard look at sales, margins, recruitment, growth etc and keep the VC informed.
You don’t have to wait till the mandatory quarterly report to convey news about your business. If there’s trouble looming, inform the VC upfront. Seek help. For example, if your top technologist on whom the business significantly depends on has put in his papers and you have done everything possible to keep him back but to no avail, you should have your VC talk to the person. Did you keep the VC informed of the possibility of this individual leaving?
If you are behind sales targets, what do you do? Ask your VC to introduce you to prospective customers. You have made a sales call on a CEO and the decision is due 2 weeks from now. Ask your VC if he can put in a word to the CEO.

In many cases, the VC will be able to help out. There’s this person you want to hire as VP Business Development. Get the VC to participate in the hiring process. In short, use the VC.

There are times when the business goes through a rough patch. And there are sales targets that are likely to be missed. There are deadlines likely to be missed. There are ….The VC MUST be told of the bad news up front and not be “expected” to read between the lines to decipher the actual situation in the company. The first warning sign that your business warrants a closer look is when promised milestones/deadlines are missed. So, don’t make unrealistic projections. Don’t make promises you can’t keep. And if in spite of your best efforts, things don’t appear to be working out, inform the VC AS SOON AS you come to know. That way, there are no surprises.
Two, the VC and you can together work at recovering the situation. It’s a partnership remember? One of the surest ways to severely strain your relationship with the VC is to have him find out the bad news from a source other than yourself and / or at the very last minute. Once this happens a couple of times, don’t be surprised if the relationship moves downhill.

So, while all the rhetoric about having “smart VCs” and “value-added VCs” is important, don’t forget that the VC isn’t running the business for you. (Of course, if there are serious problems, that too could happen, but without your participation) you need to derive the best out of the relationship by driving the relationship. You “MUST ASK, MUST TELL” the VC about your business. That is, if you are serious about building a relationship and a business.

What do you think?

[The article first appeared in FE. Reproduced with author’s permission]

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