The traction, media attention or buzz will soon bring you to the notice of venture capitalists. Cash comes in and everyone is pumped up. The founders are proud, employees are often happy to be part of that addictive environment and venture capitalists are wondering if this is that one in 10 that will catapult their fund into the upper quartile of fund performance.
Reality, however, rarely allows your venture to glide along as smoothly as you planned in the spreadsheet. Running a new venture will always test your resolve, patience and vision, as well as your business plan.
But these moments give you an opportunity to rid yourself of weak links and attach stronger ones. For example, founders and partners fight when milestones are not achieved, and strong ones rise to the challenge while weak ones will leave. And individual employees can create dissent among the team when they think they know better.
If they’re right, listen and act. If they’re wrong and they keep bashing the company, root them out before they dampen the enthusiasm of others. Customers leave when trouble has gone on too long and the vibe turns negative.
When a venture is going through tough times, innate human nature tends to hide the faltering bits of the business from the venture capitalist who has backed the deal. Few of us care to admit we’re not entirely in control of the situation and, as a result, most entrepreneurs go quiet. Don’t. Have the courage to admit you need help.
Most venture capitalists are former entrepreneurs and have the experience of the rushes, problems, and outright failures of early stage ventures. Communicating with your venture capitalist is critical. They’ve seen a lot and will often either know what to do or who to call. Any major and sudden disaster should be brought up immediately to avoid later trouble.
Your venture capitalist should be supportive and sufficiently active to assist you through the situation. However, if you do make this call and nothing happens, other factors may be at play. Let’s say you received $3 million from a venture capitalist with a fund size of $90 million in your Series A round of financing after friends and family have been tapped out. This would indicate that you are a serious investment for them and that they will do whatever they can to help you out.
Many times, however, venture capitalists will make much smaller bets of $300,000 or less on young companies in order to keep the company close to them to see what they can get done with the investment and to keep competing venture capitalists out of the picture should the company gain sudden traction. If this describes your venture capitalist, chances are that their help will be limited to phone call support and they’ll let you twist in the wind if you don’t right the ship on your own.
Entrepreneurs will often not disclose troubling issues because they are fearful that the venture capitalist may swap in a new CEO. Be aware that you will establish greater trust and cooperation with your venture capitalist if you’re forthright. There are lots of examples of venture capitalists who will back an entrepreneur even when the first venture failed because that person was a good entrepreneur and because trust had been established throughout the cycle of rush and crash. Open communication with your venture capitalist can help you, your company and your longer-term prospect of later support.
Warren Bergen is President of Alberta-based AVAC Ltd. and author of Swagger & Sweat, A Start-up Capital Boot Camp.