- Raising capital
from a VC Fund relies very heavily
on the people factor and the trust
that is established upfront.
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- Very high
failure rates (over 60 percent) occur
in collaborative ventures.
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- The key to
maintaining successful relationships
is to recognise that the will continually
be in a state of flux.
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- Understand
clearly what VC Managers bring to
the table in terms of skills, experience
and networks.
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- Professional
reputation and the way a VC Manager
does business are the key ingredients
in determining the success of an investment
relationship.
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Selecting the right Venture Capital (VC) Manager can have
a very positive impact on the performance of your company.
Selecting the wrong manager, on the other hand, may result
in delays in the attainment of your strategic objectives.
Inviting a VC Manager to join your board and share register
can be like the story of the spider and the fly. The “come
into my parlour” approach may have some serious longer
term consequences if it is not approached correctly.
Like all commercial activities, raising capital from a VC
Fund relies very heavily on the people factor and the trust
that is established upfront. It also requires building on
this trust during the term of the investment relationship.
Capital investment involves a 5 to 7 year relationship,
supported by an agreement that outlines the terms and conditions
and the business milestones to be achieved.
Apart from the people factor, otherwise known as “chemistry”,
it is also important to understand the way VC Managers work.
You need to understand their investment appraisal processes,
their investment criteria, their particular areas of specialisation
and the types of investments completed to date.
Chemistry and Critical
Skills
One of the key ingredients for any successful relationship,
whether contractual or not, is the chemistry between the
people.
It is not unusual to have very high failure rates (over
60 percent) in collaborative ventures, alliances or partnerships.
Managing these types of relationships is very difficult
over longer periods of time. Most relationships will fail
within the first 5 years.
The key to maintaining successful relationships is to recognise
that they will be continually in a state of flux.
Over time, events may occur which change the dynamics of
the relationship. For example, shifts in the competitive
environment or regulatory changes may either inhibit or
create significant opportunities.
As these changes occur, it may be necessary to re-visit
or re-negotiate the terms of the relationship.
Unless the parties are aligned and focused on the same objectives,
the outcome may be financially, as well as personally, damaging.
The financial fallout may mean a significant decline in
the value of the company and your investment, and it may
also result in a dilution of your shareholding, particularly
if further capital is required to change direction.
The personal result may be the loss of a key role or position
in the company.
CEO’s, and sometimes the founders, are asked to step
aside to facilitate the change in direction.
This may be personally difficult, but the potential future
value of the company needs to be considered.
New Capital to Support
Business Objectives
In broad terms, VC Managers provide:
- Access to a wide range of business expertise
- Expertise in speciality areas eg technology development
or commercialisation
- Access to key networks, alliances or associations
- Expertise at Board level, especially in regard to compliance,
risk management and strategy
- IPO or Trade Sale negotiation experience.
Before approaching VC Managers, several key questions need
to be considered:
- What are your business objectives and will these be
achieved with outside capital?
- Where should the capital come from?
- What are the benefits of introducing a VC Manager?
- How do you select the right VC Manager?
The first question is a broad strategic one.
It is discussed in further detail in the Determining
your Capital Requirements article at this Website.
The answer to the second question will depend on
the amount of capital you require.
If the capital requirements are over $500,000, it will be
necessary to consider the VC Funds or a Strategic Investor.
The Strategic Investor approach may be preferred where the
technology or products are complimentary or where access
to distribution is required.
The third question focuses on the value added benefits
of VC Managers, if the chemistry is right. What will VC
managers bring to the table?
The last question, relating to the selection of the right
VC Manager, needs to be carefully considered. It needs good
research and planning, as well as detailed reference checking.
The capital injection may involve an investment period of
5 years or more, so it is important to select the right
manager to work with.
Background research on the VC manager and its key investment
staff needs to be performed to understand:
- Size of the
VC Fund. How big is the fund and what
is the maximum size of the investments? How many investments
are completed each year?
- Investment Focus.
What investment stage is preferred? What are their investment
criteria?
- Investment Processes.
How does the process work and how long will it take?
- Areas of Specialisation.
What key areas of expertise does the VC Manager have?
-
Investments Completed.
What sort of companies has the Manager funded and why?
Are any of these companies in your industry sector? This
is a key question as the Manager may already be aware
of your company and its prospects.
- Co-investment
with Other VC Managers. Has the Manager
invested with other Managers? This is important when larger
capital raisings are being considered. Most funds have
limits on the maximum contributions that can be made.
- Investment Instruments.
How the funding was advanced? Shares (preferred or ordinary)
or debt securities, or a combination of both, may have
been used.
- Team Experience
and Stability. What sort of experience
(general management, board and investment) does the VC
Manager Team have? How long have the Team worked together?
When was the last departure from the Team and why? What
additional services can the team provide?
An evaluation of the VC Team’s skills and experience
is important. There should be a range, as well as depth,
of skills, and as a minimum, there should be at least 3
active managers involved in the VC Fund.
Team Reputation
Professional reputation and the way a VC Manager does business
are key ingredients that will determine the success or failure
of the investment relationship.
It is therefore important to spend a fair amount of time
evaluating the qualities of the Manager. This evaluation
needs to cover both the direct dealings, as well as third
party reference checks.
The list of parties to be contacted should include:
- CEO’s and Non Executive Directors of companies
that have raised capital.
- Other VC Managers where co-investments have been made.
- Corporate Advisers that have assisted the Manager with
capital raisings, takeovers or disposals.
- Broker’s that have raised capital through IPO’s
or private placements.
- Other Professional Advisers like lawyers or accountants.
The process of checking references may be very time consuming,
but it needs to be done. It may reinforce your “gut
feeling” about the people or it may highlight potential
relationship problems.
The reference checking process needs to be handled carefully,
with due respect for the confidentiality of the information
and the reputation of the parties involved.
Discovering any major problems after the funding has been
provided may give rise to serious longer term conflict.
Selecting the right VC Manager will definitely assist with
the achievement of your company’s objectives.
With the right VC Manager relationship in place, the chance
of successfully exploiting new commercial opportunities
dramatically improves.
The primary decision in selecting a VC Manager is in respect
of fit, with a strong focus on chemistry and experience.
Peter T Gow is the Managing Director of Creative
Capital Pty Limited. He founded Creative Capital to accelerate
the learning skills of entrepreneurial CEO's and develop
their expertise in capital management, business and strategic
planning, cash flow management and market research and analysis.
Peter has over 12 years of experience in working with growth
companies and has been involved in the completion of over
30 financings in the software, manufacturing and medical
areas. His expertise covers company evaluation, strategy
and market analysis, capital raising, transaction structuring,
documentation and completion. Peter has also set up several
venture capital funds for a major financial institution
and appraised a range of venture capital managers.
Creative Capital Pty Limited
Peter T Gow
61 412 235 455
petergow@creativecapital.com.au
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