Page 220 - Finance for Non-Financial Managers

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Venture capital firms
Negotiating
typically prefer to keep a
with Clout
low profile. Despite that Attracting Outside Investors 201
A company that has
preference, their names attracted the interest of VC firms may
are published in books be in a very strong position to negoti-
eagerly purchased by ate funding.While serving as the CFO
of such a company, I once participated
entrepreneurs and they
in a board of directors meeting
receive hundreds of unso-
where the outside VC interest was so
licited business plans
strong that the company actually
every year, only a fraction turned money away, effectively
of which ever get read. It’s rationing the next investment oppor-
generally acknowledged, tunity to those firms they felt could
although never stated as be most beneficial to the company’s
an absolute, that a busi- strategic agenda. Now, that’s my idea
of negotiating leverage!
ness plan has little chance
of getting serious attention
unless it has been introduced by someone known to the venture
capital firm, someone whose opinion they value or at least feel
comfortable with. Thus, when it comes to getting attention from
these investors, it’s often truly a matter of who you know.
Venture capital firms account for only a small portion of all
the investment funds poured into new businesses every year.
Entrepreneurs who have had VC investors on their boards tell a
mixed bag of stories ranging from masterfully insightful guid-
ance to self-serving decisions designed more to protect the VC
investment than to foster the venture’s success. Yet because of
their reputation, their ready pools of cash, and their skill in iden-
tifying and backing some of the most successful start-ups in
memory, nearly every entrepreneur who starts a new venture
seeks or at least covets the views, the money, and the support
of venture capitalists.
For their part, in spite of their skill at evaluating new ven-
tures, these investors expect to be wrong most of the time. In
fact, the traditional wisdom says they will lose money on four of
five investments they make, but getting a 10-to-1 return on the