From Venture Made Transparent: I was recently on a panel of VCs discussing the fundraising process with a room full of entrepreneurs. I always find these types of panels interesting because 1) it’s one of the few forums in which VCs compare notes about their internal processes and 2) one of the other panelists might provide a bit of advice that resonates with me. At this panel, I heard some advice that entrepreneurs should take to heart: “make sure your VCs isn’t a jerk.”
It’s a simple bit of advice and likely obvious to many. It does, however, deserve more weight in the decision making process that it is likely given by most entrepreneurs. Unfortunately, entrepreneurs don’t always have many options when it comes to capital sources, making it difficult to be picky about who they partner with. When there are options, many entrepreneurs will prioritise getting the best deal over taking money from investors that will behave like partners. That’s a mistake.
Bad partners can cause lots of problems for your company, especially when times get tough. For example, these types of investors may not be willing to provide your company with working capital to tide you over before the next round (when it would be appropriate to do so). Or, they might be the naysayer that makes many straight forward operational and financial decisions difficult to pass through the board. The list of potential challenges that a bad partner can create is long.
My intention here isn’t to suggest that you won’t face conflict and disagreement with ‘good’ partners. The difference is that good partners will always be acting in good faith to make reasonable decisions. The bad partners are those that don’t act in good faith.
The inherent challenge is that when you take money from a bad VC it feels as though your problems have ended. You’re now capitalised – the anxiety is gone – you’re now safe for a while. In reality, however, the addition of a bad VC to your capital table may only be the beginning of your problems.
There are good VCs in the marketplace. If you can, take their money.
Mark Davis is a VC at DFJ Gotham Ventures.
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