Forty-ninth in a series of weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital. We expect the series to run for a year after which we will collate the posts into a book. You can find the rationale behind the series here, and the list of questions here. We welcome your comments on any and every aspect of what we are doing.
The heart of a venture capital deal is an exchange of cash today for an obligation to grow the value of your company and eventually find an exit. Hopefully the reason that you raised venture is that value growth and exit were in your plans anyway, in which case the major difference is that once the money is in the bank it becomes much harder to change course, e.g. to run a lifestyle business. In other words, raising venture capital commits you to a path.
If you hit your plan then most likely you won’t want to change tack and raising venture will simply have been an enabler. It will have got you access to cash and other resources that will have helped you build your business. The bigger difference comes if you miss your plan, in which case raising venture will most likely have limited your options you have going forward. When an investment misses plan most VCs will either want to double down and have another go at hitting the original plan or sell early, and they will exert whatever pressure they can to make their preferred option happen. That is their duty to their investors.
If your VC does want to double down and go again they will want to understand what lessons were learnt from the failure the last time round and be happy that the plan has changed in the right ways to maximise the chances of success going forward. Often that is as simple as agreeing with the revised plan that you come up with, but sometimes they will want more changes or different changes to the ones that you propose. Often those changes will concern the speed of investment. Sometimes they will involve changes in personnel.
Hopefully you will have kept an active dialogue with your investors through the re-planning process and the new plan that emerges will appropriately reflect everyone’s opinions and influence and there won’t be any difficult discussions.
So far I’ve described what investors will want, begging the question ‘to what extent will they be able to get it?’. The first and simplest answer to this is the legal one. The more money a company has raised, the more the founders will be diluted and the investors will have proportionately greater formal and legal rights to control the company and influence operations. After Seed and Series A rounds the investors typically have a minority stake, but sometime around the Series B or Series C the investors will typically rise above 50% at which point they will have formal control of the company. The founders may have negotiated extra rights for themselves which mean that formal control is not absolute, but this doesn’t alter the fact that as more money is raised there is a steady transfer of power and control to investors.
In practice the situation is always more complex than the legals suggest and depends on the individuals involved. Some VCs have big personalities and will have a bigger impact than their equity stake alone would command. If the VC concerned has good judgement and relevant experience then this should be a good thing for your company, but it is something you should consider before taking his or her money. Similarly some founders and CEOs have big personalities and use that to bend investors to their will. Finally, some founders and CEOs are particularly critical to their businesses, particularly at the early stages and they can leverage that fact to increase their influence. In the end it comes down to legal control though and strong individuals can ultimately be over-ridden if their positions lack legal support.
In conclusion, if you hit your plan then raising VC won’t make too much difference to how you run your company, but if you miss your plan things might be different. The extent of that difference will depend on your relationship with your investors and the extent to which your revised plan fits with their ideas about what should be done differently.
UPDATE: Your VC will also punch above his or her weight if you will need to raise more money from them in the future.