Are You Guaranteed A Big Exit If You Take VC Funding?
I love the movie, “The Social Network.” I think it’s kind of like The Godfather, but for startups instead. What do I mean by this? There are so many memorable lines and takes in both movies.
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In The Godfather, you have, “Leave the gun, take the cannoli.” In The Social Network, you have so many memorable scenes. The scene I’m looking for is the one where Mark has just gotten Peter Theil to give Facebook an initial investment.
Mark says to Eduardo, his co-founder, “We did it!”
Maybe in the movies getting funding equals a successful exit, but not in reality.
Getting funded does not mean you are guaranteed success.
Here are the numbers according the National Venture Capital Association. Approximately 30% of all venture funded companies fail completely. Another 30% return their initial investment. The remainder produce positive returns for their investors.
Raising VC funding does not equal success. So, what can you do to increase the odds that you’re going to be one of the successful VC funded startups?
Here are my thoughts:
A. Make sure there is alignment between you and your investors before you take any funding.
If there’s one truism about a dispute between you and your investors is that you will inevitably lose. Every. Single. Time. And, don’t think for a moment that you’ll evade this problem.
Now, there are disputes and there are disputes. The killer disputes are when your goals and your investors goals diverge.
For example, let’s say your goal is sell you company for $50 million. However, your investors were thinking that $500 million was more like it. You’d better change your goals or your investor will find a new CEO.
Make sure you understand exactly what you want your company to be (including the exit), and make sure you understand what your investors want before you take their money. This will help you avoid a major problem later.
B. And before you even start raising money, make sure you understand the ramifications of raising money.
Let’s go back to my $50 million exit example. That’s gone now. You’re swinging for the fences.
You also need to understand that, as long as your company is losing money, your investors control your destiny. This doesn’t mean that your investors are going to tell you how to run your company.
This does man that, if you really screw up, your investors have the power, regardless of your ownership percentage, to throw you out. I’ll explain in point E. how to avoid this problem.
C. Make sure your funding is going to last you at least two years.
A big mistake you can make is not asking for enough money to run your company for at least the next two years. So, why is two years the magic number? Let me explain.
Raising funding, on average, is going to take you around six months. However, that’s the average. It could take you much longer. For example, It took me two years to raise my company’s initial funding.
Raising funding for two years gives you a buffer just in case it takes you longer than six months to raise that next round of funding.
D. Learn how to manage your investors and your board of directors.
Back to the movies. This time, let’s use Michael’s famous line The Godfather II as a reference: “Keep your friends close and your enemies closer.”
So, while I don’t like to think of VCs as the enemy (they’re not), VCs are definitely not your friends. They are money people that will protect their investment at all costs.
That’s why it’s good practice to get really close to your investors. The simple way to do this is have 1:1s with each investor and board member before every board meeting.
Make sure to go over all the key issues, especially the big problems, in this 1:1 setting. Be armed with how you’re going to solve the problem as well. You’ll avoid surprising your board with bad news if you follow this simple rule.
E. Meet your commitments.
Now, what makes managing your board and your investors even easier is you and your team execute. My friend Yuval Ariav ‘s profile says, “I get shit done.”
That’s what great CEOs do, they get shit done. Investors deal with enough teams that regularly miss their commitments. Be that one company in your investors portfolios that regularly meets its commitments.
You’ll earn your investors trust when you meet your commitments. More importantly, your company will be on the road to success.
F. Hire people smarter than you.
You can’t meet your commitments without a great team around you. Make it your goal to hire people that are smarter than you are in their respective disciplines.
Then, make sure these smart people have integrity, are passionate, better yet fanatical, about your company, fit your company culture, and you’re on your way to success.
G. Just as importantly, Don’t forget to focus on building a great culture for your team.
I’ve written about this elsewhere (see below), but the most important indicator of a successful startup is your company culture. It’s more important than your market choice, your technology. That’s how impactful your company culture is.
Spend the energy and the time necessary to really think about the type of culture you want. Hint: a commitment culture, where your team never wants to leave, is the culture that outperforms all other types of culture.
As you can see, there’s a lot more to a startup success than getting funded. Follow these seven rules and you’ll improve your odds of success.
For more, read: Why Your Startup Culture Is The Key To Your Company's Success - Brett J. Fox