Why a VC Will Get More than Their Fair Share of Your Company
If you have ever seen the show “Pros vs. Joes” on ESPN, then you’ve had a glimpse of how well you will raise venture capital (you’re the Joe – not the Pro.)
On this show, a few weekend athletes — the “Joes” — are pitted against a few professional athletes in a series of physical competitions.
The outcome? The Joes always get crushed. In the same way, at the time you enter the capital markets to raise venture funds, you’re going to get crushed and it’s going to hurt. A lot.
Here’s why: Venture Capital is the most expensive money you can raise for your deal. It will come with the most difficult terms and the most amount of restrictions and it will be a white knuckle ride from start to finish.
There are three principle reasons this occurs.
1. The VC will be an expert in your “space.”
He will know how to de-value every piece of your business, and argue that your “customer relationships are soft” and that you have “poor revenue visibility” into the next two quarters. (Start learning the language of the capital markets so you are neither impressed nor surprised by these statements.)
2. VC are capital market experts, and they know how to isolate you from other investors, lower your valuation and get “downside protection.”
They do this every day and are good at it. Better than you think. Just know, that in this match-up … the VC will win.
3. You are viewed as a commodity -the VC has plenty of dealflow in your sector.
He doesn’t need your deal, there are many others to be had if you go away. This gives him the power to say no to your terms, counteroffers or valuation.
Is there anything you can do? I explain exactly how to deal with all this in a recent Mixergy video. Take a look.