Venture capital or vulture capital?
VC’s are intrusive
In the early days of VC operations in Australia, with SME investments of say up to $5million, VCs would pick winners, and watch them run the race from the members’ enclosure. Today, the successful SME VCs ride winners and make winners. You need to test the chemistry between you and the VC executive who will be literally on your back for probably the entire period of the investment, through to the exit.
If the particular VC executive is capable and experienced in your business sector, and has the skills and capabilities to help grow your business, then this is a material value add. If the particular VC executive that manages your company as an investee is “toxic” or incapable, then this will cause major problems. While the VC executive can probably fire you, this right is non-reciprocal. You may be stuck with a toxic or inexpert individual, with significant authority, for years. This could cause you and your business significant setbacks.
If you really want to be master or mistress of your own destiny, then VC investment may not be viable for you–or for the VC.
Finding and selecting a VC
Most VCs are members of the Australian Venture Capital Association (AVCAL). They can provide lists of their members. These provide some useful information, but only engagement with a VC will really provide the information you need to determine suitability and synergies. Quite a few AVCAL members are not actually VCs; they may be advisers of one variety or another. Some AVCAL members appear to be VCs capable of investing, but a closer encounter may reveal that they are a “cashless VC” or “venture catalyst”. You need to ask any VC with which you engage how much money they have available to invest, and who their investors are. As explained above, you also need to ask:
- Who, specifically on the VC team will manage their investment in your enterprise? You need to spend time testing your relationship with this individual.
- What is the intended exit timing? How long will the investment allow you to run before an exit? Most VC funds are “closed” funds with an agreed end date by which investments need to be exited and all funds returned to investors. This is very important information for you.
- What investments has the VC made and what have the results been? The answer to this question will give you some understanding of the VC’s potential value adds. First time VC fund managers may have little track record to assess.
- Does the VC have track record in your business sector? A VC expert in green-tech investments may have little value add for an internet-based business, for example.
Finally, when embarking on a VC capital journey, consider taking on an experienced, expert adviser, with knowledge of your business sector and privileged access to relevant VCs. Your business accountant or family lawyer is unlikely to have the knowledge, experience and established relationships to fill this role.
–Lou Richard is author of A Practical Guide to Mergers and Acquisitions–Truth is Stranger than Fiction, and CEO of Sydney-based Newport Capital Group (www.newportcapital.com.au).
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