Putting in Your Money and Starting
June 22, 2016
iStock_000010528431Small(550x363)
Failure Only Happens to Those Who Fall and Refuse to Get Up
April 9, 2012

UL0010 – The VC Trap

This week the focus of discussion is the trap a VC very cleverly sets for entrepreneurs and the factors entrepreneurs should keep a watchful eye on when dealing with them.

An entrepreneur comes across many challenges in the process of setting up a business and fund raising is one of them. There are plenty of options for securing investments but the sizable sums of money that every startup needs come mainly from VCs. It is, therefore, important to fully understand how this is done and the certain factors an entrepreneur should look out for when dealing with VCs.

The business landscape is one strong ecosystem where everyone has a specific role to play. Unless all the players participate actively, it is not possible to achieve an understanding that eventually helps one achieve the peak of success. It is crucial for any business that all the involved parties align their goals and expectations so as to guarantee drastic improvements in terms of the performance rendered by the entrepreneur and the team.

Not all five fingers are the same and this also applies to venture capitalists. Not all of them will be hard to handle. Some even make great partners and working with them is nothing but a pleasure. Still, as they say, one should hope for the best but prepare for the worst. So, every entrepreneur should also watch out for any traps that VCs have been setting up for them.

It is of paramount importance to understand the unwritten and unspoken things about a VC as your business growth depends on it. It is common for entrepreneurs to face issues with VCs but they should not let the disappointment take a toll on them. The following is an account of how the mind of a VC works when they are evaluating your business proposals.

TRAP 01- VC Sing Your Praises to the Skies

A VC’s job is to identify and secure as many worthy investment opportunities as possible. It will be a failure on VCs side being unable to find enough promising projects to invest in. They also know that since considerable amount of money is involved, they have to be highly selective of the projects they choose.

It is obvious that they will want to invest in as many good projects as possible. They also know that they are competing against other VCs for opportunities that attract their investors. They will review all the proposals offered to them but will not let any opportunity slip out of their hands too soon. To achieve this, they start interacting with the company or entrepreneur at a more personal level.

The VC will ensure that he keeps the courtship going as long as possible. The entrepreneur will naturally start associating high expectations from the VC and will stop making any efforts for getting another partner. During this courtship, the VC will praise and appreciate you incessantly to keep you from going to any other VC with your proposal. This is a well-thought trap a VC sets for any entrepreneur.

Things can get messy with the passage of time and can lead to grave consequences for any entrepreneur. The VC has his reasons for doing so. If he has evaluated that an investment into your project will be of high value, he will make sure that no other VC benefits from it. Instead, he will want to bring other VCs in with whom he has worked in past. So, when a VC brings another VC into the scene, do not think he is doing you any favor. All he is doing is securing his future in hopes that the other VC will do the same for him in return.

An entrepreneur should, therefore, hear the subtle sirens if he feels that the courtship is going on forever. By eliminating other VCs from the scene, VCs prevent other potential investors from coming to you, hence; absolutely finish your chances of ever knowing what you could have achieved. This is a very favorable situation for any VC and often the lack of options encourage entrepreneurs into taking such desperate measures as accepting a deal on the VC’s own terms and conditions. This is something that has to be avoided by all means.

An entrepreneur should never fall for the feel good factors as they may be just a trap. Not doing any competitive search for VCs can be the biggest mistake you can make as you will never get around to finding out the prospects you missed. Do not give up. Remember, success comes to those who wait for the best opportunities to knock.

Leave a Reply

Your email address will not be published. Required fields are marked *