If you have ever watched ABC’s Shark Tank, you’ve probably gained some insight into the mind of an investor. You may know, for example, that we like great ideas or products that deliver on an addressable market need. Or you may have seen that we are fans of big gross profit margins, significant (or at least noticeable) sales growth, savvy entrepreneurs who are dedicated to their businesses, and markets or industries in which we can actually add value.
Of course, we like other things, too. Like proven business models that have advanced well past the proof-of-concept stage, and an economic model that hints at high growth potential.
But once we have crossed all of those things off our investment checklist, there’s something else that we like to see: valuations that align with a company’s true worth and businesses that are ready to do something productive with the cash we give them.
Diving Blindly into the Deep End
Ultimately, this is where many entrepreneurs (and, to be frank, venture capitalists) screw things up. In preparing to accept outside investment, business owners often unknowingly ignite a ticking time bomb by:
- Accepting money before the business is ready for it
- Choosing an investment partner who doesn’t share the company’s vision or goals
Why are those actions so risky? It’s simple. By taking too much money too soon -; or choosing a greedy, impatient investment partner -; you’re almost guaranteeing that you will eventually cede control of your company.
Let’s look at the first scenario.
When you accept VC money before you are ready (or because you desperately need the cash to survive), it’s unlikely that you will be able to do the right things with that capital, and you will find it impossible to drive the growth that your investors want to see. Plus, if that ultimately leads to you having to ask for more money, your stake will only be further diluted, and you will probably lose majority control of your business entirely.
As a result, you might show up to work one day to find that your parking spot has been claimed and the locks on the door have been changed. Welcome to the ranks of the unemployed.
Now, let’s look at the second scenario.
If you rush through the due diligence process and select the first VC firm that hands you a term sheet, you’re basically playing Russian roulette with your future. Maybe you will get lucky and that investor will be perfectly aligned with your mission, vision, and values.
Or maybe (and this is the more likely possibility) you will arrive to your first board meeting to find that your VC wants you to shift the company’s product focus, target a market you don’t particularly care for, and hire a team of half-wits who don’t jive with your corporate culture.
The typical results of that scenario? You voluntarily step down from your post as founder and CEO out of pure frustration, or the board elects to boot you in favor of a CEO they can more easily puppeteer.
Is Your Head on the Chopping Block?
No entrepreneur likes to lose control of his or her business, and just because you sign a VC term sheet doesn’t mean you have to hand over the keys to your company.
But if you mismanage your VC partnership, drop the ball on your valuation, surrender too much equity in exchange for capital, or fail to do something productive with investors’ money, your days as the CEO are probably numbered.
As billionaire investor Kevin O’Leary often says on Shark Tank, most investors care about one thing: M-O-N-E-Y. So, when you accept outside funding, it’s critical to remember that your new partners are also co-owners of your business, which can be both good and bad.
While the best VCs will probably share your passion for the business and care deeply about its long-term health, they will also be capable of making the kinds of unemotional decisions that many entrepreneurs cannot. Put yourself in the wrong position, and one of those decisions might be to throw you into a pool of bloodthirsty sharks.