- Talk to your venture capitalist before you crash and burn
- Entrepreneurs need to know when to call it quits
Open communication with your venture capitalist builds trust, strengthens your company, and secures future support
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Everything is positive when a new venture begins. There is a rush of excitement, people are fully committed, hours are long, and creativity is cranked to its peak.
The traction, media attention or buzz will soon bring you to the notice of venture capitalists. Cash comes in, and everyone is pumped up. The founders are proud, employees are often happy to be part of that addictive environment and venture capitalists wonder if this is that one in 10 that will catapult their fund into the upper quartile of fund performance.
Reality, however, rarely allows your venture to glide along as smoothly as you planned in the spreadsheet. Running a new venture will always test your resolve, patience and vision, as well as your business plan.
However, these challenges offer valuable opportunities to rid yourself of weak links and attach stronger ones. For example, when milestones are missed, conflicts may arise among founders or partners. Strong ones rise to the challenge while weak ones may fall away. And employees who believe they know better can create tension within the team.
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If they’re right, listen and act. If they’re wrong and they keep bashing the company, root them out before they dampen the enthusiasm of others. Customers leave when trouble has gone on too long, and the vibe turns negative.
When a venture faces tough times, it’s natural to want to hide the struggles from the venture capitalist who has backed your business. Most of us are reluctant to admit that we’re not fully in control, and as a result, many entrepreneurs tend to go quiet. Don’t. Instead, have the courage to admit when you need help. Reaching out not only builds trust but also opens the door to valuable advice and support that could help steer the business back on course.
Most venture capitalists are former entrepreneurs themselves, familiar with the highs, challenges, and even failures that come with early-stage ventures. That’s why maintaining open communication with your venture capitalist is critical. They’ve seen a lot and will often either know what to do or who to call. Any major and sudden disaster should be brought to their attention immediately to avoid later trouble.
Your venture capitalist should be both supportive and actively engaged in helping you through tough situations. However, if you reach out for help and nothing happens, other factors may be at play.
Let’s say you received $3 million from a venture capitalist with a fund size of $90 million in your Series A round of financing after friends and family have been tapped out. In such cases, they are likely highly motivated to offer assistance and guidance to protect their investment and help you succeed.
In many cases, however, venture capitalists may make smaller investments, say $300,000 or less, in young companies. This strategy allows them to maintain a close relationship with the company, monitor its progress, and prevent competing venture capitalists from getting involved if the company suddenly gains momentum. If this describes your venture capitalist, chances are their help will be limited to phone call support, and they’ll let you twist in the wind if you don’t right the ship on your own.
Entrepreneurs often hesitate to disclose problems because they fear that their venture capitalist may swap in a new CEO. However, being forthright can actually build stronger trust and co-operation with your venture capitalist. There are lots of examples of venture capitalists who will back an entrepreneur even when the first venture failed because that person was a good entrepreneur and because trust had been established throughout the cycle of rush and crash.
Open communication with your venture capitalist can help you, your company, and your long-term prospects of later support.
Warren Bergen is the author of Swagger & Sweat, A Startup Capital Boot Camp.
The opinions expressed by our columnists and contributors are theirs alone and do not inherently or expressly reflect the views of our publication.
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