Is venture capital worth the risk, or is it overhyped?

Getting into a car is a risk, whether you’re driving or not. A new partner in life is a risk. Even eating out can be risky.

Yet millions of us are taking these risks every day without much consideration, and that’s because we don’t always stop and thoroughly think through our decisions and their potential consequences.

But there is one really important aspect to making decisions, whatever their perceived risks are, that we all need to be more aware of. That is, decisions have both positive and negative consequences that we simply cannot foresee conclusively at the time of making the decision. We can only decide. And once we’ve done that, reap the benefits of the positive consequences, as well as deal with the negatives.

Venture capital is yet another one of these risks.

Founders would not contemplate taking capital and diluting their shareholding unless there was a striking reason for it.

Whatever the reason, once they’ve raised capital with a VC, they’ve engaged in a long-term relationship, and as with any other relationship, they need to maintain and nurture it.

If founders do this, they have a much higher chance of experiencing positive outcomes, but if they neglect this new relationship, they have a much higher chance of experiencing negative outcomes.

I have personally experienced different types of investors. Some are happy to provide funds but are relatively passive post-investment. Some are providing funds and want to stay connected. Some others invest to help with the cause because there is a strong connection and they genuinely can and want to help.

Some investors are easier to deal with than others, which is no different from any other life situation. Sometimes personalities clash and other times you form productive relationships or friendships that extend past the venture that brought people together in the first place.

Startup founders typically have a different risk profile than most. They take risks because they have a generally positive view of the future and can see how what they do can lead to something that doesn’t yet exist. They don’t usually get bogged down by thinking about all the negative outcomes their venture is potentially leading to.

Looking at it through this lens, there is not much wrong with working with a great investor and having a great relationship with them. What it comes down to is finding the right investor and building a great relationship with them.

There are a few general attributes that can make working with investors a great experience.

1. Alignment on expectations. It’s really important the founder is clear about what they want to achieve and what their purpose is. And it’s really important the investor is aligned to that purpose and vision. If either one wants to exit really fast and the other doesn’t, for instance, it’ll cause conflict.

2. Transparency and openness. No one likes to believe the other party is hiding something. Surfacing bad news as it happens is a good thing as it allows both parties to work on solutions.

3. Availability. A lot of effort and headspace goes into managing communication. It’s annoying to chase founders and it’s annoying to chase investors. If you invest or if you take investment, make yourself available to the other party with priority.

In addition to these attributes, there are a few things founders should also consider when engaging with investors.

1. Consider what you need. Apart from the capital, of course. Venture capitalists usually specialise in something — make sure you understand what that is and how it helps you to get to the next stage. Check out other portfolio companies and see whether there are synergies.

2. References. It’s a far higher impact decision to get an investor on board than an employee, yet we tend to do reference checks for the latter far more often than for the former. Talk to other portfolio companies about what it’s like to work with the investor and see whether that works for you too.

3. Consider the whole package. Don’t just make a decision based on term sheets. Take into consideration who the investor is, what they expect, what they stand for, how much bandwidth you get from them if you need it, and what individual you’d be working with. A potentially less favourable deal can work out better if the whole picture is right.

Working with a VC does add a dimension of risk, but if the founder of a startup chooses carefully and nurtures the relationship post-investment, it can be a great experience, and ultimately, the difference between success and failure.

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