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What should I do with calls from Venture Capital Associates?

Private Equity Venture Capital Emerging Growth CompaniesLexBlog is not seeking funding from venture capitalists (VC’s). We’ve grown through self funding of my own to start with then and now organically through the great clients we have supporting our subscription revenue stream. But being an emerging growth company headed into markets dominated by a diverse group of companies in the fields of  business information services, media, publishing, marketing/PR, and data mining, I receive regular calls and emails from VC’s and private equity companies. Generally, they want to know what and how LexBlog is doing. My goal in the call is like anything, I want to meet people. It’s not so much the company, though it can be, it’s the person who calls that I’d like to get to know and possibly meet while I’m on the road or when they are in Seattle. Though LexBlog is not seeking capital now, it’s possible the day will arise when I’ll want to liquidate part of my investment without selling the company, to fund LexBlog’s acquisition of another company, fund accelerated development, or fund a strategic partnership we’ll be doing with another company. Larry Cheng (@larryvc), Managing Partner of Boston based Volition Capital, has a good piece this morning, ‘What happens after the VC associate call,’ explaining how VC’s view the same call.

[click] The conversation with the associate is over. The associate will then enter the notes of the call into Salesforce. If the company is deemed by the associate to fit our specs both in terms of what the company does and our investment focus (more on this later), the notes of the conversation will be emailed to the entire investment team. Elevating the visibility of the company through this means happens irrespective of whether the company is interested in raising capital. Every investment partner at the firm will read the notes of that call within 24 hours. Typically some email dialogue on the company occurs at this time. In addition, those notes will be included in a packet for discussion at our Monday team meeting. We discuss every company that has been elevated in this way every Monday. It is at this meeting that we decide next steps, if any, with the company. So, the net of it is very clearly this: If you want partner visibility for your company – talk to the associate.

VC associates are assets to an entrepreneur like me in a couple ways says Cheng.

  1. They know what kind of opportunity the firm gets excited about, and
  2. They know which partner would probably like the opportunity the most. VC partners pay attention when an associate is excited and has conviction around a company.
Per Cheng there are a number of things to think about in advance of and during the call.
  • Ask the associate what specifications he or she is looking for and decide whether you should do the call based on how closely your company fits those specifications. This can be as to the verticals the VC fund invests in and the size of the companies. For example, a VC associate I spoke with yesterday is looking to invest in small companies with $10 Million in revenue and $3 Million EBITA – who wouldn’t.
  • If the associate can’t give you specific criteria of what they’re looking for, then he or she is probably just fishing and their firm probably has more of a referral-based orientation. In this case, it may make sense to ask for a partner.
  • If you think your company does or will eventually fit the spec of the calling firm, and you either want to build relationships with investors for down the road or raise capital in the not-too-distant future, then proceed with the call.
  • If your company doesn’t fit the spec and likely won’t, then it’s completely fair game to let the associate know that and politely decline the call.
  • If you’re not sure, it never hurts to know what firms are looking for and just keep your own database for future reference.

I’ve done angle and lower level venture capital with Prairielaw.com, which I sold to LexisNexis. Though the dot.com days (greater fool investments) are not indicative of the investment landscape today, taking VC money can raise issues for a small company.

  • Raising money from the right VC on the right terms takes time. In the case of LexBlog, Kevin McKeown, our President, and I, as CEO, would need to spend a lot of time in preparation for and negotiating an investment. McKeown and I have operational and client development responsibilities. If we dive into raising capital, LexBlog revenue as well internal processes and morale could suffer.
  • You need to negotiate from a position of strength. Are you strong financially? How’s your management team? Have you put good systems and processes in place? If not, you may not want to to negotiate an investment until you get stronger.
  • Are you ready for money? How much time have you spent on organizational development with the leaders on your team? Do you even have strong leaders? Have you built strong relationships of trust between each other? Do you have each others backs? If not, taking on money to accelerate revenue, development, or hiring could be throwing gasoline on a fire.
  • Managing the relationship with a financial partner takes time. Each financial partner will say they are not just offering money, but also offering value in the form of counsel and connections. That can be a double edged sword if you don’t have the time and situational awareness to manage the relationship.
  • Taking an investment means recognizing there needs to a liquidation event. Like any investor, a VC needs to have a liquidation event to receive a return on their investment. The time frame may be longer today, especially if you’re well managed and generating value, but at some point there’s likely going to need to be the sale of your company.
There’s always a natural adrenaline surge when an investor calls or talking with a fellow entrepreneur who closed a round of funding. “Boy, could I do some great things with that money. I would’t have all the worries I have today. We’d blow the competition out of the water by capturing market share.”
At the same, stay aware of what you are doing today, where are you headed (what’s your plan), where do you want to go, and do you have the team to get there. An investment, though it may be, is not always the answer. Remain strategic.