The Right VC Partnership
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Can you assign the right role for your VC instead of being assigned a role by the VCs?
The answer can impact whether you build a unicorn and how much wealth you keep because:
· You may not build a unicorn if you do not control your venture –94% of those who built unicorns kept control; and
· You are significantly diluted if you do not control – in a sample of 22 billion-dollar entrepreneurs, those who delayed VC kept more than 2x the proportion of wealth created than those who got VC early. VC Avoiders kept 7x (Truth About VC).
In addition to asking whether you should seek VC, whether you will get VC, and who is the best VC for you and the venture, perhaps you should ask yourself: what is the best role for your VC? Here are the three key VC roles to help you decide the best one for you.
#1. VC as controller
The ‘classic’ VC role is the Silicon Valley method, especially among the Top 20 VCs, all of whom are based in Silicon Valley or have offices there. Andy Rachleff, formerly of Benchmark Partners and eBay fame, noted that the top VCs finance after the Value model (Strategy Aha) and before the Growth model (Leadership Aha). At this stage, VCs get better value and reasonable risk. They can also take control of the venture, invest a lot of capital in the venture to help it take off, and find a new CEO, usually a successful entrepreneur or corporate executive, who is expected to take the venture to a profitable strategic sale or an IPO.
· eBay is a prime example of this model and one of Benchmark Partners’ major successes. They invested $6.7 million, hired a new CEO, and harvested about $5 billion in about 18 months.
· Apple is a not-so-successful example of the VC model. Jobs was fired and the multiple CEOs after Jobs could not stop Apple’s slide towards bankruptcy. Jobs returned and brought Apple back to the top of the business world with capital from Bill Gates.
#2. VC as mentor
VCs can also serve as guides, especially when the entrepreneur is young and inexperienced. In such a case, the entrepreneur can benefit from the experience of a successful mentor. As mentors, VCs may sit on the board and advise the entrepreneur. But previously successful entrepreneurs are often considered to be better mentors and advisors than VCs. Bill Gates did not need VC, but he wanted a guide with an investment in the venture. So, he got a VC who invested in the venture after it had taken off.
#3. VC as arms-dealer
This model is useful after the entrepreneur has launched the venture and taken off. But since other ventures and VCs may be entering the field, the venture may need capital to dominate. The entrepreneurs keep control and use VCs mainly for the capital they provide.
· Michael Bloomberg was a successful executive on Wall Street when he started his own company. He got Merrill Lynch as his first customer and as a strategic investor and went on to dominate the industry.
· Jeff Bezos of Amazon.com used family and angel capital to takeoff without VC. When his sales had jumped from around $500,000 to more than $15 million and was on track to hit $148 million the next year, he got capital from John Doerr of Kleiner Perkins to build the giant of the Internet.
· But VC as arms-dealer is not a fool-proof strategy. WeWork tried the capital-intensive strategy with enormous amounts of capital from Masayoshi Son and others. It did not work.
The best VC role for you and your venture
To determine the best role for VCs in your venture, decide if you need VC, when you need it, how much to get, what will you achieve with the VC you get, do you want to stay in control, and how much of the wealth created do you want to keep. Most importantly, you need to know whether you want to learn the skills to build and control a growth venture or risk your venture on instinct. Consider:
· Your stage: Delay till Leadership Aha if you want to stay in control.
· Your needs: Reduce your VC needs if you want to reduce dilution.
· Your goals: Have unicorn goals if you want the best VCs. And keep control if you want to keep more of the wealth you create.
· Your skills: Learn unicorn startup, launch, and leadership skills to achieve your goals.
· Proof: Prove your potential to create FOMO (fear of missing out), as did Mark Zuckerberg.
MY TAKE: If you need it, the best VC role is VC-as-arms-dealer from the Top 20 VCs. To do that, you need to prove your venture’s unicorn potential and your leadership potential.
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