Entrepreneur Bill of Rights – Article Four: The right to insist that your investors stand behind you in later rounds January 15, 2010Posted by Lawrence Lenihan in Uncategorized.
Funding is a mutual, ongoing, moral obligation. If you decide to have a VC partner in your company as an entrepreneur or to invest in an entrepreneur’s business as a venture capitalist, thinking otherwise will get you in deep trouble.
When he/she takes funding from an investor, an entrepreneur gives his/her commitment to deploy that funding responsibly in ways that will grow the entrepreneur’s business and generate a large return for the investor (and, of course, the entrepreneur!). The entrepreneur agrees that he/she will work his/her tush off to grow the business successfully and achieve the milestones that the entrepreneur and venture capitalist discussed prior to funding (you did discuss milestones and expectations before you took investment, didn’t you?).
In return, the venture capitalist gives his/her commitment to work tirelessly on behalf of the company and to add tangible value (see Article Three). But, the VC also agrees to stand behind the entrepreneur and the entrepreneur’s business both financially and reputationally.
Building a successful company is one of the most exciting, but also, most difficult challenges in business. Nothing (other than abject failure!) moves in a straight line and while you are battling in the trenches to move two or three steps forward for each step backward, you really don’t want to be spending your time looking over your shoulder wondering if someone has your back. In the end, that is our job as a VC – we got your back! In my mind, the visual that always reminds me of this obligation is from the movie Braveheart, when Mel Gibson’s William Wallace commits to luring the English army into battle in a position vulnerable to a cavalry charge from the Scottish nobles who are waiting out of sight, per the agreed plan between Wallace and nobles. As Wallace succeeds with his commitment, he signals to the nobles to charge-in and wipe out the English. However, unknown to Wallace, the Scottish nobles changed their mind prior to the battle and sold-out to the English king in return for some land and additional titles. As Wallace signals for the cavalry charge, the nobles simply wave goodbye to Wallace and ride off home as he and his comrades are left to be wiped out.
This scene is a perfect (if a little poetic and overly-dramatic) metaphor for the relationship between the entrepreneur and the venture capitalist. Wallace did what he committed to doing and achieved the milestones (getting the British in a vulnerable position) that were agreed. Moreover, he had established credibility through demonstrated and measurable previous achievement. He had every right to expect the nobles to be there for him.
VC’s cannot be like the Scottish nobles. As the entrepreneur fulfils his/her commitments, so should we VC’s. An entrepreneur should never have to wonder if his/her VC will be there in future fundings if the entrepreneur is fulfilling his/her commitments. That means putting money and reputation behind the entrepreneur when the entrepreneur needs it. Future fundings should be reserved and a commitment to being a partner, not just a participant in these fundings are valid expectations on the part of an entrepreneur.
As an aside, this follow-on funding obligation is the biggest difference between a traditional seed investor and a venture capitalist. Seed investors typically participate only in your seed round and there should not be an expectation (unless agreed otherwise) that they will support you in later fundings in a material way. A VC, on the other hand, is an institutional investor and should be expected to participate and support future funding requirements. We are not subject to the same financial constraints that govern the actions of individual or even institutional seed investors. Of course, an angel would stand behind you reputationally, but there is a difference between standing behind you with words and standing behind you with a checkbook and putting money behind the mouth where the words come from*!
* Yes, I despise ending a sentence in a preposition but to do otherwise would detract from the point and make the sentence awkward and clunky. I write this footnote to spare all of you who delight in pointing out poor sentence construction and errors in grammar from sending me an email! However, we can certainly argue about the placement of commas if you would like!