Wednesday, June 13, 2012

The VC Bugbear : Why is the ball so firmly in their court, when they don’t play fair always?

It is paradoxical that a key element of the entrepreneurial ecosystem—venture capitalists—are also the most dreaded as a community. I know they are called vulture capitalists, so you may ask, why I am surprised. Each time I have the dreaded ‘encounter’ with them vis-à-vis our mentees, I tell myself, I have seen it all, and yet they manage to surprise me by stooping to a newer low! Let me share some of my experiences.

Much at stake
About a month ago, one of our mentees attended a startup event where he met some angels. One of them expressed interest in our mentee’s business and a second meeting followed. I had told our mentee very clearly that he should not sign any document without running it by me first. The discussion obviously went well and the angel said he would invest Rs.75 lakh for a 45 percent stake. He then produced a term sheet and asked our mentee to sign on it. So, our mentee said, “I have a mentor and I need to run it by her. I will sign only after discussing with her.”
The angel turned ugly. He said that the deal could not be discussed with anyone, least of all the mentor. “If you don’t sign the term sheet now, the deal is off the table,” is what he said. Our mentee then managed to buy a day’s time by saying he needed to take permission from his father who is also a director in the company. The angel reluctantly agreed.

Lucky break
When our mentee called me, I told him that 45 percent stake for Rs.75 lakh was worse than a deal Shylock would strike. So, he needed to think this through before signing and one day was not good enough to take that decision. I also told him that there would come a time when not only would the angel have two seats on the board (he had asked for them in the term sheet), he would even have his own guy running the company and it will soon become the angel’s vision and not his anymore. Fortunately, we managed to dissuade him from going ahead and he soon met an NRI from his domain who came on board as a strategic investor. But we were not so lucky with another mentee who decided to sign a similar term sheet, much against our advice and much to his peril.

Caught unprepared
My second peeve is about their high-handedness and shallowness and how, combined, they architect a forgettable encounter. Some time ago, one of our mentees met a large and reputed VC organization through some connections. As they had already invested in a competitor’s company, our mentee sent them an NDA (Non-Disclosure Agreement) before meeting them. Pat came the reply that they don’t sign any NDAs. Our mentee, who did not want to sound churlish, went ahead to the meeting. He was told that he had 15 minutes. Being a mature professional, he played ball. He was very surprised when, during the conversation, the gentleman made random statements with respect to his business, claimed he had gone through the website, but the observations belied that. How hard is it to actually do some homework before meeting an entrepreneur? Everybody understands they will not invest in every business idea that comes their way but given their aerial perspective, they can at least make sensible observations, right?
I am waiting for a time, in India, when entrepreneurs can be as choosy about their VCs as the latter are. Right now, it is a lopsided market, with all the dice loaded in the VCs’ favor. But I am sure there will come a day when entrepreneurs will do due diligence before divesting their stake, and they will do so on a level-playing field.

From Entrepreneur Magazine, May  2012, Edition.

1 comment:

  1. Thank you mam, for this post. This will really help many aspiring entrepreneurs while dealing with VCs or AIs.
    Thanks once again, cheers..