Unquestionably, entrepreneurs without a tangible passion for their technology, product or service are soon statistics. However, the more experience I accrue from interacting with Angels and VC and developing entrepreneurial ventures, the more I appreciate the importance of the deal and how it is conceived – let alone how it is constructed and the terms that define it.
The more I learn about the nooks and crannies hidden in the investment terms sheet, the more I am convinced that too many entrepreneurs are guilty of “falling in love with love”. Too many are “technopreneurs”, blinded by the wonders of their technology or the mind-blowing size of the market. Too many abdicate their duty to learn the rules of the equity investment game.
In the fast-paced and heartless world of “Return on Investment‟, ignorance is no longer a defense for entrepreneurs – particularly post GFC. It only takes one run-in with Liquidity Preference Shares; Redemption Provisions and Full Ratchet Anti-dilution Clauses to crush even the most seasoned entrepreneur.
I was fortunate to win a scholarship to attend the Venture Capital Institute in Atlanta in 2008. The most memorable take-away for me was during the session entitled “Being an Effective VC Director – Coach, Confident & Killer”. VCs were instructed to ask themselves two questions at each Board meeting: “Are we going to fire the CEO today? If not, how can we help?”
With 50% of management fired within months of an early-stage VC investment, naive entrepreneurs need to understand that the smiling and nodding investor is likely their executioner; a badly understood term-sheet their death warrant.
Post-VCI, I am now even more attracted to the equity investment term-sheet and less excited by the technology. As one venture-backed entrepreneur I know once said to me recently, “the more you venture, the more you move to the Dark Side”.
VC learning is not a franchise owned by the investor set. It’s time for our serious, growth-oriented entrepreneurs to learn for themselves how the investor really thinks and how Angels and VCs craft the deal. If the end-game lies in a profitable exit, the VC term-sheet describes what profitability will look like.
As one of my past investors said to me, as he tied me over the proverbial barrel and forced me off the board, “It’s the Golden Rule, mate: he who has the gold makes the rules”. Knowing what I know now, I prefer to think that “He who knows HOW to make gold makes the rules. That’s Alchemy”.
“Entrepreneurial Alchemy” lies in the rule book and the rule book is the Equity Investment Term Sheet. If both study this equally well, Entrepreneur and Venture Investor alike, each will hear the coins hitting the table and two hands clapping in time, to wild hoots and wolf whistles of “Vive L’Enturepreneur”! “Vive L’Enturepreneur”!