May 1, 2019

What does taking on VC funding mean for the founders?

Hi y'all,
I'm currently deciding if I should take a reasonable offer for my start up from a well known vc. However, I have many hesitations and I was hoping other hackers could share their experiences/opinions one.

Once you take on VC funding,

  1. do you lose the freedom to build whatever you want. (i.e. can you only build products/services that could return $1B+ to the firm)

  2. what is your time commitment to your start up? Is this a multi-year venture?

I know that all VC firms are different, so I'm just looking to survey the crowd. Appreciate the help IH. Keep on building!

  1. 2

    My experience: 4 devs, built an "MVP" product, got a little bit of revenue, and went looking for capital to take it to the next level (ie. pay ourselves). This was mid-2000's to mid-2010's.

    We got $500k in angel money. Three tranches, gated on meeting milestones.

    Then several rounds of VC money, starting with $5m series A.

    For the angel money, we didn't really have either the target market or the feature set nailed down. Our choices were pretty collaborative, and we kinda had the ability to "veto" suggestions if we thought they weren't reasonable. As we learned more, our milestones were reset to reflect the new reality. But our investors were absolutely involved in the discussions, on a sort-of weekly or two-weekly frequency at minimum (and at times, hourly calls). There was lots of discussion, and while we certainly pitched to people we thought were not a fit for us, it never went far enough to become an issue.

    Once we took the series A, we gave up more equity (much more than would be usual now). We also, as required by the VCs, accepted a CEO they supplied. Our board had reps from each of the three VCs who joined the round, plus the CEO and a "founders representative". From then on, decisions were made by the CEO or the board, and while we had a board seat, we didn't get a lot of credibility in that process.

    The product direction was completely out of our hands, and we were expected to just deal with the technical issues of implementing what was decided by the CEO and the board.

    I've certainly heard far worse stories than ours, but we certainly lost a lot more control than I'd hoped in taking on the VC money.

    Regarding time commitment, that was a question that all of the VCs asked of each of the founders, and they expected us to commit to "whatever it takes", basically. Our shares had a clawback agreement where we agreed to sell them back to the company (for $1) if we left, with more "vesting" every year until after 4 years (from the series A) we could leave and keep them all.

    Realistically, if all goes well, I think you need to plan on being involved for 5+ years for a company of any significant size.

    Good luck!

    1. 1

      Thanks for sharing your story. It sounded pretty awesome and scary at the same time!

      Do you wish you can do anything differently if you can go back in time? i.e. not taking VC fund or better deal negotiation.

      1. 2

        Absolutely I would do some things differently if I had the chance.

        But it was also a different time. The last 10 years have been good for founders in many ways.

        My key takeaway really is to have self-confidence. We didn't fight very hard when the VCs wanted to install a CEO because we thought that we didn't know how to run a company, so surely someone experienced would do better than us. I now understand that we would have done a much better job than I realized, having seen what the supposed "experts" did.

        The choice of taking on VC funding is tough. You almost certainly give up freedom to take different paths that might be quite viable as a lifestyle business, or if you can just grow more organically.

        On the other hand, you get a stack of cash that will enable you to build something you likely otherwise couldn't ever afford, or afford it too late to hit a market window.

        I think it's fair to say now that I am less inclined to take the money after my experience, but ... it depends on the situation. There's things you just can't do without the capital.

        One thing I hadn't realized at the time is that there are often other options: the one that would likely have worked for us would have been partnering with a customer to get the money, either as debt or for equity, but with lower growth expectations, longer runway, and more intimate knowledge of the target market.

        1. 1

          Omg my heart dropped reading this...

          How does this story end? Are y'all still there? Did you make it out rich?

          1. 1

            We ran for 10 years, had up to 50 staff, but never really found the right product. We sold out to our biggest customer, but didn’t make any money on the deal.

            It was a hard but great 10 years.

  2. 1

    I can only speak from my own experience but we have a really great relationship with our VC so it's been awesome.

    They provide a ton of resources in addition to the capital - introductions to prospective customers, office space, and advice when requested.

    We speak regularly but it's still a low time commitment - quick catchup in the middle of the week and email update at the end of the week.

    Every situation is different, but i'd recommend that you like & respect your VC personally and want more from them than just their money so the ongoing meetings are valuable to you!

  3. 1

    I covered VC-backed businesses and now have a newsletter where I cover early-stage startups: if you're raising money, the expectation is that you'll be able to turn $1 invested into $5+. Not all VCs firms need $1bn exists, but it's difficult to grow a product and increase valuation without extreme focus, especially at early-stage.

    I don't understand the time commitment question. If someone is investing in your business, then the time commitment is however long it takes to either get . to profitability or exit (which is what a VC cares about), or until the business runs out of money and can't raise any more. (Hope that helps!)

    Q: Do you have a term sheet? Will there be other investors and if so is this firm . leading the round?