Being a venture capitalist must be one of the toughest jobs going – they are as popular as a traffic warden who used to be an investment banker. Their odds of success are no more than one or two projects in ten.
Although they perform as much due diligence as they can, they are still reliant upon the representations that the management team make. If they succeed no one likes them, if they fail they deserved it.
Yet without this important source of capital, some of our largest and best companies in the world could never have made it – Google, eBay, Amazon.
A chance to catch the wave of new technology
There are only three ingredients to a successful business excellent people, timing and luck.
Timing is becoming an ever more important factor in the success of a venture-backed business. The technology highway is littered with the road kill of fantastic technology that was too soon for the market. Companies that perhaps burnt too much fuel too early and didn’t have enough to make it to the ultimate destination.
The Internet of Things (IoT) and big data offer a significant opportunity to breathe new life into older technology companies. Enabling them to capitalise on and finally ride a wave to growth and success.
When a business begins to fail
When a bleeding edge technology business begins to fail the venture capitalist starts to get more and more involved in the day-to-day running of the business. Eventually, the VC has a difficult decision to make. “Do I bring in another investor and suffer severe dilution?” or “do I cut back to the bare bones, batten down the hatches and ride out the storm until the timing is right to then find a passage to the new world?”
The problem with the latter course of action is that in the acrimonious debate as to why the company hasn’t lived up to expectations and why the VC is limiting further investment, quite often the original management team either bail out or are pushed out.
The issue for the VC is that they have to steer the boat themselves or bring in a new team.
Finding the right team is crucial
If a new team is brought in, the new team appear like a hired gang of gunslingers – kicking over the bodies of the fallen trying to see where the treasure is buried. But why would the hired hands believe in the vision of a company which has failed once already? Why would a top class executive leave a top class job to take on this challenge? The truth is most won’t.
The VC will have to find executives who are “out of a permanent role” who will “give it a go”. And therein lies the problem with trying to revitalise a business. The new management team are people who don’t believe in the product or the company and will give it a go until either they suffer a conversion and the company turns around, or something else more permanent comes along. There is no passion or belief from the new management team only from the investor.
In the meantime, the VC has had to put in another round of funding to give the team some sort of a fighting chance. The boardroom becomes an audience to phrases like “It’s not my money, but if it were I would do …………”. One of the most dangerous phrases in the board meetings.
Success often comes after failure
Some of the best IT successes have come about after a turnaround, but just like second marriages, the odds are stacked against rather than for.
The challenge for the venture capitalist must be to find a co-investing entrepreneur, a team from a previous success or to retain some essence from the original founding team who can spread the belief.
It’s worth considering a part-time FD?
An experienced part-time or interim finance director can add significant value to both the VC and the company in a turnaround situation. They have the experience and ability to deal with difficult situations objectively.
Companies like Isosceles, do this for a living. In a turnaround situation, we can act swiftly and decisively providing a dispassionate analysis of costs and potential returns and are not looking for “a better permanent option” they stay long after the successful turnaround to keep the company on track.