To VC or not to VC

My colleague Aaron came in this morning having attended a TechHub event last night.

Wow, and I thought some of my ideas were bad.  Aaron gave us a long description of a series of ‘companies’ he’d met (I put that in inverted commas because I’d call most of them ‘ideas’) – and some of them were truly depressing, and only one did not evoke the question “but…why would you want to do that?”

Most depressing of all is that the majority of these people are looking for venture capital (VC) investment.  Now, I’ve looked through a lot of VC portfolios and worked with a number of the businesses of which they comprise, and I am always shocked by the quality of some of the investments – and it leaves me asking the question “how?”

In reality the answer is all too obvious: many ‘ideas’ chasing too much cheap capital, brought about by low central bank interest rates.  The sad fact is: most of these companies will fail.  Why?  Because a) they should never been offered investment in the first place, and b) the ‘entrepreneur’s’ motivation for taking investment is misguided.

The first problem I cannot solve – if investors make obviously poor investments, and have access to the money with which to do so, then it will continue to happen.  However, I’d rather that entrepreneurs’ energies were put towards creating useful outputs.

The first mistake is for an entrepreneur to take an idea then go out looking for VC investment in the misguided belief that it is the end-state they want to achieve.  It doesn’t exist to boost egos – it’s there to support company growth.  It is no more than the enabler.  Your idea may not even need VC investment – and let’s face it, it may not need the strings that a lot of modern VCs attach to their investments in order to de-risk them (although you could question why they’d need to do this if they, as an industry, hadn’t had their fingers burned making stupid investments in the past).

VC investments in London these days often constrict the very companies they are supposed to be helping through capital.  They use debt instruments and clauses to take over companies and make the entrepreneur do what the VC thinks is right.  Do entrepreneurs really need / want that?  The only time you should be taking VC investment is when you do not need it.  I was taught that lesson by a very impressive US entrepreneur called Tim Wallace.  You don’t need the money, but it will enable you to do things faster than without it.  At the end of the day, if you need something – you are going to get screwed.

A properly planned business will take account of the trials and tribulations it may face – ‘courses of action’ and ‘actions on’ – it will consider all possible options before piling around the local VC community boring the good investors to death with rubbish, or convincing the incompetent investors to part with (what is often) someone else’s cash.