Take the Money or Run?

In recent weeks, several of the companies Catalisto represents have sought our advice on their capital raise. Now fundraising – no matter who you are – is never easy. It’s distracting from your daily operations, every hour you spend with an investor, is an hour you are not spending with your customers, and external capital comes with strings and expectations. Here’s the honest advice I give (as a former VC and angel investor) to our own companies considering this issue:

1.    Investors want their money back, and sooner than you think

No matter who you are taking money from – angels, family offices, VCs or friends – they all want their money back with interest. And forget all the news articles you read about early stage ventures being a 10 year investment horizon. That’s true – but not because the investors want it that way. Investors generally expect their money back within a 3-year horizon.

After that time, they start to get ants in their pants. Smaller investors will call you to check-in and see how it’s going. What they are really asking is “Are you going to hit a wall and lose my money?”, or “Why aren’t you thinking of selling?” Larger and more experienced investors can be more insidious – board meetings and strategies get pushed to deliver exits in the near future, investors start presenting buyout offers, and the pressure to grow the top line at all costs (because this will lead to a sale) can push you down a path of uncomfortable cash burn (and consequential financing). And if you can’t deliver that top line growth, institutional investors will rarely take that passively – they actually can’t given their obligations to their own investors. Which means after 3 years your VCs may start maneuvering (often in a Machiavellian fashion) to put in your place someone who can. 

So in short, if you are very confident (not delusional) of getting those big revenues over a 3 year horizon, taking venture capital can be phenomenal. But if it takes longer than that, a venture round may be the stuff of nightmares. 

 2.    Investors rarely deliver on their promised strategic value

Almost every investor I know gives well-intentioned advice. Often it’s exactly the right advice you need – especially when it relates to financing, structuring and an understanding of other business models they have seen work in other companies. However, very few investors – even the corporate venture capital teams – live up to grander promises of new customers, new distribution channels, or joint ventures that deliver the growth. As much as I adore those truly rare strategic investors, over the years I’ve developed enormous respect for those investors who don’t even pretend to provide strategic value. They write their checks, they give wise counsel at board meetings, but by and large they don’t waste the entrepreneurs time chasing rainbows, making irrelevant introductions, or worse – endlessly reviewing and interrogating the entrepreneur’s operations. There is a certain maturity and authenticity to those financiers who are just that – financiers, who won’t get in your way provided they get their money back. And if you have an investor who is promising all kinds of “magic beans” as part of their investment – it’s still fine to take the check. Just understand that even that investor believes they are going to add that value to your business – but probably won’t. Hope for the best but prepare for the worst.

3.    Make sure when the s*it hits the fan, they are in your corner, not on your back

Over the years I’ve heard lots of nonsense from investors about being “pro founder”, “founder friendly”, “an entrepreneur’s best friend”.…. insert your own cliché here. The reality is, things in your business are going to go through a bad patch. Some things are really not going to work out. You’ll probably need to pivot your business several times on the journey, and let’s face it – you are going to have some dumb ideas too. So when the chips are down, you are running out of money, and the stress levels start to climb, how will this investor react? Exactly what type of “friend” will they be then? Will they stop calling, find shinier toys to play with, and fade in your memory likely a pleasant summer romance? Or will they put the “enemy” in “frenemy”, become a thorn in your side, demand endless emergency board meetings and updates, go into governance hyper-load and rob your business of the precious time you need to get it on the right track? Or – hopefully – will they roll their sleeves up, jump into the trenches with you, and own your future like it was their own, never give up, and truly help you right the ship?

The only way to truly know how an investor will behave, is to ask some of their former portfolio companies. To do this – don’t ask the investor for permission. This is like giving a reference – who is going to give you a bad relationship to talk to? Instead, most investors list on their profiles, their website, or during your discussions with them, other companies that they have invested in. Contact those founders (the success stories and the failures) and ask them how the investor behaved, particularly when things went bad. Do the same for the individual that the investor is proposing to put on your board.

At the end of the day, the strength of the investor’s brand and their successes in their past life, is far less important than aligned expectations and constructive relationships. Depending on your company, the right capital partner might be angels, VCs, family offices, hedge funds or corporates. But do your homework on the investor and take the check with your eyes wide open. 

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Catalisto is a next generation security distributor and solutions provider. We help organizations and their trusted providers access unconventional solutions to their biggest security problems. Find out more at www.catalisto.com