Stay away from venture capital!’ – an entrepreneur’s view
Once bitten, twice shy. Why WANdisco co-founder David Richards steers clear of VCs
Venture capital is often seen as a saving grace. An answer for high-risk start-up companies unable to secure a bank loan or complete a debt offering. In reality though, bringing a VC partner on board is often a Faustian pact.
While it can often play a vital role in developing more established enterprises, venture capital can be damaging and detrimental to smaller businesses looking to expand.
I can tell you this from first hand experience. In 2000 I founded Insevo, a company that offered the framework to connect enterprise systems such as SAP to the internet. Having secured the initial bank loan and established the company we looked to venture capitalists to help grow our business fast.
How venture capital can slow you down
The outcome, in short, was a nightmare. The fund managers, to whom we had signed over a controlling share of our company, clearly had no understanding of us, or our product, or how we hoped to expand.
They wasted copious amounts of company time, energy and money on a ‘rebranding’ scheme that involved things like changing the colour and weave of the carpet and the size and font of the letterhead, to name but a few ridiculous minutiae irrelevant to our business that were implemented.
The problem with the venture capitalists that we worked with is that they liked the idea of growth without having the slightest notion of how best to implement it. The danger is that the luxury of financial support affords bad decisions and a loss of control of the day-to-day running of the company.
Having a VC with a controlling stake meant that we couldn’t control the direction of the business, even at a basic operational level. When an opportunity arose for a business partnership with the potential of over a million dollar yield, the VC prevented it from going ahead, thereby hindering rather than encouraging the growth of the company.
Avoiding VCs second time around
This is why, when I started my second business WANdisco, my co-founders and I were determined to avoid VCs at all costs. With WANdisco we chose instead to adopt an organic, bottom-up approach to expansion that allowed for a company with its focus totally on the customer. Each and every cent is channelled directly into product development – not wasted on minute details that add little to company growth.
I am happy to say that, even though we may have grown more slowly than we would have done with venture capitalists on board, we have still managed to create a successful business without the presence of an ‘angel investor’. Now, in a position of strength and stability, we can look to outside investors.
It may be a tougher route to success, but fortune favours the brave and I can now say with confidence that we have built a company we are proud to call our own. And this time, we can really call it our own.
My advice, therefore, to small businesses looking to expand? Look to other methods of financing. Beg, borrow, mortgage, but stay well away from venture capital.
David Richards is co-founder, president and chief executive of WANdisco, a Silicon Valley / Sheffield based software firm whose product is used by a wealth of Fortune Global 1000 companies in the development of products – from Skype to tractors.