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.

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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.



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Showing 3 comments

  1. ps. in business fortune favours entrepreneurs with a group of people supporting them who have a wealth of knowledge, industry / general business experience, financial support and ideas/critical feedback to share. Those are the entrepreneurs who invite people on their journey and embrace investors who are enthusiastic about their business to join them on their journey.

  2. Paul_Liverpool is correct. Venture capital provides long-term, committed share capital to help unquoted companies grow and succeed. They are joining you in taking a financial risk on the chances of your success, but unlike you they can never really be sure of your convictions about the opportunities and so they will require comfort margin in the stake they receive.

    As a business you should treat a VC company as any early stage investor. While they will be measuring you up to decide whether you are likely to be a profitable investment, you should also be measuring the investor up for whether they will be of any use to you going forwards, seeing as they are going to be a partner going forwards.

    If you did your due diligence before agreeing to investment (by researching other companies the VC firm has invested in) you would probably have found that they specialise in improving carpets rather than profit margins. It is your fault and not “VC” in general.

  3. I think the moral of this story is simply not to give away a controlling share, and that both parties know what direction the business is taking and are entirely happy before any deal is done.