To create wealth, share wealth

These are age old words of wisdom in the Silicon Valley but some people still do not get it. I have encountered a lot of budding entrepreneurs that see venture-capitalists and angel investors as no more than a source of capital. They forget that one of the key reasons you want to ask other people to invest in your business is that it creates stakeholders in your success. These people actually begin to actually care about whether your business succeeds or fails for a very selfish reason- they will make money if you do.

In fact, I recently was advising an entrepreneur in India who has successfully rolled out 3 new business initiatives in last 5 years. With a very limited amount of invested capital, he was able to launch 2 new publications and 1 industry event- all of which are profitable in a few short years. The problem is that none of these businesses will ever grow into a 100-million dollar business. The reason being that even though the business ideas were smart, there are not enough smart people who are thinking about expanding, growing, re-structuring these buds into bigger business. In order to do that you need to scale across various axes- capital, infrastructure, management, sales channels, etc. The problem is that unless you are organized from the very beginning with multiple stakeholders within and outside your organization you reach a plateau after the initial success. In my experience this plateau tends to come around $5-10M in revenue (lower for developing countries).

Here is a common objection that entrepreneurs come up with-VCs will take away a chunk of my company. Yes, they will and you want them to. If they did not own a sufficiently large interest in your business they will not spend time & effort, leverage their networks, reach out to friends in industry, give advice on weekends and late evenings to help you succeed. My advise is that you need to be careful in selecting your VCs and other investors- money should be just one of your criteria. Equally important is to find investors that:

• are of appropriate size so that they are investing a sum of money in your business that will draw their attention. If you raise $1M from a $1 billion fund, you can rest assured that the VCs in that firm will dispense the money and then forget about you.
• have a background in your industry. VCs can help you understand the business dynamics, hire key people and even act as your informal sales and marketing channel. But in order to do so they must have an established knowledge base and network in your industry.
  
• understand you and your business. As you go through the ups and downs of a venture, you will need someone on your side that shares your passion, understands your vision and can provide guidance. You are looking for a mentor with a vested interest in your success.

Furthermore, the idea of sharing in your success (and failure) applies not only to the VCs but other stakeholders too. You want to give equity to advisors or better still ask them to commit a small amount of money to your business. You will be surprised how much effort people will go through to make sure $1000 of their invested capital is not lost. Hire the best people and then give them an equity stake that will motivate them to succeed.

Tags: VC business shares India Silicon+Valley