Q. I’m currently thinking of taking on board an institutional backer, but want to know more about handling the post-deal relationship. Having run a business for several years, the last thing I want is to be told what to do by someone else all the time. So where do I draw the line? When should I take their advice and when should I not? In short, what’s the best way to handle a venture capitalist?
 
Gary Woodward of Pasporte writes:

Remember why you want an institutional backer involved in the business in the first place – to fund business development, or maybe to allow shareholders to release some of their equity wealth. In either scenario you will need to convince them of the growth potential of the business, as it is this growth that will fuel the increase in the equity value of the company. Institutional backers are not charities, they want their equity investments to grow signifi cantly, usually over a forecast (not necessarily fi xed) period of time. They will buy into your business plan to grow the business in line with the forecast, so if this doesn’t happen, they will obviously hold management responsible. In certain instances, there are extraordinary market and/or economic conditions that perhaps couldn’t be foreseen. If such circumstances arise, the institutional backer will again rely on the management to plan a way out and get back on track towards growth (and an increase in equity value).

In my experience, the last thing that institutional backers want is to tell you what to do. You should always be best placed and have the most experience to make the decisions that are right for your company. It is usually a nightmare scenario for backers to fi nd themselves in a situation where they have to change management or introduce their own people on an interim basis. If that point is reached, you are almost inevitably in a rescue situation.

It is important to treat the backers honestly and with integrity. No one likes nasty surprises, so if there’s some bad news, let them know at an early stage and, most importantly, tell them your proposed route out of the problem.

If you have previously been an ‘ownerdriver’ organisation, you may have to prepare yourself for a little more discipline and structure in the way you manage the business – management reports prepared on time, board meetings scheduled in advance, etc. But is this a bad thing? Deep down I think most business owners acknowledge that there should be more control and discipline in the way they operate.

Without institutional investment, many of today’s great business success stories may not have happened. Be sure of why you need the investment, be confident that they are individuals you can work with, negotiate the best deal you can (using advisers where necessary) and don’t have too many worries about working with your backers in the future.

And one final thing, don’t resent them sharing in the future proceeds. Without their backing you may not have had the opportunity to get there in the first place

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Gary Woodward is the chief executive officer of VC-backed Pasporte, the UK’s leading provider of managed ICT outsourcing to mid-market companies. www.pasporte.com