Balancing on the Venture Capital Tightrope
A serial entrepreneur explains how to work with venture capitalists. And how to maintain control
Venture capital is a popular route to building an enterprise. But it’s a path many entrepreneurs find difficult to navigate. Are they ready to give up some control? Is this the right partner for a long-term journey? Can our enterprise really deliver on the expectation of fast and high growth? Shyam Ramchandani has embraced VC financing – with great outcomes. Ramchandani calls himself a “serial life sciences entrepreneur” who has successfully founded two biopharma ventures, including CorVista Health ('Analytics 4 Life' – at publication), where he’s vice-president of research and development. Ramchandani also teaches at Smith School of Business, where he earned his MBA. Smith Business Insight spoke with Ramchandani for the podcast series The Startup Cycle. What follows are edited remarks.
Let’s talk about your first business. Did it go through VC financing?
Shyam Ramchandani: Yes, it did. At the time, I was a naïve graduate student doing molecular experiments. My experiments ended up becoming the foundation of a Montreal startup company that was ultimately financed through a VC out of Boston. In those days, people were very interested in the science and the market was hot. It ended up being a bit of a dog and pony show, where the university shopped around the concept to VCs. Those VCs probably had a relationship with the university’s tech transfer office.
So getting funding isn’t always formulaic. It really does come down to who you’re working with and who they know, especially if there is mutual trust. Even at the institutional level, the VC world is big, yet very small. VCs know one another, especially in the niches they’re most interested in. And they usually invest as syndicates, where one person takes the lead and is the board member for the venture.
VCs have their own ways they like to do business, and it’s important for the entrepreneur to know this. The more they [the entrepreneurs] know about what the community is looking for and the specific people they’re engaging, the better chance they have of communicating about their business in a way that will resonate.
Often, VCs don’t want to hear about the technical stuff. Instead, they’re looking to understand the go-to-market plan and how the entrepreneur plans to sell it. Others may only be interested in whether the concept works, because they feel they already have the expertise and the network to develop a strong go-to market strategy.
It’s important for the entrepreneur to understand which angle the VC is coming from. Given that entrepreneurs often give up some control and equity in the business, they need to know around which part of the business they’ll have to loosen their grasp. It’s a balance between holding on to your business and being able to work with the resources and expertise presented by the VC.
How have you found that balance?
The key is communicating with your investors regularly, before they ask questions. We take a methodical approach, explaining results and future plans. Creating communication opportunities at key junctures also gives VCs greater line of sight into when they’ll be able to ask questions, and prevents ad hoc meetings.
Entrepreneurs should talk to their investors every quarter or every couple of months through a more mass communication method, so that they’re not making a hundred individual phone calls.
Right now at CorVista Health ('Analytics 4 Life' – at publication), we have over 200 individual investors, and we send a quarterly newsletter to keep them informed. Few call us, because we’re out in front of it. Sometimes the news is awesome and other times it isn’t great. But they know they’re going to get the straight story, and that helps build our credibility.
And by communicating proactively, you can control the message. While it may be extra work, it gives you the ability to be a little more autonomous.
You’ve given up a stake in your business, yet you’re still proactive.
Yes. Some people worry about dilution of their equity. And really, to be successful, it should dilute. But the absolute value of each share should go up at each financing.
Here’s an example. If I owned 10 per cent of my company and it's worth 10 cents a share, should I worry if now I only own one per cent of the company and it’s worth a dollar a share? No, because I’ve actually made 10 times more. I may own 10 times less, but looking at the absolute value, my position is now valued in absolute dollars at 10 times more.
Do entrepreneurs sometimes get in their own way because they’re so married to the idea of owning and maintaining control?
There are different mechanisms of how you maintain control. As you become more formal, you’ll have a board of directors, which would typically include the founding entrepreneurs and the CEO. You maintain control by controlling the board of directors. You populate your board by selecting the right people. And if they’re in your camp and believe in your philosophy, you’ve maintained control. They’re on your team; they’re following your vision.
There is a perception that VCs come into companies and gut the management teams and do it their way. That’s why it’s important to know the track record of VCs you’re considering working with. Do they do that routinely? If they have done it before, was it for good reason?
I think it is too simple to say that every VC thinks they're going to come in and gut your business because they believe the entrepreneurs know the technology but have no idea how to go to market. In many cases, that's probably true. But there are also times in which there is a very experienced management team that's been in the business for a long time. In these cases, VCs may choose to invest in the team, not necessarily the technology.
