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Don't Sell Your Soul to Vulture Capitalists



Editor's note: People who start businesses often dream of the day they will attract a big venture capital firm that will give them millions of dollars and leave them on easy street. The truth is more complicated than that and sometimes easy street can turn into a dead end. Venture capital organizations can and will give you money if you have a product of interest to them. Along with the money comes advice and control to some extent. You may have to give up some or most control depending on the situation and the contract you sign.

The view expressed by the person who wrote this article is a warning that any time you take someone's money you have to be careful and understand that they might not have the same view as you. WWWiz presents this anonymous report without passing judgment on the facts in question to provide a snapshot of one person's venture capital nightmare. 

Approximately 18 months ago my husband, another partner and I decided to start an Internet business. We had discovered a product in high demand and were about to enter into an untapped market. At the time, my husband and I were running two other computer related companies. Because of the demands of the other companies my husband did the initial marketing and business plan while I continued to concentrate on our other companies.

After about one month I jumped in and helped my husband and our other partner create the corporation, develop the sales force, enhance the marketing department and hire the back office. We began selling the product like wildfire, and as a result of the growth my husband and I had to invest personal funds to continue to grow the business. The business took off like a rocket and as a result of the demands our other computer business tapered off and we focused all our efforts on the new company. In a year's time, the company grew from the three of us to more than 300 employees.

After using our personal capital to finance the business for the first six months, we could not continue to market and grow the company at that rate with personal funds. Marketing funds were eating into our budget and the pressure and stress began to increase. We knew we were on a fast track and could not turn back. My husband came into my office one day and told me he was looking for financing and was thinking about talking to venture capitalists to help us keep up with the growth of the business. I had read many articles in the past regarding venture capital and I was very apprehensive. I had never used any financing in my other business and managed to successfully grow the company independently for the last 15 years. As I saw it, we had two choices:

Grow the company at a slower steady pace with our own funding….or take our chances with the vultures.

We chose door No. 2. Our first mistake.

After visiting many venture capital firms we decided to take our first million dollars from a small venture capital company based in Irvine. When we met the partners and told the story the energy level was very high and everyone was excited to enter into a partnership. The venture capitalists kept telling us over and over that they would only be there if we needed them for advice, and that they would in no way change our current method of operation. We decided to go forward under the impression that they would be our "silent" partners. They began stopping by for informal meetings 30 days after their investment and slowly began calling the shots. Their "advice" became mandatory.

Their million-dollar investment did not go very far and we were ready for the next round within months. Even though we were skeptical, we needed to grow the business and stay ahead of the competition. We had agreed to give up 35% of our company in exchange for fast-track growth. Days before the funding and a verbal approval to go forward the VC's threw a monkey wrench into our agreement. They decided that it was not in the best interest of the company to have a husband and wife team, and that it would not look good on Wall Street for our upcoming IPO. Days before the funding was completed they pulled my husband aside for a private meeting and told him that in order to continue the funding that I needed to step down as vice president of sales. My husband had explained to them that I was a vital part of the company and without me he could not guarantee its success. We were shocked and could not believe that they would lead us down a rosy path and at the last minute come in and make unreasonable demands.

Because we had already increased our marketing budget based on the funding, we were hundreds of thousands of dollars in the red. We still decided to fight back. And immediately investigated other venture capitalists. We managed to negotiate a better deal with a company based in San Jose. We presented the business plan and told them the entire story. They were very excited and we negotiated our second round of financing for $16 million. In the beginning they informed us that they did not have a problem with a successful husband and wife team, and that they had no intention of breaking up our team. Our corporate attorney later told me that we needed to incorporate in another state and I needed to come in and sign some additional papers. This paper stipulated that only my husband could sit on the board of directors and because I was his wife the investors would not approve us both being on the board. I did not want to rock the boat so I agreed to function as vice president of sales. As a result of working 14-hour days, we managed to grow West Coast sales from three orders per day to more than 300. However, our East Coast office was suffering and our sales vice president in that office was not performing.

In addition to the lack of sales, we had many operations and human resource problems in our East Coast office. It was time to make some changes. Based on lack of performance it was time to replace our East Coast sales vice president. While we were preparing the paperwork, my husband got a call from one of the three venture capitalists on our board of directors informing him that our East Coast vice president was a friend of his and we were not to proceed with this change. I recommended proceeding anyway.

This started the war.

The next board meeting was held in our office and the venture capitalists piled up on my husband and informed him that they disagreed with my management style and it was time to make a change. I chose to attend the next board meeting to explain and validate my decision.

The vulture capitalists proceeded to tell me that a husband and wife team did not sit well with Wall Street, and now that we were getting close to IPO it was time for me to step down. They told me that they were very impressed with my abilities and offered to fund any other venture I wanted to begin. I was shocked.

I explained to them that my husband and I had worked to build this business from nothing and that I was appalled that they would make a judgment call like this without spending one day in the company. I refused to step down.

I decided to take some time off work to decide what my next move would be. Spending time with my family, playing tennis and enjoying life sounded pretty good.

After three weeks and careful consideration, I went into the company to find many loyal employees greeting me. Several of them told me that without me "nobody managed to get things done." I could feel my husband's stress level increasing. When he went out of town on business trips, I held down the fort. My options were to go to war with the board or sell the company. I still have not made my final decision.

The bottom line was that our business was going great and we had a strong team in place. The vultures swooped in and turned our business upside down. Instead of focusing our energy on growing the business, we were forced to take an emotional roller-coaster ride, which resulted in our having to choose between selling the company and finding a way to fight the board.

Looking back on our mistakes, we decided that if we could go back in time we would either seek private investors or build the company at a slower pace. When you take money from venture capitalists, you are in essence giving up your business and the independence to make decisions on your own. You might as well be an employee and work for another company; you will have fewer headaches and less stress.


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