Digital Innovation & Entrepreneurship
MANAGING RELATIONSHIPS
I have a photograph on my office wall of Michael Douglas in his Oscar-winning role as Gordon Gekko. It serves as a useful conversation starter. When most people think of venture capital (VC), they sometimes picture the Hollywood blockbuster Wall Street and its dog-eat-dog world of cut-throat deals, where only the strongest and meanest survive. According to Gekko, feelings are weakness, greed is good, and information is the most valuable commodity of all. In reality, there is another commodity that is even more important for those aiming to succeed in VC – human relationships. The industry is built on long- term partnerships and networks. The VC process involves a long- term commitment to backing risky innovations, with no certainty that they will work out. It is not a pure transaction, so trust is paramount. Founders raise money and, in return, VC representatives join the board. This small, tightly knit team has to get along when the going gets tough. This means VCs spend a lot of time helping to grow businesses and manage teams, making it a very people-oriented business. It’s all about understanding human characteristics, motivations, and behaviours in different circumstances, then applying that to build a successful company. This theme runs through my teaching at Warwick Business School and my new book, Building Value: The Business of Venture Capital . Here are six ways that building and managing relationships can help you succeed. 1 Securing deals Reputation and referrals are key factors in closing deals, which means relationships built over years pay off
in future opportunities. Good relations with founders, accelerators, and industry insiders help investors to access high-quality deals early. It can also provide valuable insights into a start-up’s leadership, market potential, and risks. However, less than three per cent of start-ups are successful in raising capital. That means VCs spend a lot of time saying no, and the way they do that matters. “To build the most effective teams, VCs need to be adept at reading people” It is important to leave the door ajar for revised proposals and provide positive feedback. This helps to build a reputation for being constructive, widening the net and generating more opportunities. 2 Selecting a team The biggest determinant of a start- up’s success is how the management team performs. This means hiring the right people and nurturing the team carefully. VCs with strong networks can bring in key hires, advisors, and even potential customers, accelerating growth. To build the most effective teams, VCs need to be adept at reading people and what they are really saying, as well as how they are performing. 3 Coping with adversity Things will always go wrong. The key is how the team responds to that. As the saying goes, “back the team, not the idea”. There are many great ideas out
there but putting them into action – and being able to cope – when things go badly wrong is what really counts. VCs often have to be ruthless in making decisions which are at odds with the management team’s views. This could even include removing the original founder. Strong people management skills are required to do this the right way, as key individuals who are let go may remain shareholders and ambassadors of the business. 4 Managing diverse leadership teams Every time there’s a new investment round, more people join the board, and some drop off. These diverse views are important, but they can create complex relationships within the board that require careful management. Individual members may have their own goals and strategies, but the board must act in the interest of all shareholders. This can create potential conflicts of interest. Learn to look beyond what people might say and understand why they are saying it. 5 Aligning the interests of funders and entrepreneurs Aligning the interests of everyone involved is critical to the success of a VC-backed start-up. This requires compromise and all deals need to be seen to be fair. If the deal doesn’t feel fair to all involved, it could cause problems later. For example, if a founder is unwilling to sell at the right time due to perceived unfairness, it may be necessary to return to the original deal for a wider management carve out. Good relationships with corporate partners, private equity firms, or acquirers can help start-ups exit successfully. VCs often hold what we call ‘preferred shares’ that ensure they
A valuable commodity Why human relationships are vital in venture capital
by Simon Barnes
Image © AJ Pics / Alamy Stock Photo
Warwick Business School | wbs.ac.uk
wbs.ac.uk | Warwick Business School
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