MT EXPERT: How to choose an investor

James Caan's right hand man explains how to find the right VC and why giving up a tiny bit of autonomy can be the best thing for an entrepreneur's business baby

by Faisal Butt
Last Updated: 21 Oct 2013
One of the reservations that almost always comes up when an entrepreneur is considering the venture capital (VC) route is their autonomy. I always advise founders to weigh up having a bit less autonomy with the value-add proposition that a VC can bring, and take a view on what that could mean for their business and them personally. Some of the most successful entrepreneurs (Steve Jobs at Apple, Sergey Brin and Larry Page at Google, and countless others) were confronted with the same decision, and they chose to go down the VC route. A good VC will help the entrepreneur to make informed decisions and propel them to greater heights than they would have reached by themselves.

What should you look for?

Finding the right balance with a VC is key if you’re looking to build and scale a business to one day enjoy an exit, what I call the "life changing event". It should be a partnership where you’re working together with them to reach the ‘golden pot at the end of the rainbow’. Much of this comes down to personal relationships, and business chemistry, which is absolutely essential when selecting a VC.  

The VC needs to be a visionary. They should be able to imagine the future while the founders are preoccupied with the day-to-day. They should be able to pull management teams out of the trenches and show them what the business could look like in three years’ time if a particular growth strategy is implemented, and advise on how or who can carry out the implementation. The VC should be a veteran in making tough decisions and be able to advise entrepreneurs on things like hiring and firing, running teams, managing finances, and how to control the burn rate.

The ideal VC will be a good coach. Think of yourself as Andy Murray going for the Wimbledon Championship. You need to be able to rely on your coach for plotting strategy and brainstorming tactics, and you should be able to lean on them for emotional and psychological support during the difficult moments. It should feel like they’re on your side all the time – encouraging you and motivating you to succeed.

Real experience working in start-ups or high growth SMEs sensitises a VC to the realities of start-up life. Good advisors have start-up or SME experience themselves, and they will help you to avoid making the same mistakes that they might have made.

What should you expect?

If a venture capitalist isn’t challenging the management team, then they're not adding value. A good VC will tailor their value-add proposition to the needs of the entrepreneur, and will be able to offer something to even the most experienced CEOs.

What good venture capitalists do will ultimately depend on the type of entrepreneur they’re dealing with. First-time entrepreneurs haven’t made the ‘big’ decisions before so the VC will need to offer more support. In their previous life as employees in a corporate the management team might not have been involved in hiring senior staff or managing the company's finances, however, as the owners of a new company they will have to be responsible for all of these decisions and the VC should be there to help.

On the other hand, a seasoned entrepreneur will have had a couple of failures in the past, and they’ll know what to do and more importantly what not to do. Entrepreneurs that have started up before and failed are my favourite type because they have the benefit of hindsight and the wisdom that comes with it. When the VC has picked a seasoned team, they can take a step back and do what they do best – be a strategic advisor to the business.

How much autonomy do you give away?

Entrepreneurs take great pride in their business and in the sense of ownership they get in running it. This is the ‘secret sauce’ behind the value of a business so VCs that compromise this risk demotivating the management team.

That said, the role of the VC is not to be a ‘cheerleader’. The role is to debate key points with the founders, offer your advice and mentoring, and help founders to take a more rounded view when making decisions.
 
Decisions make or break a business and it’s up to the VC to make sure the critical ones are not made in isolation. Decisions need to be informed, considered and balanced. Part of being a good VC is supporting founders in putting in place a management information system (MI) that enables them to feel like they have their fingers on the ‘pulse of the business’, and they have everything they need to make the right decisions.

Remember, in order for a VC’s value-add to be effective, the entrepreneur needs to have an open mind-set and be prepared to listen to advice. In that sense, they have to be prepared to give up some autonomy.  I’ve dealt with entrepreneurs that are pig-headed; they feel like they know everything and aren’t open to advice at all. It’s really to their own detriment. I think if you’re going to be ‘200 per cent yourself’ you need to drop your guard now and start listening. That doesn’t mean you’re letting someone else make the decisions for you. You can keep the key bits of knowledge that the VC provides and make it your own decision.

Final thought

Entrepreneurs shouldn’t be overly obsessed with autonomy. You should be asking: "Would my business be worth more with or without the VC?" Consider how you can best to get to that ‘life changing’ event, and whether the VC will increase the ‘big number’ you walk away with at the end. And if you decide to go down the VC route, ask yourself:  "What have they done to earn the right to advise me?" You don't want to get inexperienced advice on important matters. By having the right kind of advisor as your coach, you could end up ‘turbo-charging’ your entrepreneurial engine, albeit from the side-lines, and reach that ‘life changing event’ a lot faster than you would on your own.

About Faisal Butt

Faisal Butt is Co-founder and Managing Director of Hamilton Bradshaw Real Estate, a venture capital firm he founded with James Caan to invest in entrepreneurs with property related ventures. He’s a former winner of Shell Livewire’s "Young Entrepreneur of the Year", a recipient of the much-acclaimed Skoll Scholarship, and holds an MBA with Distinction from Oxford University. Faisal is known for his unrelenting focus on ventures he embarks upon and his partnership approach to doing business.

Follow up on twitter at @FaisalButt_ or learn more about him at www.faisalbutt.com.

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