Most venture capital firms claim that they add value to the startups that they fund; however, surveys have indicated that this perception is not shared by many of the said startups themselves. In light of this, to avoid buyer’s remorse, it becomes crucial for startups to be careful when picking their VC firm.
In many cases, the requirements of a young startup, which are mainly launched by young entrepreneurs without extensive experience, go far beyond the money that they need to commence their operations. For instance, a startup firm may require assistance with activities including hiring, setting remuneration, sales, PR, and financial planning. If such factors are not things that they have ready access to, they might become burdened with the administrative side of the business, instead of really focusing on their product which would generate sub-optimal results.
This article attempts to address this issue. It outlines 3 steps that founders looking to raise venture capital funding should consider when attempting to decide which venture capital firms they should approach for funding. Before that, it shall briefly touch upon the notion of buyer’s remorse, and what it means in the context of founders raising venture capital.
What is buyer’s remorse?
Buyer’s remorse is simply the feeling of regret that one may experience after making an inadequate purchase commitment. While typical instances of buyer’s remorse are associated with the purchase of tangible property, the feeling can very easily be related to infructuous partnerships as well. This is especially relevant when it comes to startup founders looking to raise venture capital.
One of the main reasons that cause buyer’s remorse in venture capital is a lack of support services which distracts a firm from its product-building efforts to take care of management and governance problems.
The fear of buyer’s remorse can reduce when a firm is cautious about its sources of funding and does its due diligence on VCs willing to associate with it. The following steps illustrate how to avoid buyer’s remorse to assist founders going through this crucial stage in the development of their startups.
Speak with other founders, note their references and their grievances: To avoid buyer’s remorse, it is imperative for you, as a founder, to get in touch with as many founders within the startup space who have raised funding, as they can help you get references and understand their experiences and gain insights about the various venture capital firms that you can approach. You can also ask these founders about what their expectations were when they were looking for potential VCs, what problems came up on the administrative side of things once they had received funding and the types of responses that they received from their respective investors.
This step would enable you, as a founder, to comprehend practices that might get swept under the rug when choosing a VC. It would also enable you to realise the problematic areas that are most likely to emerge once funding has been obtained. This would be of great assistance when you undertake the next step of scaling up; moreover, it could significantly reduce the probability of avoiding buyer’s remorse in the future.
Understanding what you would want from your investor: This crucial step involves thinking deeply about areas where you may lack expertise. It can range from not being as tech-savvy with digital marketing strategies to knowing how remuneration negotiations should be conducted to optimise personnel costs for the firm.
Financial planning can be difficult for young entrepreneurs without any prior business experience, something that becomes especially crucial for late-stage startups looking to list through an IPO. All these factors make it crucial that, as a startup founder, you should consider the types of support services that you would be likely to obtain from the VC, so that you can avoid buyer’s remorse.
Build the right mix of investors for your company:
In many cases, it is quite unlikely that a single investor will be able to provide the firm with all the support that it requires. This makes it necessary for founders to carefully audit the kinds of investors available to them and evaluate them in terms of the commercial advice, network and management insight that the VC would bring with them.
This is particularly relevant for a startup in its early stages, as it launches from a blank slate, and can freely create any kind of capitalisation table that it wishes to, given its capabilities.
To avoid buyer’s remorse, therefore, your startup would have to bring in a mix of investors on its cap table that would take care of all potential problems that it expects that it might face in the future.
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