This important variation on “money talks” is an important consideration for entrepreneurs when seeking an investment from professionals such as VC’s. Something like a marriage (and often lasting just as long statistically), your investment partner can be a great cheerleader, coach and resource. But the moment things turn sour, including missed plans, some investors on company boards go into a predictable mode of dictating terms for emergency loans or additional investment.
These include forcing early investors to “pay to play,” or invest their pre-rata amounts to keep their original percentages, or suffer the consequences of being diluted to the extreme and losing preferences in a liquidation.
The reaction to bad news by VC’s controlling the board by virtue of their power to supply additional money, often includes the threat – or reality – of starting the process to find a replacement CEO. So the combination of bad news and VC or professional investors on the Board can be volatile for the founders or management. Angel investors tend to be much more understanding, and usually resort to coaching rather than replacing the CEO during bad times.
[Email readers, continue here…] These are only a few of the considerations that have caused an increasing number of early stage entrepreneurs to draw business plans for companies that can be grown with angel and friends-family capital. It avoids the increased risks and pressure that come with subsequent VC investments.
On the other hand, if a business needs large amounts of capital in order to succeed, the entrepreneur and board should contemplate the advantages gained against the increased risks, making a conscious decision to go for the growth with such funds or to grow organically – or to grow with a smaller round from internal investors.