I’ll give you one example. Decibel owns ~20% of Kaleidos and has 1 seat on a 5-seat Board where 3 members are founders and represent founders+employees. Decibel made sure the founders and employees would have broad control over the company.
Kaleidos is no that special, there are millions of examples like us. This is actually quite common practice for a VC, to make sure the founders control the company and have all the incentive to work towards their vision, while the VC hopes their bet on them was right.
This is how a VC typically operates, particularly an early stage VC. I’ve made some numbers simple to make sure we don’t get distracted by them
- They are a team of 10 people.
- They have $100M and the need to return $1B (10x multiplier) after 10 years.
- They make 10 investments of $5M each and leave $50M to be able to continue to help those companies that show growth.
- They know their investments are extremely risky as 9 out of 10 will fail.
- They know they need to leave broad control of the company to the founders, otherwise, founders will immediately leave. After all, the VC fund doesn’t have the expertise to run 10 different companies, they are just “smart money”. The times when whoever had the money made the decisions are over, that’s super old school VC mindset.
- Their investment thesis is “great founders, great team, great vision, great execution, great market, great opportunity”.
- They do ask for some veto power over fiduciary responsibilities and they typically ask for the founders’ loyalty to the project for several years (3 or 4). They know that, without the founders and their motivation, they have a living carcass.
So, VC gives you money to accelerate YOUR vision, not to puppeteer you, that never works, you would just walk away and they would have lost $5M, reputation and the ability to attract money in the future.
Now, not all VCs are created equal and this is key. The same way you pick NGOs to support based on your values and interests and avoid some others that do not represent your worldview, yo do end up with some VCs and not others.
VCs will tell you they are here to help, and it’s your responsibility to decide whether you want that specific help. The most common error among founders is to accept money without asking the tough questions. So often people get excited about instant $$$ that they forget about everything else. Perhaps the VC’s thesis to invest was completely misaligned with your strategy as a team. You can picture this as a marriage proposal, you shouldn’t say yes just because you got excited about the fact that someone loves you, right?
As a founder you have the right to ask all sorts of uncomfortable questions. Where does the money come from? What is your track record? What do other invested company founders say about you? Why do you like us and what do you think we must do no matter what? For every answer, you have to be honest to yourself and the team and decide whether that’s a good match or just “money today, pain tomorrow”.
Remember, VC have NO intention of controlling the company at all, that’d be stupid of them and they know it. They can’t even invest in remotely similar companies, so they really want you to succeed.
What it’s true, though, is whenever a company raises more money at a higher (speculative) valuation, the new VC expect they will have their 10x return after 10 years, so all the tough questions just get more uncomfortable, but the golden rule is that founders keep controlling the company. In my experience, VCs are the most founder-friendly speculative money there is, while private investors tend to want more control over the company (I have personal experience with this and actually Kaleidos was born in 2011 out of rejecting that other type of deal).
I’m not here to defend Venture Capital, I’m not particularly excited about them because they represent a fundamentally wrong distribution of wealth. It’s true that at least they operate in the productive economy, in companies and tangible assets instead of pure speculation like Futures, but still represent an uneven share of concentrated power. The reverse to the “9 out of 10 investments will fail” also operates here, “9 out of 10 VCs are not for you and will upset you” (or in my personal experience, “29 out of 30 VCs are not for you”).
Hence, my “support framework” shown above.