Is All Venture Capital Equal?

My startup, Kinematix, was selling TUNE, the most advanced wearable device to help runners improve their performance, when it had to shut down. Unfortunately, this is not completely out of the ordinary, as many startups never make it.

What’s relevant here is that Kinematix belongs to an unusual subset of these startups that close: the market didn’t kill it, the relationship with the investor did.

In October 2016, we launched TUNE in the global market amidst many positive reviews and sales started to come in. One month later in November, we announced a new €2 million investment from our investor. Three months later, in February 2017, after having received only a portion of those funds, the investor ceased any further investment and Kinematix was forced to close before TUNE was able to gain traction in the market. My head is still spinning. Technically, I knew it could happen. But the train was picking up speed — sales, distribution deals, positive product reviews. So why now? It is a question we will never know the full answer to. The end result? The knowledge and technology built over 10 years were lost in just a few weeks.

Am I sad? Unbelievably. Am I giving up? Never. But I also feel compelled to take this opportunity to share our experience so that other entrepreneurs — especially those outside the US — might learn from our situation.

When I started this company 10 years ago, it was almost impossible for a company in a European country to approach VCs from other countries (England was the exception). In Portugal, a very small country, it was even worse as there were very limited options to seek funding other than a few public, semi-public or private VCs or a few business angels, all relying on government or European Union structural funds. There were no private venture capital firms with the funding sources and structures we find in the United States, so Kinematix had to rely on a government-controlled VC. Over the years we tried to attract private VCs, but every time they found out that a public VC was on board, they became less interested to even consider the opportunity.

I can’t stop wondering if our situation would have turned out differently with a private VC, as the approach, rationality, skills, way of doing business and even the decision-making processes of both types of investors are often quite different, and usually have very different outcomes.

Public VCs all too often follow political agendas, which typically change with each new government administration, labelling those agendas as “development policies”. These changes result in frequent turnover of VC management, with the newcomers bringing vastly different ideas from the previous management, inevitably generating uncertainty and distraction, as well as unclear, inconsistent and slow decisions. Private VCs usually have higher stability in their positioning and follow business rationality. There are good and bad examples of both kind of investors, but generally the way of thinking and behaving is clearer with private VCs.

So, this leads to what should be a very relevant question for any entrepreneur when raising money and selecting investors: is all venture capital equal? Too often, entrepreneurs forget that engaging with the right investor is like marrying the right person, especially when there is an urgent need for funds.

Regardless of whether you work with a private or with a public investor, here’s some advice from a guy who will certainly do things very differently when it comes to choosing an investor the next time around:

1. Stability: Look for investors with stable boards and stable investment policies, ensuring that you won’t spend your time and energy retelling your story and reassessing business, marketing and go-to-market plans over and over again to new board members. Our investor had three CEOs in the last 2 years. Can you imagine the damages such instability provoked to what should be a truly healthy, open relationship?
2. Track Record: Analyze the background of the board and staff of the potential investors. Run away from those that do not have a high percentage of staff with prior entrepreneurial or business experience. Those that do not will have a difficult time understanding your business and won’t be able to help you.
3. Funding Sources: Understand the sources of their funds — do they belong to private stakeholders or are they government-controlled funds? My advice is: always go with a private VC. They are often tougher and more demanding, but they have deeper experience and knowledge that is essential to help you grow in all aspects of your business.
4. Public Information: If you cannot easily find information about an investor, their portfolio companies, exits, board and staff, etc., run fast and run far. It is also a good idea to call entrepreneurs who received funds from target investors to know how they behave, how they manage their companies, and what resources they are able to provide. All these things combined make the money you get ‘smarter money’. As an entrepreneur, you are constantly under assessment, but you have the same right to assess your VC. The more transparent an investor is, the better.
5. Management Style: Have you heard stories of portfolio company CEOs being treated disrespectfully? Do the fund managers devalue the portfolio company’s initiative and efforts? Stories of entrepreneurs having to jump through hoops to convince the VC of the sales, marketing and product development strategies, over and over and over again? Investigate those stories. If there is any truth to them, avoid those investors as you will not be the exception.
6. Communication: Pay deep attention to the way VCs communicate with boards and CEOs of invested companies. This is a key point. Regular and open communication, as well as the accessibility to people at the highest level of decision making inside your VC, are essential to a healthy and strong relationship. Avoid the investors that block communications to higher level executives or don’t reply to messages, since sooner or later this will create unavoidable friction.

Some of this might sound like common sense, and it is. But when we are excited about a business idea and eager to get going as quickly as possible, the temptation to take whatever funds come our way is hard to resist. The recommendations above can be applied to other types of investors, such as angels, as well. The characteristics of your investors are key and determinant to your future. Choose those with a good track-record of stability, professionalism, entrepreneurial and business experience, but also who are smart and respectful of entrepreneurs.

Let me answer the question posed in the title of this post — is all venture capital equal? No it is not, because not all VCs are equal. The literal financial value of each dollar may be the same, but the advice, resources and support that a VC can bring to your startup make their investment more or less valuable. Of course, money is an essential resource for a venture, and if it comes from a reliable, helpful source, it can catapult your startup to success. If it comes from an unreliable source without a clear track record, it can also make you lose everything.

I am thankful to Angela Costa Simões, José Manuel Mendonça and António Lopes for their constructive comments to improve the readability of this article.