Starting Your Own Business? Venture Capital Questions – To VC or Not VC?

Of course nothing to do with Shakespeare, but an old question nevertheless. If you are starting up a new business, or expanding your current one, should you partner with an investor/VC? If you do what should you expect? The choice depends on your ambition and the success depends on your partner of choice.

From an investor’s point of view, the next 4-5 years represents an excellent recruitment market window. The market is far from buoyant but the sentiment is on an upwards curve. Like buying a house, no-one wants to buy at the peak of the market or at the bottom of a lifeless trough. But catch the market as it’s rumbling into life and you’re on to a winner. If it’s good timing for investors to get back into growth mode it’s an ideal time for business owners.

Ambition.

Are you ambitious? Of course you are. You are in recruitment and successful enough to contemplate starting a business or are running one already. But ambition means different things to different people. One end of the scale, “A”, could be to run a ‘lifestyle’ business with a small to medium sized team and simply be your own boss. At the other end, “Z”, it could be to grow a business to IPO. Where you are on this scale dictates what you should do.

Let’s be clear, if you are nearer “Z” than “A” on the ambition scale and you choose the right investor your chances of creating genuine wealth FAR outweigh going it alone. It’s not just the money but the decisions you make all along the journey, knowing that you have backing. It’s fully committing to plans versus trying things out cautiously. It’s structuring the company for success from the outset versus discovering along the way that you have made mistakes. It’s tax efficiencies that double your money, literally, versus getting caught out. Do you want a large piece of a small pie or a smaller piece of a large pie?

Investors are looking for ‘scalability’ in order for their investment to feel exciting. It is not just a case of making profits but of opportunity cost. To some extent investors have a choice of where to invest their funds so the greater the potential returns, the more attractive, influenced by their measure of risk, of course.

However, statistics would suggest that to grow aggressively and/or beyond the average recruitment company size of 5 to 15 consultants in a 3 to 5 year window requires funding. Bank funding is virtually impossible to come by in the present climate which leaves investors as the only option, unless you have just won the Euro Lottery! If that funding can be combined with specialist recruitment knowledge that you can draw on, then your chance of success multiplies.

Once you contemplate external funding, the big questions are:

How much equity will you sell (or split in a start up)?

For an existing business with a track record this is easier to calculate, if difficult to agree! For a start up, in the vast majority of cases, there is no real value or valuation that can be carried out. It will come down to what you are bringing to the table, aside from a business plan. Are you putting cash in? Do you have guaranteed revenues? Are you taking a salary cut, at least in the early stages? The more you bring, the more you get. If you bring less you should still have the opportunity to increase your ‘share’ by delivering on your business plans. Your success should be well rewarded. Having a truly happy and motivated business owner makes sense for all involved parties.

How much control will you have?

You started your own business because you wanted to be in control. You were fed up with an employer dictating the pace. You don’t want to end up in a relationship that feels like employee / employer, at least not with you as the employee! This should not be the case and if it feels like it will be once the contract is signed, then get out. However, expect controls to be put in place to protect the investor’s money. How that money is spent, how fast and by whom will require rules and regulations. That’s normal. What would you do if you were investing your money?

What sort of investor will be best for you?

The initial answer is easy. It’s the same as the question of “which investors should you approach to get investment?” One that invests in and understands your market. It doesn’t have to be your narrow niche but it must be recruitment and preferably as close to you market as possible i.e. temp vs perm, search vs contingency, blue collar vs specialist. The better the investor understands your market the less chance of confusion and misunderstanding and the quicker the grasp of your approach and nuances. Very importantly, they will be able to add value to your strategy, decision making, company structure and eventual exit plans.

It’s a great time to strike out on your own or grow what you have over the next 3-5 years. Decide what outcome you want and choose wisely. To VC or not VC, that is then the question.