By John Yates and Scott Allen
ATLANTA – In these challenging economic times, many entrepreneurs are struggling to find the path to success. In the Southeast, this is even more challenging given our lack of available sources of venture capital.
In meeting with many entrepreneurs, we hear several misconceptions regarding the technology community and the capital raising process in the Southeast. As 2008 draws to a close, let’s consider a few of these myths and dispel them once and for all.
1. Myth: I could raise venture capital if only I were in Silicon Valley.
Fact: While this may be true for a few companies, the vast majority of businesses are unlikely to benefit from being in Silicon Valley. To the contrary, many entrepreneurial companies may actually find it more difficult growing a business in California. Salaries are higher, cost of living is greater and the competition for talent much more fierce.
Of course, some companies may find a Silicon Valley venture capital fund that is a perfect match, but moving to the Valley doesn’t ensure a successful fund raising.
2.Myth: As a Southern entrepreneur, I face a significant disadvantage because so few venture funds are located in our region.
Fact: This statement is generally untrue. A solid business plan and strong management team will attract capital from firms in our region and located outside the region.
Yes, it may take more effort to locate the right venture fund, and more attention must be paid as to whether a fund located in another section of the country is actively looking for deals in the Southeast, but there are many that are.
3.Myth: Venture funds in Boston and Silicon Valley only want to invest in deals in their area.
Fact: Not only is this untrue, but many funds in these areas prefer to invest outside of their region where there is less competition for deals. They consider the Southeast to be fertile grounds for finding attractive technology companies.
Funds in Silicon Valley and Boston complain that a large number of VCs in their area make it more difficult to find the strong technology companies. They prefer to fish in a smaller pond — often the Southeast.
4.Myth: My company won’t succeed unless I obtain venture financing as soon as possible.
Fact: Even for early stage technology companies, this may be untrue. Many of our region’s most successful tech companies have never raised a nickel of venture capital. For example, companies like Manhattan Associates and SAS Institute.
Many of the strongest and fastest growing technology and business services companies in the region have been self-funded by entrepreneurs who built their companies by using their personal resources and the resources of friends and family, attracting referenceable customers and scaling their businesses one deal at a time.
5.Myth: Venture capitalists are only interested in protecting their own investment and provide limited value to their portfolio companies.
Fact: Based on experience, this is patently untrue. Of course there may be some venture funds that are narrow-minded in focusing only on their own investment needs. Most VC firms, however, are fully committed to growing their portfolio companies and will commit significant time and resources to bring about success for their businesses.
6.Myth: The interests of a founder and the venture capital investors are always aligned.
Fact: Untrue. While venture investors want their portfolio companies to succeed, there are many instances where the entrepreneur and the management team may be at odds with the investors.
This is a natural part of the investment life cycle and these differences are usually ironed out through professional discussions; of course, the company/management should have legal counsel that is separate from counsel for the venture investor.
These differences often manifest themselves around selection (or removal) of the CEO or other senior management talent.
In these challenging economic times, we can expect ongoing changes in the relationship between the entrepreneur and the venture investor. It will be important to separate truth and reality from fiction and myth. In the long run, the entrepreneur will be best served by seeking wise and loyal counselors and investors who have a solid track record of successful investments.
This column is presented for educational and informational purposes and is not intended to constitute legal advice.
John Yates and Scott Allen are attorneys in the Corporate Technology Group of Morris, Manning & Martin, LLP, with offices in Atlanta and the Southeast.
Southeast Venture Conference, February 29 – March 1, 2012 at the Ritz Carlton in Tysons Corner, VA – Where Smart Money Meets Smart People.
www.seventure.org
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