I spend the majority of my time seeking out new emerging growth companies to finance. A meaningful amount of that time is spent reading and listening to investor presentations – I’m on the buy-side for most of my day. One of the more difficult parts of the business is shifting to the sell-side when we are pitching potential investors in our funds. Some potential LP’s make the process easy – some don’t. Raising capital in this environment is extremely challenging to say the least. I had breakfast with a venture capitalist recently at one of my favorite places – Twist in Millis (started by my former SVB partner, Phil Ernst and his very talented wife, Catherine). The VC told me a cautionary tale about managing his relationship with a prominent university endowment. (Names are withheld to protect the innocent).
The venture capitalist said he was closing a new fund and had spent countless hours pitching to limited partners, preparing diligence checklists and negotiating legal documents. He was very near attracting a large commitment from a coveted university endowment. As the date for the first closing of the new fund drew near, he got lengthy comments on the legal documents from the Chief Investment Officer of the University. These were changes that no other LP was requesting and presumably were not in the immediate best interest of the VC. The negotiations became protracted and for whatever reason weren’t resolved by the first close date. The VC went ahead and did the first close with a substantial sum of other investors but neglected to make any of the recommended changes to the legal documents. His attorney’s reasoning was that no other investors had requested those changes so why offer them up?
A few months later, the University was re-engaged and wanted to invest in the second closing of the fund. When the Chief Investment Officer reviewed the legal documents, he saw that none of his recommended changes were made. You can guess his reaction…”We don’t do business this way – the deal is off.” The VC said that he’d be happy to amend the documents but the damage was done. A missed opportunity in a difficult fundraising environment is particularly painful.
This particular VC is one of the good guys – one that you just want to succeed and they have in fact had some early successes. He’s changing his approach and he’s changing his attorney. Building long term relationships with investors means thinking beyond the terms in any one fund document. The mating ritual with the university will continue a few more years and my bet is that they’ll invest (and be happy that they did).
Eastward Capital Partners
432 Cherry Street
West Newton, MA 02465
o: (617) 762-3611
c: (617) 947-6272
Eastward Capital Partners – providing $1 – 10 million venture debt, growth capital and equipment financing to venture-backed, emerging growth companies since 1994. We also provide expansion capital to non venture backed companies.
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