Startup CFO's - Managing VC Expectations

What do you think is the biggest challenge for founders or growth equity CFOs in the fund-raising process today?

I think it’s more about meeting the expectations of the venture capitalist. They are taking high risks, but they also want very high returns and they have a certain set of expectations. They are looking to invest in the companies who can be 100x where they are. The late stage investors are a little bit more realistic. For example, they are looking for certain IRR, which tends to be a 15% or 20% IRR. If companies can deliver that, they are much more open to fund. But for the VC business, out of 100 companies, one or two will be successful and most of them will fail. For the one or two which are successful, they are looking for very high returns.

Their expectations are to invest in the businesses that can grow, exponentially, for a long period of time. With that expectation, the founders also need to provide that picture to the venture capitalists and to grow, especially in the consumer business. The marginal cost of growing the business is very high, but you still need to show the funded growth, and a different set of beliefs, because the expectations of the VCs are very different. I found that a little disconnected, many times, between what the right way of running the business could be and what the thought process of a VC is. That disconnect could be a bit tough. You need to show a plan which is very aggressive; you get the funding from the VC, for that particular plan and then executing on that plan becomes hard. Even if you execute on that plan, you have to invest a lot of capital, which may not be the right way to think about running your business. That becomes one of the issues in the business.

The other thing is, right now, there is a lot of liquidity in the market; interest rates are so low. You have so much capital floating around and VCs need to put that capital to use. Different players can raise a lot of capital and if your other competitors have raised the capital, you also need to raise capital, to compete with other subsidies and benefits on other platforms. It becomes a rat race, from that perspective.