When a fund runs out of money, the ‘honeymoon’ with the founders also ends. Statistically, some companies will not be able to stay on the market, so this is the moment when difficult conversations begin. They often turn into a festival of mutual grievances lasting for months, but more on that in a moment.
The simplest situation is one in which, in the opinion of both parties, both VC and startup did everything they could, but the product did not catch on on the market. Inventory of assets, attempt to monetize, liquidation, and – we disperse in peace. We are thinking about further projects. On the market, however, scenarios are the most different. Some founders blame funds for such failures. They claim that they failed because they received too little support. This is an aberration because the VC is not here to do business for someone. They only play the role of an advisor – not someone who runs the company operationally. The exception is when the fund forced a certain direction of development that failed, but this is rather rare. So, this begins: ‘cooperation with you didn’t go as it should have, you didn’t get involved, and now I have no income.’ Or worse: ‘I have debts and I can not afford liquidation, do something about it’. To put it bluntly: the founders are responsible for the success or failure of the company. If it doesn’t work out – you just have to accept it, learn a lesson and move on. Looking for the guilty everywhere around doesn’t work out well for anyone.
Such situations look equally curious from the fund’s side, because it must now decide how to end cooperation. If everything was fine and the project simply failed – the fastest possible way to write off is sought – liquidation, sale of shares for one zloty [the most common way out in Poland, with data covered by the NDA :)], etc. But what if the founder was guilty for various reasons, bending or even breaking the provisions of the investment agreement? It should be remembered that the fund is responsible for the capital managed towards its investors, so it cannot be passive. How to decide when to let go and when to draw the consequences? When to go to court and fight for compensation, and when to give up? These are extremely difficult situations that must always be resolved individually. Typically, as funds, we take the risk and we should not force ourselves to blame for our failures, because we decided to entrust funds and it was our duty to do it as sensibly as possible. If it did not work out for business reasons or mistakes – it’s difficult, such is the industry. If there has been abuse of a significant magnitude, action should be taken and consequences drawn. One thing is certain – you have to look for the golden balance between business efficiency and simply being a human being with a certain amount of understanding. This is something we all need like oxygen.
The comment section had a few words to add:
VC funds in Poland definitely abuse the use of contractual penalties. They do it only to get the money back, even if the founders weren’t actually at fault. For VCs, it doesn’t matter. It is important to recover at least some of the contribution, even at the cost of the founder’s life…
After all, when doing VC, you should assume in advance that the vast majority (90%?) of companies will be listable. And founders, who still have to swallow the bitterness of failure, should be let go of stress and dragging on the courts.
Therefore, I sensitize all founders to read the proposals of contracts with VC in terms of contractual penalties 10x and to demand a precise description of the situations in which these penalties could be activated.
In my opinion, the funds do not verify the company in terms of the experience of project leaders, but they see visions of profit based on a trading product that is to bring super profits in a shorter or longer time.
‘They only play the role of an advisor – not someone who runs the company operationally.’
Well, not exactly. If someone gives you bad advice and you feel pressured to accept it, then the counselor is not entirely blameless. However, the person taking the advice is also guilty and should never, ever get involved in business, management, etc. If they don’t have enough knowledge and skills to deflect the pressure of investors who often ‘know better’ because they observe different companies in their portfolio, quite superficially. Management is a responsibility and there is no room for succumbing to pressure and executing someone else’s plan instead of your own.
You always have to look for solutions, not the guilty 🙂