Startable – Healy Jones’ & Prasad Thammineni’s Blog

This is my follow up post on what to do if the venture capitalist who invested in your startup leaves their firm. (For the first post on what it means when your VC leaves click here.) My first thought for you, as a startup CEO in this situation, is “wow, you’ve just become an orphaned deal and you might be in trouble.” But all is not lost, and there are steps that you can take to make the situation better; perhaps even a positive. The amount you freak out depends on your particular situation. 

Your situation when the VC leaves

Let’s hope that you’ve picked your VC wisely. Some venture funds have good internal information and responsibility sharing on existing investments. These funds also force rank their investments across the entire portfolio. I think that many of these funds will handle partners leaving much better because they have real understandings of which investments will be supported, regardless of which partner works with the portfolio. Why don’t all funds do this? Because it is a huge amount of work to develop these rankings and keep them up to date. While I was at Atlas we did this exercise several times, and it required the attention of every investing partner, principal and associate, plus the CFO and several members of the administrative staff for two of full days, plus hours of preparation time. And it wasn’t fun. But I think that the exercise gave the fund a much better, more rational understanding on how each portfolio company was performing and the key value drivers and risks faced by each. If you are a portfolio company that is doing well at a fund like this then you will be handled with care during a partner transition. I still suggest you think about following some of the steps I list below, but you are going to probably end up being in good shape.

However, if your fund seems disorganized and doesn’t seem to know who will be managing their investment in your startup after your partner leaves (for example, if you first hear that your partner left in the media/news and not through someone from the fund contacting you), or if your startup is not exactly … kicking ass then you need to be very pro-active.  

Is this the only fund that invested in your startup, or is there a syndicate? This is one of the reasons why you, as a startup CEO, should want to syndicate your early financing with more than a single venture firm. If there is a syndicate you may be in better shape. Hopefully that other fund will continue to be supportive – if so this will make raising follow on financing from new investors much easier. And hopefully this other member of the syndicate will be able to help you meet near-term capital needs.

I am operating under the assumption that you have a good view into what your cash needs will be, and that you know when you will need to raise additional funds for your startup. (If you don’t have a fresh financial plan get it together ASAP!) You should be less concerned if you have 12+ months of cash runway.

Steps you can take when your VC leaves

Figure out what is happening at the venture firm. Did they just raise a new fund? Then you may be in better shape, because this is a strong sign that the fund will continue to exist as an entity and that the remaining partnership should be stable. If the firm’s most recent fund is on the old side and they do not have plans to raise a new fund soon then you should be a bit more worried. In this case, the next step becomes very critical.

Hopefully you have an existing syndicate partner and this other venture firm can continue to support you. Call this partner ASAP and develop a plan of attack with them. Do they know what is happening at the other fund, and have they worked with the new partner before? You want this other firm to continue to aggressively support your startup. You need them to be willing to step up and invest in your next round. You may wish to talk with them to see if they are interested in trying to buyout the other fund – occasionally this can be accomplished at bargain basement prices. This syndicate partner may also be interested in proposing/leading an aggressive financing round in your business, with the purpose being to remove the other fund from the cap table. This is called a “wash out” and it is not for the faint of heart. 

Again, I hope that you’ve got a well build financial model and you know when you will need to next raise cash. If you feel worried about the level of financial support that you will get you may want to consider taking steps to decrease your cash burn and increase the company’s runway.

I believe this is my most important tip: I would try to schedule at least half a day (if possible a full day offsite) with your senior management team and this new partner. You should be prepared to re-pitch to this new partner. They will need to be “reminded” of how big of an opportunity you have, how great your team is, all the progress that you’ve made, etc. Remember that this partner did not do the same level of diligence on your company, and that they have not been sitting on your board closely watching you evolve as a business.  Try to help them get all the diligence that your original partner had at the time of the investment in a very short period of time. This is really hard; diligence really can’t easily be crammed. But the better you do, the more educated of a partner you’ll get- and in theory this will lead to a more supportive partner.

Don’t forget to provide some customer diligence to this new partner. VCs get excited when customers pound the table and say how much they need the product/service. In an ideal world you’ll connect the new partner with a customer who they already know. I realize this may be pretty hard to pull off, but maybe when the venture firm did the original due diligence on your firm they introduced you to potential customers? If you closed on any of these customers they are the greatest people to have speak with the new partner. You may have to set these calls up, but I think they will be worth the effort.

You should have a voice into which partner will take over managing the investment in your company. Have an opinion. Figure out which partner has the time, experience and desire to help your company. Also take into account who the “power” partners are at the fund. They may have more pull and thus have a better shot at making sure you get the resources you need from the fund.

In summary, when a partner leaves and your deal becomes an orphan you could be in serious trouble. But there are steps you can take to increase the probability of having a smooth transition. You need to get serious mind-share from the new partner. You’ll need their support at their fund, and you’ll want them to be a productive member of the board of directors. This will require work – put in the effort!