SIX STEPS TO MAXIMIZING THE VENTURE CAPITAL RELATIONSHIP
By Gavin G. Galimi and Eric Klein, Katten Muchin Rosenman, LLP

Your venture capital investors have more value to a growing company than the capital they provide. Maximizing that value is what can separate a good company from an explosively successful company. You probably know this already having carefully considered which VC investors to pursue on the basis of their industry expertise and rolodex. But, your venture capital relationships can extend far deeper. Here are six steps to maximize your company's venture capital ("VC") relationships and make your VCs partners in the growth and success of your company.

Wants and Needs List
Every business has a pet list of wants and needs. You may need to add a COO to your management team. You may want to expand into a particular region and are looking for potential target companies to acquire. Perhaps you are looking for a new channel partner. Whatever your wants and needs, take the time to write down your list. Then, share the list with your venture capital investors in regularly scheduled meetings.

While you may wish to make your wants and needs list an agenda item in your board meetings, regularly scheduled meeting devoted solely to your wants and needs list can be more effective. Not all of your VC investors may be on your board and the formality of a board meeting can dampen open discussions.

Ask your VCs what they can do to help obtain and achieve your wants and needs. Who do they know that could be a great COO? What companies do they like for your short list of target acquisitions; more importantly, which ones can they introduce to you. What do they know about your channel partner candidates?

Require follow-up and accountability from your VCs on their action items. With regularly scheduled, separate "Wants and Needs" meetings, your next one is a built-in deadline for follow-up on those action items. Plus, if you later need board action on a wants and needs item, you already will have buy-in from the VCs.

Management Team Praise
Every executive knows that praise is an effective tool for motivating your team. Sometimes a team member needs a little extra attention and praise. Ask one of your VCs to do a one-on-one with that team member. It can be a great motivational tool to your executive, plus it is an opportunity to showcase some of your management team's talent to your investors.

CEO Support From VC Portfolio Companies
Executives of VC portfolio companies share a common bond: accountability to the same venture capitalist. Ask your VCs to introduce you to other top-performing CEOs in their portfolios. Compare notes on management issues, relationships with the VCs, opportunities to do business together, and other possible synergies like volume purchasing arrangements. Be sure to share successes resulting from the introductions with your VCs.

Also, consider forming a small (TEC-like) CEO group with some of these portfolio company CEOs. The small group sessions are great opportunities to develop solutions to particularly thorny problems that may not belong in, or be ready for, a VC discussion. They are also great opportunities to focus on your operations, share best practices, and educate each other out of worst practices.

VC's Critical Eye and Experience
Use your VC's experience and critical eye. This point has many facets, but the basic idea is that your venture capital investors want to be your partners in success. You need to give them concrete opportunities to help them contribute to that success. Such opportunities abound. Consider, for example, management reporting and strategy.

Ask VCs to provide you with the best, most effective management reporting they receive from their portfolio companies (on a redacted basis, as necessary). What metrics are on the dashboards for the other portfolio companies? Are your reports as easy to understand? Consider adopting appropriate reports. You may streamline your reporting requirements, identify better metrics to track, and make your VCs review of management reporting easier.

Strategy has to evolve as the market changes. Be sure to provide regular strategic updates to your VCs. The most effective updating occurs outside of the board meeting process. Add a strategy update to your wants and needs meetings if your VCs have the time. If your VCs are local or are periodically in town, get together with them over a meal and discuss strategy. However you provide the updates, ask the VCs to try and drill holes in your strategy.

As an added benefit of the strategy updates, your VCs will be ahead of the curve on issues that may require board action. For example, if your strategy updates addressed changing your pricing strategy to grow market share in the face of increased price competition and declining cash reserves at competitors, the VCs on your board will be anticipating revised projections at the upcoming board meeting that reflect a short-term decrease in revenue and margin before the strategy turns into increased profits.

Competitive Intelligence
Use the VCs for competitive business and market intelligence. One of the criteria you used in picking your venture capital investors was whether they were active in your space. Leverage that industry expertise. Here are some practical ways to do so.

When you meet with your VCs, are you getting a download of their intelligence gathering activities? Who are they meeting with and who are they planning to meet with today? What trends do your VCs see? This can be invaluable in adding additional perspective to your own competitive intelligence gathering. Also, keep in mind that what may not seem material to the VC may be the missing piece to your puzzle!

Excel Jockeys - Spreadsheets, Projections and Feasibility Studies
Preparing spreadsheets for projections and feasibility studies often burns a lot of time and energy for growing companies. You need an "Excel Jockey," someone who can navigate and create Excel files as easily as you type an email. VC funds often have great "Excel Jockeys."

Ask your VCs if one of their associates or analysts can help with financial analysis until you hire the right person. Use them to help put together your projections and feasibility studies as extra, unpaid resources. This also helps with VC buy-in on the strategy issues involved. Finally, consider asking for their help making any revisions to your management reports and dashboards that arise from Step 3.

Gavin G. Galimi and Eric Klein are attorneys based in the Los Angeles office of Katten Muchin Rosenman, LLP, an AmLaw Global 100 and BTI Top 30 Client Service law firm, focused on serving middle market and emerging companies.

Gavin is an experienced technology and corporate attorney who works extensively with software and technology companies across all industries, including software, hardware, internet, search, healthcare, and biotechnology. He helps entrepreneurs of large, middle market, and emerging companies achieve their business objectives, from venture financings, mergers, acquisitions, inbound and outbound licensing transactions, and advising on operational matters. He also advises clients on privacy and data security matters. Gavin can be reached at gavin.galimi@kattenlaw.com.

As a leader of the firm's West Coast corporate and securities practice, Eric advises private and public companies on acquisitions, financings, operational and technology matters, data security and privacy issues, and licensing. He regularly provides in-house training to companies and lectures to business schools, trade associations, investment bankers and venture capitalists on topics such as advanced negotiation skills, improving operational performance, controlling legal costs, and integrated risk management programs. Eric can be reached at eric.klein@kattenlaw.com.

© 2005 by Gavin G. Galimi and Eric Klein. This article is not to be construed as legal advice.

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