Last Updated on February 24, 2023 by Emmanuel
Some venture capitalists use unscrupulous methods to take advantage of founders and engineers of startup businesses, which these people can see as unethical.
They often get away with their actions because the founders of startups are unfamiliar with their working modes and don’t know how to protect themselves.
VCs can also promise businesses significant investments but only provide a fraction.
This leaves startups with less money and often forces the founders to give up their businesses early.
Besides, VCs can take advantage of startups by pressuring the founders into giving up equity for a lower valuation than they are worth.
So let’s discuss in detail the methods VCs use to screw founders and engineers.
What do Venture Capitalists look for in founders?
Everyone is looking for a piece of the startup pie in today’s business world, but only some understand what it takes to be a successful founder.
Venture capitalists are businesses and individuals who fund startups in exchange for equity and other perks.
To provide capital, they look for founders with a clear vision, who offer profitable products, and can make their companies succeed.
Other criteria they use to look for the best potential founders of startups include:
VCs typically look for founders with straightforward business models to grow their companies and can take them to the next level.
This criterion is essential because a well-thought-out business model distinguishes a successful venture and a failed one.
Besides a clear vision and business model for developing the startup successfully, a founder must also have good communication skills.
Communication skills are essential for entrepreneurs who want to convince others to invest in their businesses.
Founders who can’t express themselves clearly can lead to mistrust and damage their businesses in the early stages.
Founders must also demonstrate intellectual property to merit the venture capitalists’ trust.
Someone who maintains his integrity and can stand firm on what he believes has more chance to become a successful entrepreneur.
Balance risk responsibly
Another thing VCs look into founders is their ability to balance the risks their businesses are likely to encounter responsibly.
But it can cause tension between founders who want to go big in the long run and VCs who need to get the most out of the investments quickly.
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How do VCs manage to screw founders and engineers?
Ventures capitalists use different methods to screw founders and engineers, but this article outlines a few.
Pressuring for unrealistic goals
Some venture capitalists often pressure founders and engineers to achieve unrealistic goals to get more money from investors.
It can lead to the people behind startups working long hours, burning out, and ultimately leaving their businesses.
Besides, VCs do whatever possible to get their money back in fear that the companies they have invested in can fail.
Micromanaging and second-guessing
There’s no room for micromanaging or second-guessing in venture capital that can:
- Making unreasonable demands, including unrealistic deadlines or goals, can create immense pressure and cause startup owners to make mistakes or burn out.
- Some VCs also take advantage of inexperienced founders by offering deals or terms which are not in their best interests.
- In addition, they can screw over the startup owners by mismatching their incentives.
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Taking advantage of the founder’s naivete
A few Venture capitalists in Silicon Valley also take advantage of the naivete of startup founders, which many consider unethical.
They use different methods, including offering low valuations, pressuring the founders to give up equity, etc.
The founders must know these tactics and do their best to negotiate from a position of strength.
Playing hardball with equity.
Another method venture capitalists use to invest profitably in startup businesses is playing hardball with equity.
They do whatever possible to convince the founders to give up significant shares of their companies for less money.
Since startup owners need significant money, they find negotiating challenging and often let the VCs get what they want.
Controlling the boards of directors
VCs also place their trusted people on the boards of directors for the companies they invest in to ensure complete control.
More control over startups empowers them to manipulate and exploit the founders and engineers.
In addition, VCs can use their influence on the boards of directors to eliminate the founders or force them to decrease salaries.
What percent of venture capitalist firms fail?
According to some studies, nearly thirty percent of venture-backed firms don’t achieve their objectives within five years and fail.
This section will not describe the causes of such failure because we have outlined many of them previously.
We can only say that this rate seems like a high number, but many startup businesses in other industries fail more.
What is a good ROI for Venture Capitalists?
In conclusion, it will help if founders and engineers in startup businesses know the various ways in which venture capitalists can screw them over.
Of course, they need significant investments to develop, but VCs want to get their money back quickly.
And this can lead to using methods not always in favor of founders and engineers, hence the need to stay cautious.