VC Wants Consultant to Evaluate Your Business

A recent post I responded to on ExpertCEO brought up an issue that expansion stage companies sometimes run into with their existing venture capital investors… What to do when an existing venture capital fund wants to have a third party review of the company…

The CEO in question has an outside investor interested in putting expansion capital into the company… and existing investors that are open to the idea… and an existing investor that is not. The latter asked that a third party consultant be brought in to provide a perspective on the future prospects of the company.

Here was my advice to the CEO…

Unfortunately, you are living the consequences of having two too many investors in your company… I know I’m stating the obvious, but I bring it up for other CEOs that may be considering raising money…

In this case, I’m afraid you need to go with the flow… and facilitate the outside review process by being open and forthright. Resisting the outside review will only cause more hesitance on the part of the investors in question.

You also could use that process to your advantage… Figure out the consultant’s particular area of expertise, and ask him to expose you to his insights at the end of the project. Basically, pump up the consultant by showing genuine interest in his expertise… and be open to learning from the findings to improve your business. I always encourage CEOs to use due diligence as a learning process. It can be an invaluable source of free consulting/outside perspective.

You should also ask that the findings be available to the other investors so as to reduce duplicate diligence. You should precede that by asking each investor to provide you with a list of issues that their investment committees have as they consider the investment. Boil down the issues across the board to a handful of common ones, and share them with the consultant. Might as well make the consultant really earn your money…

As for the reluctant investors… I suggest that you take the lead on addressing each of their investment committee’s concerns. Ask that you present to their respective ICs your perspective on the business… and why this new investment is in the best interest of the company. There’s not much to be done with weak reserves. But the weak representation by the partners on your board is something you can address by going direct. I have used that tactic myself (and I consider myself a strong representative of my companies to my IC).