Interested in learning more about venture capital? American Small Business News is pleased to bring you insights on this important topic from Dave Hersh, co-founder and CEO of Jive Software.

Q: As a small business, how do you know whether it’s time to consider pursuing venture capital funding?

A: From my viewpoint, two main things need to be in place before considering the VC plunge:

1. You must be positioned to support a 10x return on the VC’s investment, so the market and the company need to be set up to meet that growth goal

2. The company should be at a point where you can prove out how it will scale (i.e. a “just add water” scenario). For instance, you should have a few good reference customers who have proven the value of the solution and who will help you as you scale up sales (e.g. case studies and ROI).

Q: What are some of the common mistakes that small businesses make when considering VC funding and how can they avoid them?

A: While I’m not a VC myself, I would guess that many of the issues come down to companies not understanding how VCs think. They don’t do their homework and they are too myopic in their perspective. A good practice is to pitch a friend or two who are VCs. For instance, I had never done a formal TAM (total available market) analysis and didn’t have that in my original deck, but I learned that it’s something VCs expect. I received some advice from VC friends on ways to approach it, and also worked with some consultants, and in my next few meetings, I nailed that part of the presentation.

Q: Why do so many smaller companies grapple with this?

A: Entrepreneurs can be very passionate about things like the story behind the company, happy customers and culture. While these are all part of the equation for any good VC, they tend to speak a financial language (similar to the public markets) that may be foreign to a lot of entrepreneurs who have grown from scratch.

What are the positives of getting VC funding as a small business and what are the potential negatives that all companies should consider before exploring VC funding?

It’s difficult to nail this down because there are so many and they differ for each company and VC firm. In general, the positives are accelerated growth, validation, management assistance/coaching, recruiting, M&A assistance, corporate governance and business development introductions.

The negatives vary a lot, but I think many of them come down to the VC partner and CEO not connecting. In a more traditional entrepreneurial company, it works well if the VC partner has also been an entrepreneur and has an innate sense of the underlying issues in the company. For example, a VC who has been an investment banker but has never run a company might be suitable for a later-stage company; however, the VC not be a match for an entrepreneur because they would presumably have contrasting views of the issues.

Q: Can you offer some tips to small businesses to help them determine whether or not they are ready to consider VC funding?

  • Ensure you have a rapport with the partner. That’s more important than anything else.
  • Seek coaching from VC friends before pitching them.
  • Don’t tell VCs which other firms you’re talking to (they all know each other and they’re all alpha dog competitive).
  • Ideally, raise money when you don’t need it.
  • Don’t screw them over or haggle over a few points. They’ll remember.

American Small Business News thanks Dave Hersh for sharing his insight on venture capital with our readers.  In six just short years, Dave Hersh has led Jive Software from a small open source project to an Inc. 500 company with 100 percent annual growth rates. Hersh is responsible for overseeing the company’s strategic direction, planning and implementation.