The true adventurers, pioneers, and generally brave and bold people to which we all owe our modern existence, are the dreamers and the venture capitalists. Venture capitalists are an extremely rare breed; there are many pretenders that need to be filtered out.

Genuine venture capitalists are lone hunters – more like tigers than lions. Angel networks don’t hunt in packs but they do provide effective networks of like-minded people you can share with. Or do they?

Incubators bring together dreamers and subsidise the dream for a while. The reality of venture capital is harsh: four out of five pre-screened start ups fail. Out of five successes – 25 start ups – three will be exceptionally pedestrian businesses that bore you shitless.

Of the other two, one will be really exciting. It will have rough patches and extremely rewarding patches. Every day will be a fight – but the profits will pour in. The other one has usually gone through the rough stage and will mature into an excellent cash cow.

A reality check: just going from idea to product takes anywhere between two and five years. Tack on a few more years to get from product to customer and don’t even think of actually penetrating the market and building a business in under five. Surviving predatory competition from better resourced but useless competition? Another five to ten years. Then and only then does the one-in-25 emerge.

Be prudent – budget another 10 years to achieve stability and here you are looking at 25 years of hard slog. When this reality sets in it seems hilarious the idiots in Wellington wanted to set up a venture capital fund with a three-year cycle.

Venture capitalists fall essentially into one of three groups: bankers, vulture capitalists, and true pioneers. 

Bankers are easily picked. Once a banker, always a (w)?banker. The first meeting between a banker and a dreamer will involve some banker analysis, and the question, “What is your exit strategy?” Then they will ask you how much money you need and what’s in it for them.

What started out as equity will migrate to dressed up debt.

They will want a front-of-the-bus position, a preference share, or convertible note. They will perhaps want a coupon compounded. They will want strategic control, milestones for drawdown, and a clear exit commitment – at least for them. These guys are bankers. Everyone knows what happens when you disappoint a banker.

The differences between the vulture and the venture capitalist are slight. There are however, several tell tale signs. The vulture’s objective is to put in little but get lots of control out. They then use that control to force the hapless dreamer to default on promises, at which point they lever the dreamer out – after sucking all the dreams out of them.

Usually these people will promise you funding all the way through the process, at least through to market penetration,  and will agree with you upfront the pricing of each lump sum, which will be milestone driven. They will tell you they have done all this before and can help you with management and strategy. They will take a board seat and often chairmanship as well. They might even take an operational role and you will think you have found heaven. They will then work hard to ensure you miss your milestones, and the fine print will have some pretty nasty consequences.

They will continue to fund you either on more punishing terms for equity, or they will say something along the lines of: “Look, the old deal’s off, but we will provide some more cash as debt.” The end game is a quick receivership and a new company. There are many ways in which these guys eat everyone’s lunch.

The real venture capitalists, the true pioneers, will do nearly all of the above. They will want to value the company with cash flows, will want to milestone their investment, they will want board seats. The difference is, these guys will rarely talk about exit and somewhere along the line they will say to you words to the effect: “Listen mate we are partners. If you get rich, I get rich, and vice versa.

“You are not going to get rich on salary until this thing is making cash. Don’t even talk to me about your market worth – I only care about how much you need to have a peaceful life at home.”

Then these guys will start talking to you about the management resources you will need and they will find these people for and with you. These guys are owners not workers. They rarely, if ever, take an operational role. They won’t pretend to know your job better than you.

Unfortunately the only time you will know the difference between a vulture and a venture capitalist is when you hit the first bump in the road.

The vulture will either abandon you or take you out.

The partner will simply roll up their sleeves and help you out of the hole. At the end of the day they will wipe their brow and yours and say: “That was a close one.”

The difference will be the direction and force of the hand they offer you, and sometimes that help goes beyond money.