Venture capital firms provide capital to early-stage, high-potential, high-risk growth startup companies. The venture capital firm makes money by owning equity in the companies in which they invest. The typical venture capital investment occurs after the seed-funding round. This is usually called the growth funding round (sometimes called the Series A round). The venture capital firm will typically realize a return on its investment when the companies in which it invests has an IPO. (Initial public offering) to sell stock to the investing public.
Venture Capital Firms Need To Manage Reputation At Two Levels
Venture firms, like any firm in the financial services that needs to raise money, must maintain a pristine reputation. But venture capital firms also need to be mindful of the companies in which they invest. For the venture firm to realize maximum profit its portfolio companies need to fetch the highest possible price when the stock goes to market. Negative online publicity can have a negative impact on stock prices so it is in the best interest of the venture capital firm to assure that their portfolio companies do not have negative online publicity.
The venture capital firm's challenge of maintaining their own reputation is fairly direct. The firm needs to make sure that all their business practices are free of conflict and that they treat all prospective investors and potential portfolio companies with respect and honesty.
However, the challenge of managing the reputations of their portfolio companies is much more challenging. Start up growth companies are generally all about capitalizing on an innovative new idea. The people who start these companies are generally hard driving workaholics who are single minded in their quest to make their company successful. Also, young companies often do not have the resources to do the best possible job with customer service or technical support. Negative publicity – which can impact both the portfolio company and the venture capitalist, can be the result.
The answer for venture capital firm is to provide the support and consultation to make sure that all portfolio companies understand the importance of a good pre-IPO reputation and understand what they need to do to prevent negative publicity before it becomes a problem. Oftentimes, education and a little bit of training is the answer.
Education about negative reputation and the flash points where it can occur can be an extremely effective tool for venture capital firms. Reputation management is a new industry and the dangers – and potential costs of a bad reputation – are not well known. Pre-emptive reputation management is easy to do and the cost is minimal. However once bad practices result in online defamation, it can mean a major expense and long months of delayed progress. Once portfolio companies understand this, they will gladly take the steps needed to assure a good online reputation.
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