Glen Hellman is the founder and chief entrepreneureator of Driven Forward LLC. This post originally appeared on his blog.

It’s every startup founder’s dream: Having a venture capital firm invest in your company.  Let’s celebrate! We’ve finally made it! We’re going to be big … right?

Well, most likely not.

First off, only 20 percent of venture funded companies are considered a success by their investors, and of those, not every company exits with the founding team intact.

Here’s a list of some of the unintended consequences of VC funding caused by the unnatural acts of mixing the needs of a VC with the realities of growing a company.

1. Increased Difficulty of An Exit – When a founder raises big money at a high valuation investors inject funding terms like board control, preferences and participation to ensure that the founders are 100 percent focused on delivering a BFE (Big Friggin Exit). Investors want a 10X return and aren’t going to agree to a puny $10 million exit. There are a large universe of potential buyers in the $10 million range.  There are an order of magnitude fewer exits opportunities in the $50M+ range.
2. Lower Return for Founders – You raised $5 million from investors. They’re targeting a $50 Million return (10X) for themselves. So now you found one of the few companies that can buy you and pay $50 million. Your investors most likely have dictated deal terms that either guaranteed that they will get a large portion — if not all — of that money or they will veto the deal. Founders may have to sell for $60+ million, a Herculean feat, to earn as much as they would in a buy-out of a bootstrapped company sold for a more easily obtainable $5 – 10 million.
3. Less Flexibility – Your company has grown to $10 million in revenue and is creating $2 million in free cash flow. If you’re bootstrapped, you and your co-founder pivot to a lifestyle company and pocket a million dollars a year, not counting salary and bonus. If you’re venture funded and the company growth is stalled, you may get replaced. If you’re not ejected and your compensation committee (staffed by investors and not you) will insure your compensation is such that you need a big exit.  You won’t be pulling down the big bucks until the VCs get theirs.
4. Pushed to a Half-Baked Exit – Venture funds typically have a 10 year life. VCs are focused on winding down the fund at the end of fund-life and exiting out of all investments. A three-year-old fund is going to push you to sell your company within 5 to 6 years of investing in you… whether the cake is fully baked or not.
5. Purgatory – File this under “Crazy But True.” Sometimes a venture firm will keep a company alive, even when pulling the plug is the obvious and humane outcome. They’ll pare down the staff, cut the burn, and allow the company to survive long enough for other portfolio gains to outweigh writing off the loss of your brain-dead company. I’ve been the CEO of a company kept on life support, fed only enough cash to live another day and not enough cash to grow and thrive. I pulled my own plug from that painful life without dignity.

Keep in mind that closing a round of funding is just a stage in your company’s growth. It adds capital that can accomplish great things and it adds risk. Celebrating a funding event is like celebrating a team’s selection to NCAA basketball tournament. It’s not time to pop the champagne. You’re not the tourney champs yet. It’s tougher than the regular season because you have a lot of games in front of you and one loss by even 1 point knocks you out of competition.

Glen Hellman is a former serial entrepreneur and hired gun turn around CEO for VCs. Today he’s an Angel Investor, Executive Leadership Coach, and blogger.

Photo credit: TaxCredits.net

You just got hacked. What happened? How could you have prevented this? The obvious questions only come after the deed has been done. Security firm Cylance wants to put an end to reactionary security, and focus on the prevention of attacks. The company got $15 million in its first round of funding today led by storied venture capitalist Vinod Khosla.

Cylance was started by former McAfee executive Stuart McClure in 2012. The company has since been in stealth mode, though it has previously talked about some of its products. It officially announced its board members today, including Stewart Baker, formerly of the National Security Administration, and former chief information security officer for the CIA Robert Bigman.

Fairhaven Capital also participated in the round.

The company formally announced its first service called Presponse in December. Presponse, or pre-response, is an auditing service performed by Cylance that looks at a number of your attack vectors, assesses your risk, and gives you a plan of action for protecting yourself.

Presponse first looks at the “critical infrastructure” your company uses, such as connections to the smart grid and connected water systems. It then looks at other smart devices such as Internet-connected thermostats, healthcare devices, and more. It then looks at your business, what kind of information you might store, and how valuable that information is. In the end, it shows you how at-risk you are and exactly where an attack might try to attack.

“If you can secure the very fabric of our society and economy – critical infrastructure and key resources (CIKR) – you can secure anything,” said Mark Hatfield, Partner at Fairhaven Capital in a statement. “The security industry is ready for an overhaul and Cylance has the vision.”

Cylance image via Cylance

The S-1 is the first and most significant document that a company fills out, and the Securities and Exchange Commission publishes, prior to an initial public offering. If it’s typical, we’ll see many boilerplate risks, such as an earthquake wiping out Facebook’s headquarters in Menlo Park, a global economic meltdown, and the world deciding en masse that the Internet is boring. Lawyers include so many of these risks — in Groupon’s S-1, the risks section went on for 20 pages — that it can be hard to isolate the meaningful ones.

Here’s a look at what I believe are the three biggest risks to Facebook’s business.

The rise of mobile and Android. Mobile phones will be the centerpiece of social networks. They’re already tremendously important and will become even more so. This is especially true in the developing world, where the phone may be the only device consumers use to get online.

In this space, Google has strong assets that Facebook does not. I fully expect that Google will attempt to shove Google+ down the data pipe of every Android user. Google+ will eventually come pre-installed on nearly every Android phone, much as Google Maps does today.

Google has already built some interesting features into its Google+ app. For example, although I’m not a big fan of Google+ in general, I do like the feature that automatically uploads pictures I take to Google+. From there, it’s easy to share them. The easier you can make it for people, the more they’ll use your service.

An often-overlooked asset that Google has is Google Voice. Social networks like Facebook miss a key piece of the social graph: the people you call and text. For my closest friends, I tend to text with them regularly. That is data that Facebook currently doesn’t have.

To the extent that Google can deeply integrate Google+ features into Android, it has a significant advantage.

Facebook itself is no slacker on mobile. More than 350 million people access Facebook on mobile devices, the company says. In developing countries, Facebook has worked with mobile carriers to launch its Facebook Zero initiative, which gives people a way to access a low-bandwidth version of Facebook for free. Facebook also has a strong enough brand that it can push on carriers to have its app pre-installed.

Advertiser spending and attention shifting to Google+. With Google’s new Search plus Your World integration of Google+ into Google’s dominant Web search tools, marketers have a strong incentive to focus attention on Google+.

Although I wouldn’t recommend Google+ to advertisers on its own merits as a social network, I do recommend it based on its impact on Google search engine rankings. Marketers can move their pages from search oblivion to the front page of Google results by engaging with their customers and prospects on Google+.

When Google adds advertising to Google+, it can also make the ad buy integrated into AdWords purchasing. (Or even make it a bundled buy.)

Facebook still has so much traffic that advertisers will need to continue using Facebook, but it doesn’t have the social world to itself anymore.

Privacy-related regulations. Facebook’s greatest strength is the amount of data it has on hundreds of millions of users and their interactions. But it’s also a potential challenge when it comes to privacy regulations.

For the U.S. market, this isn’t a huge challenge, as privacy advocates have relatively little sway in government. But European regulators take a much tougher approach to privacy. (In some cases, such as Google’s StreetView Wi-Fi data collection, I think it’s absurd.) In December, Facebook agreed to make 35 privacy changes in Europe.

Even with privacy regulations in place, Facebook can still grow its ad business. The bigger concern is the degree to which compliance with a patchwork of global privacy rules takes away engineering resources and inhibits the implementation of new features that consumers may want.

Rocky Agrawal is an analyst focused on the intersection of local, social, and mobile. He is a principal analyst at reDesign mobile. Previously, he launched local and mobile products for Microsoft and AOL. He blogs at http://blog.agrawals.org and tweets at @rakeshlobster.

Top photo: Rupert Ganzer/Flickr

Although the economic downturn was historic, we were surprised to see how many savvy investors and startups simply shut down during this time period. While conserving cash was critical to survival for a lot of companies, whenever possible, that should have been done within the framework of doing more with less, rather than simply doing little or nothing at all.

It’s not part of our inherent DNA as entrepreneurs to eschew risk, and we must once again celebrate and reward the risk-takers among us as we head into 2011, because it’s these groups of individuals that will help pull us out of the morass of the past two years.

We’re already seeing signs that the startup community is getting back to its innovative roots, and we fully expect entrepreneurial endeavors to come back into style over the next year. Companies and consumers are beginning to spend again, the exit markets are rebounding, appetites for risk are resuming and natural selection has taken place – thinning out weaker organizations, as the stronger have survived.

Also, crises breed opportunities, and many seed-stage companies got off the ground in 2010 thanks to unemployed entrepreneurs that cobbled together initial plans and funding. In 2011, these young organizations will aim to take the next steps, which in many cases will include a Series A round of venture capital.

So what risks should investors and entrepreneurs be prepared to take in this climate? Here are our thoughts on seven risks that may well result in success:

Start spending again. Do it wisely and maximize every dollar, but don’t sit on your hands trying to conserve cash forever. Hire critical employees, invest in new channels, and reward innovation or risk being left behind. Just as real estate experts talk about kitchens and bathrooms being high-value, dollar-for-dollar renovation projects, there are similar examples in entrepreneurship, such as sales, marketing, research and development.

Hire new assets. Hiring is a great way to strategically invest in growth. The employment market is clearly a buyers’ market right now. There are a lot of talented people among the unemployed as well as an increasing number of semi-retired workers. These trends highlight creative ways to bring high-quality, experienced people on board for reasonable (in some cases even part-time) salaries.

Change your core business. If your current market is changing rapidly (and whose isn’t), now is the time to flesh out and fully consider Plan B. Don’t be afraid to make a wholesale shift in your business to catch the right wave. Many of the best ideas came from a discovery process that led an entrepreneur from Plan A to Plan B.

You may lose some good employees and customers along the way, but you need to think about whether your initial plan is still going to net you and your investors the big rewards you thought it would three years ago. If it won’t, then look for ways to maximize your IP and your expertise to forge a new path.

Investigate new revenue models. Is freemium working for you? Have you considered free? How about a subscription model? What will it take to make your business a success? Don’t be afraid to consider a radical change to the revenue model.

Sell the company. Many founders are reluctant to sell too early, but they can easily miss the window of opportunity. Rather than looking at selling as a necessary evil, and a viable option only when you can no longer make it on your own, consider what company or companies might make a great heavy-hitter once combined with your assets.

Forge impactful partnerships. Partnerships have long been a great way to extend one’s reach. In addition to traditional agreements that might broaden a company’s geographic reach or technical capabilities, investors and entrepreneurs should look for ways to merge portfolio companies to lower overhead, expand service offerings and accelerate product development and R&D.

Enter new geographic markets. The Internet and other modern technologies are great at breaking down barriers, and many economists are forecasting higher growth for China, India and Brazil than for traditional markets like the U.S. and Western Europe. It might not be as hard as you think to start selling into these burgeoning markets.

OpenPages’ software highlights any inconsistencies in risk and performance goals — such as overly aggressive revenue goals for an emerging market like Latin America — and gives management a comprehensive view of the business opportunities and risks associated with the expansion.

OpenPages had previously partnered with IBM for the Operational Riskdata eXchange, a consortium of banks formed to collect loss-event data and meet operational risk guidelines outlined by standards set by an international banking committee.

The Waltham, Mass.-based company had previously raised an undisclosed amount of funding from Goldman Sachs, Matrix Partners and Sigma Partners among others. Allianz, Barclays, Carnival Corporation, Duke Energy and SunTrust are among OpenPages’ clients, according to the company’s website.

IBM has invested about $11 billion in analytics research and interpretation, which included hiring about 6,000 consultants and seven full-time analytics centers.

[Photo: epSos.de]

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