For many an aspiring Bill Gates, "having a VC" -- or venture capitalist -- has become the ultimate status symbol. Being able to attract millions in investment is a validation of an entrepreneur's business dream and a possible connection to quick riches. All that largesse has its price, though: Rigorous oversight, tough new demands, and an unceremonious deposit on the junk heap if you can't please the newest member of your extended family. If any of those prospects bothers you, you may want to think twice before selling your soul to a VC -- a step not to be taken lightly in any case.

"All of a sudden I had a boss," says Randy S. Storch, founder and CEO of 105-employee Open Port Technology, a Chicago-based telecommunications company that now has $24 million in investments from five different venture firms. Storch, who once owned one-third of Open Port, now holds a share "in the single digits." It is still worth far more than his original share, he says, and much of that growth is attributable to the cash and advice he has gleaned from his venture backers.

There are trade-offs, though, and they start the minute the marriage is consummated. "You start realizing that these guys are in it for real, and the expectations are very high," Storch says. Prime among those expectations is intense pressure to perform. As a rule of thumb, venture capitalists demand three times their investment after three years, and five times the grubstake after five. Because of the push for rapid growth, companies that sign on with venture capitalists can expect a dramatic change in their outfit's culture and goals.

ANTIDILUTION CLAUSES. Gone are the days of seat-of-the-pants management. VCs expect timely financial information as well as detailed plans and projections for meeting targets. Storch calls the scrutiny only a "little less tough than for a public company." Luckily, he says, he has met all of his goals so far. But he cautions VC-funded firms against inflating their projections: "If you don't meet them, you're crushed."

In particular, most venture deals include a so-called antidilution clause, meaning that the VCs don't want to dilute their investments. So if a company loses value, they have rights to a larger equity stake, to keep themselves whole. "You're giving up a lot in terms of equity," says John Fox, principal at Baltimore's Reservoir Capital, which lends to many small companies that also have venture-capital deals.

VCs also bring cultural shifts, which begin in the boardroom. A venture capitalist almost always gains some measure of influence, if not outright control of the company. What may once have been the personal vision of an entrepreneur suddenly becomes a collaborative project. Collaboration with a backwoods flavor: "If they have any question, they'll throw you out and get somebody else," says Judith Obarmeyer, a Cambridge, Mass., consultant to small companies.

Entrepreneurs have varied reactions to such conditions. Raging Bull Inc., publisher of the popular investing site Ragingbull.com, was co-founded by University of Virginia student William C. Martin, who sought and got a $2 million investment from @ventures III, the venture arm of CMG Information Services Inc. Within three months, the company brought on a seasoned manager who was a former executive at Fidelity Investments. "We were fine with that," says Martin. "It's our baby, but we're only 21."

RESISTING THE CALL. Personal control is still priceless, however, to Chan Suh, founder of Web production company agency.com. As his young design shop grew, he was approached by a number of venture funds. He resisted them all and instead chose to fund the now 600-employee company out of operating profits. "Nirvana doesn't come from a VC," he says. "That's not the only way to be an entrepreneur."

If you're intent on getting venture money, it's important to investigate the investors just as thoroughly as they'll investigate you. That means interviewing existing clients about their relationships to the VCs. Even better, find those who are no longer funded, and get a candid appraisal of their experience.

"Good VCs are your partners," says Jerry Colonna, who runs venture firm Flatiron Partners in New York's Silicon Alley. "If you can't look across a table and say, 'I want to be partnering with these people,' then don't do it." That's good advice for any marriage, particularly when you've already invested plenty of blood, sweat, and tears.

By Dennis Berman in New York
dennis_berman@businessweek.com

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