By Eoin Callan and Elizabeth Rigby

Raising venture capital can be the most painful experience of an entrepreneur's life. Most have left their jobs and gambled their future on an idea. They are most vulnerable in the closing stages of the deal, when success is within their grasp but the venture capitalist is still in control.

"Raising funding takes longer and is much harder than you believe," says John Bates, executive director of entrepreneurial management at London Business School. "It is a game. The more you need the money the less likely you are to get it. The golden rule is never be desperate, always be talking to a number of people...It is a tough world."

Shakir Merali, a senior associate with Geocapital Partners, a venture capital company, adds that entrepreneurs are in a very difficult position. "They have invested their time, usually their money, in an idea that has become their life for the last year or so. Then they are facing this powerful, all-knowing VC, a guy with lots of money behind him who can make or break their business.

"The power relationship is really skewed. So the responsibility is on the VC to behave ethically. Some do behave equitably and with integrity and some don't."

When Sonia Lo, chief executive of eZoka.com, a business purchasing network, set out to raise capital for her latest enterprise she welcomed the invitation to discuss her proposition with one of the more seasoned UK technology venture capital firms.

The VC showed keen interest. "We were invited in three times to present our proposition," she says. "I was then called back by the venture capitalist who told me he had found our idea seductive, but hadn't been seduced. Which I just thought was completely inappropriate vocabulary."

s Lo asked for his reasons. "He told me he had to think about them and would come back to me. Needless to say he never got back to me with any reason. A week later, I found out that they had invested in a competing proposition to us at half our valuation."

s Lo, who has raised $25.5m for European internet ventures since leaving her position as director of new media investments at United News and Media, took the setback in her stride. Noting it down in her book of lessons learnt, she came to a sombre conclusion: Europe will never achieve the same levels of enterprise as the US until there is more transparency in the funding process.

"In other industries you would expect people to disclose a conflict of interest, but not in this one," says Tom Donaldson, co-founder of Sessami, a mobile commerce business. "You have to assume the VC you are talking to is also talking to your closest competitor."

ThinkNatural, the alternative healthcare website, should have made this assumption when it was approached in August last year by Atlas, the venture capital firm which is backing rivals ClickMango. ThinkNatural had already closed its seed round when it was approached but was eager to explore first round funding opportunities.

Atlas was well within its rights to talk to a number of companies at once, says Rob Zeeglar, a partner at Atlas, because they had not yet signed term sheets with ClickMango. "It is normal practice." However, he cannot recall if Atlas disclosed to ThinkNatural that they were also pursuing talks with ClickMango. "I don't know . . . whether they were specifically aware that we were looking at ClickMango".

"We were not aware they were discussing a deal with ClickMango", says Carol Dukes, co-founder of ThinkNatural.

"I think that was a bit of a sensitive point," adds Anne Glover, managing director of Amadeus Capital partners, who is lead investor in ThinkNatural.

It became more sensitive when on September 3 ClickMango tried to register ThinkNatural as an EU trademark and then on September 7 bought the domain names, ThinkNatural.net and Thinknatural.org, and linked them to a spoof website.

The domain name issue "was a pure joke...these guys are extremely ethical and professional business people," says Mr Zeeglar. Ms Dukes failed to see the funny side, particularly when ClickMango released a statement saying ThinkNatural had agreed to pay for the domain names. ClickMango reportedly put forward a figure of £10,000 for the domain names.

"Following an exchange of legal letters, they backed down," says Ms Dukes. "We are ahead of them and we intend to stay ahead of them, despite the dirty tricks."

ClickMango signed a deal with Atlas eight working days after they met on August 24, according to Robert Norton, co-founder of ClickMango. He refused to comment on the issue of from where they got the ThinkNatural name.

Venture capitalists are expected to evaluate several different business propositions in same space in the normal course of their business. "It's part of our job. Entrepreneurs are usually the most vociferous about how their product stands out from their competitors. You have to look at their competitors to validate that...it's a standard part of due diligence," says Mr. Merali.

"But if the guy has basically committed to investing in a specific company he should not be doing competitive intelligence under the guise of the opportunity to invest. I believe that is unethical. I don't think that's right."

Emile van der Burg, chairman of the European Venture Capital Association, does not see regulation as a solution. "You are dealing with very important, but very general, business ethics issues. People should act honestly, but you don't capture that by just putting it into some regulation."

r Bates agrees. "As a member of the British Venture Capital Association I would be loath to see any regulation. It would be a retrograde step in what is a fast moving and fluid market."

"Anyone who joins the EVCA has to sign a statement that they will adhere to our code of conduct," says Mr Van der Burg. But at the end of the day...it is up to the VC".

"The market works, and it is competitive, and it is moderated enough," says Mr. Bates, "entrepreneurs need to do their homework. Do your due diligence on investors: take the rifle not the shotgun."

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