My Monday morning begins with catching up on a bunch of VC blogs and other start-up-related feeds. I think there’s a wealth of knowledge being communicated daily to entrepreneurs, but many won’t touch it for some reason.
First on my reader today was Fred Destin asking why entrepreneurs hate VCs. It’s something that annoys me when I talk with fellow entrepreneurs - this anti-VC thread, almost as though we’re all supposed to join in venting about how bad they are. I’ve been told I have VC Stockholm syndrome when I suggest that perhaps it’s worth working a little towards accommodating the VC occasionally isn’t a bad thing. Maybe that’s true. Maybe it’s just that I have tried to put time and effort into understanding what VCs need out of me and my company in order to mutually align goals and increase my chances of success in building a billion dollar company and changing the world. Maybe both.
If one takes for granted that some VCs behave badly - as do some members of any group - we still have to figure out why the views are so very widespread among entrepreneurs.
Mainly, I think communication is the root cause - VCs enjoyed a veil of secrecy about how the operated for decades, presumably thinking this confusion on the part of the entrepreneur benefited the VC (though I’m not sure that’s true). As a result most incoming new entrepreneurs have little understanding of the process, and popular culture has led to a slew of common misconceptions about what VCs are there for (e.g. they give money to people who show up in their offices armed with a great idea, that just needs some money to give it a go!).
Fred asked for specifics - but issues with individual terms, while frequently expressed, primarily come from the more-experienced entrepreneur who is negotiating, or has negotiated, a term sheet - though I am not sure this is the biggest source of problems in the relationship. The short list below is hardly original, but what I hear the most:
ISSUES WITH SPECIFIC TERMS
1) Founder Vesting
Now, you learn pretty quickly why Founder Vesting is there and why it makes sense. But this concept hits any first time entrepreneur like a shockwave. ”It’s my company and you want me to give it up again?” The best way to explain it to an entrepreneur is what happens if a co-founder leaves with all their equity after a fall-out - that kills a company. No-one expects this to happen but it does (been there). The issue that more experienced founders have is that then when one founder leaves the stock is then not issued, which effectively dilutes the founding team to the benefit of the VC with no additional benefit from the VC. Most entrepreneurs eventually see the wisdom of RSPAs, but then when shares evaporate like this due to a founder shuffle they often feel that the VC has picked the pocket of the entrepreneur.
2) Paying VC legal fees on closing
The numbers are not always that great - though I was involved in a closing where by the time the money hit the bank 25% of it had been eaten up with legal fees and other term sheet items. However, this item just pisses off entrepreneurs unnecessarily. It’s an emotional gut-feeling thing. I have not met many entrepreneurs that don’t hate this term. VCs have lawyers they use deal in, deal out. They can pay their own bills. Or explicitly add $20k more to the raise specifically to pay those bills.
3) Needlessly provocative restrictions
When a VC drags out a term sheet close for weeks, but then says you cannot pay salaries for the closing month, it’s just needlessly picking a fight with the entrepreneur. The argument that the funds should only go towards costs incurred after the raise, sounds great, but when it means that you’re taking a month of salary away from entrepreneurs’ due to your own stalling, it just causes conflict.
4) Acceleration on acquisition
If a company gets acquired the entrepreneurs have created huge value for the investors - if the acquirer wants co-founders to stay on then that’s a separate conversation and should come with additional compensation. If it is the team that’s being acquired more than the technology, even more so. VCs shouldn’t be able to get all their cash out while we’re bound in with no additional benefit. If the entrepreneurs build a company and it gets bought for a half billion dollars they have done what they promised. Having an entrepreneur stuck in a big company with golden handcuffs ends up as a lose-lose-lose.
5) Liquidation/Participation - all those terms your lawyers talk you through
I don’t know anyone that likes the idea that VCs get double dip on their investment in an exit.
6) Money off the table
If doing a later round at an up valuation it should not be a fight to let the entrepreneurs take money off the tablet. When large value has been created, and the VC now wants the entrepreneur to swing for the fences, then to align interests the entrepreneur needs to be able to give something back to the family that is in the background, create some financial stability, all of which comes from making huge initial sacrifices and taking often less-than-market rate salary for an extended period.
ATTITUDE & RESPECT
I worked out of a large incubator for a while and you’d hear a lot of contempt for VCs among the entrepreneurs based there. The pitching process itself seemed to be exacerbating this contempt (which I am pretty sure the VCs wouldn’t want).
A lof of complaints seem to come down to attitude. If I am honest about it (and if we weren’t bootstrapping our company for the foreseeable future I’d probably not mention this) probably more than half of the VC pitches I have done have involved participants on the VC side who have behaved in a rude disrespectful manner, and I don’t think this is atypical from what I hear. The blackberry-checking issue being just one.
But I think one common issue is that most entrepreneurs’ first interaction with a VC firm is often with an associate. That associate is usually trying to find one good deal to champion to their higher-ups so that they can progress their own career. It’s not uncommon to deal with associates who have no operating experience, little domain knowledge and who can border on the insecure. This can be galling to an entrepreneur. Most entrepreneurs have war stories of associates making “helpful suggestions” which treat the entrepreneur like they’re an idiot who hasn’t looked into their own industry. You cannot put everything you’ve learned about a space in a 12 slide deck, so perhaps assuming there’s more work done behind the scenes by the entrepreneur would help the average associate.
It must be a tough line to walk for associates, so it’s hard not to empathize with their position in the abstract, but you don’t feel that way when you walk out of a wasted hour with a poorly prepared associate who has spent that hour show-boating for an intern they brought along to the meeting. (Been there too.)
Surprisingly many VCs appear totally oblivious to the strains entrepreneurs are under due to the personal financial sacrifices entrepreneurs have to make to get their company to the stage that VCs can invest in it. This insensitivity leaves entrepreneurs fuming. It’s particularly a problem with VCs who have not come from an entrepreneurial background. There is nothing intrinsically wrong with the route from Ivy League school, to investment firm, to MBA school, to VC firm - but it doesn’t tend to give VCs shared life experience that a typical entreprenur can identify with. They don’t know what it’s like to worry about paying rent. To worry about healthcare for your family. To worry about making payroll for people who’ve trusted your word because they believe in you. All the things entrepreneurs have to do, day-in day-out, to get an investment opportunity to the stage at which a VC can even take a sensible look at it. Just saying you respect entrepreneurs doesn’t cut it if you don’t truly understand the sacrifices we make because we believe in a vision and work our hearts out to deliver on that vision.
FAILURE
I wonder if the biggest reason for animus is that most startups fail. So, most entrepeneurs’ experiences with startups involve failure - either before or after funding. Failure breads frustration. And blame.
Failure before funding is easily blamed by the entrepreneur on the lack of VC funding, which often allows entrepreneurs the emotional and psychological escape clause of avoiding self-examination on their own failings or errors that led to their start-up not making it. Failure after funding also leads to resentment - if the VC was active, then they interfered; if the VC was passive, then they added no value. Part of it is discomfort, almost embarrassment, on the part of the entrepreneur that they took money and blew it, delivering no return. Some VCs exacerbate this by not behaving very well in the wind-down situation - accusations and blame-casting. This leaves the entrepreneur feeling annoyed as well as almost guilty for losing their investors’ money - and it’s common psychology that this guilt is often externalized and presents as resentment. It may sound stupid, but it’s something I see in many startup failures.
I wrapped up a start-up that didn’t work out well earlier this year. I was quietly annoyed at one our investors for a while afterwards. I kept it to myself of course, but I wouldn’t have considered working with them again. They’d pressured us over a big issue that had had a serious negative impact on our ability to execute. However, just recently I was talking with them when unsolicited they said a simple “we’re sorry about [issue x]” and it all evaporated. It was easy to realise that we all tried our best, we all wanted broadly the same end result, we all made mistakes, and we’ve all learned from them. (As an aside, people often underestimate the value of just saying “I’m sorry” when it’s warranted, it’s almost like it’s fallen out of our national psyche.)
The one thing I would encourage my fellow entrepreneurs to try to wrap their heads around is that when someone earns money, pays taxes on it, then writes a check from that money, to you, so that you can execute on your vision and make your dreams a reality - it’s a big deal! That needs to be respected. That’s something you should be grateful for. Sure, they’re not doing it out of the goodness of their hearts - they want a return. But they are placing trust in you. They’re validating what you believe about yourself. Now it’s up to you to go repay that trust and show them they’re right in making that bet on you. If you start out with a sense of entitlement - that somehow you deserve this investment money for some imagined reason or another - you’re almost certainly not going to succeed as an entrepreneur.
MIS-SET EXPECTATIONS
So, this is a rambling stream-of-consciousness set of thoughts based on my own experience and on working with fellow entrepreneurs for about a decade… if I were to try to find one main point: it it’s about communication, the lack of which has led to mis-set expectations.
A lot of frustrated entrepreneurs just don’t understand why VCs don’t invest in their idea, on its own. Before they start the process they often believe that VCs are there to invest in good ideas. VCs often, as a group, overstate the range of investment risk they take in startups - they like to talk about the limit cases. The typical VC’s concern to not miss out on the next Google makes them take a lot of long-shot meetings they’ve got almost no likelihood of ever seriously considering - they’re looking for the lightening strike - but this isn’t made clear enough to entrepreneurs.
VCs benefited for years from the veil of secrecy over their methods and reasons. This has changed with some great VC bloggers who have let people understand what’s going on. That helps lessen the feelings of confrontation and makes it much easier for entrepreneurs to know what hurdles they have to jump, so at least they feel they have a fair shot. An entrepreneur who hates VCs is one who rightly or wrongly feels the VCs never gave them a fair shot, that the game was rigged and they weren’t told the rules. This may not be true but that’s the underlying feeling.
Entrepreneurs would probably do well to read the websites and blogs of VCs and then they wouldn’t be so surprised by these issues. The information is out there. There’s really little excuse nowadays for an entrepreneur to go into a VC pitch blind. If you’re doing that you’re just not ready for prime time and probably deserved the NOs you’re receiving. Likewise VCs would probably do better to be a bit clearer with entrepreneurs about the specifics of what will or will not make a deal fundable by them. When you’re on stage at a conference be frank about the odds and requirements. That will stop entrepreneurs going to VCs when they aren’t ready, or when their business really isn’t a VC play, and lessen the frustration.
I don’t particularly have a beef with most of these issues (any more)… I’ve worked in a startup environment for long enough to understand why things are as they are. But I know that most entrepreneurs coming into the process are driven spare by them.
When I tell people we’re bootstrapped right now, I am surprised by how often entrepreneurs give me a “Good for you - you don’t need those [expletive] VCs”. No. We’re bootstrapping not because we hate VCs but because we can bootstrap. We have a start-up that can generate cash. Lots of it. We’ll almost certainly work with VCs at the appropriate time, as the VC process is simply the best way to source capital to grow your business once you’ve achieved product/market fit, where you believe you have a genuine opportunity to build a billion dollar company. If you can justify taking a sizable equity investment and use that cash to outpace your competition it makes sense. But go into the funding process realizing you’re talking to a potential ally, not an adversary.
by Jerry Kaplan and from then on my eye was on Silicon Valley - with a business idea I’d been mulling over with friends for years.
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