This week in the geekosphere, this presentation on venture capitalists has been making the rounds.
Its funny, and as an entrepreneur who’s met and worked with VCs, I can relate to this. Some are clueless, herd following clowns, and there’s no small amount of glee we all take in poking fun at those folks. Many aren’t, though.
Irrespective, if you’re working as an entrepreneur and you want or need venture folks to build out your company, then it’s important to have a clear-eyed, rational view of what venture capitalists are doing. Having this perspective will help you more effectively set your own expectations, and ideally, will help you do a better job in working with them. This thinking led me to a two part post. Part I, below, is meant to provide a different perspective from a founder’s poin
t of view on VCs. I think its useful for founders starting out to have this perspective. Part II, which I’ll get to later, is about how I’d suggest doing reverse diligence on investors or VCs–who do you speak to and what questions do you ask them–this is more concrete.
So, Part I has the risk of labeling me a VC apologist, a kiss-ass. Whatever. I’ll share this not because I think VCs need defending. Rather, I think its important for founders to have a rational view of VCs, in order that founders are thinking clearly about what VCs can do, and how to think about working with them. If you’re a good entrepreneur, you need to be thinking clearly and rationally about what you’re doing.
Here are the key 3 things I try to remember when I think about venture capitalists.
1. At their core, VCs are the money. VCs, at their core, represent the money. At times and at their best, they represent more, but at the end of the day, they are ‘the money.’ This is not meant as a negative–within the sphere of ‘money,’ I view VCs as useful and constructive. They’ll try to be useful, and they’ll (hopefully) try to remember that they’re not magicians. They want to help, but they’ve got 7 or so boards to work on, in addition to other companies to look at, in addition to raising money themselves. They want you to succeed and they want to spend less time worrying about problems, more time helping you accelerate, recruit, get press, etc.
They’re way better money than any other institutions out there. They’re generally not like private equity funds–looking to lever up and sell off! They’re not (generally) in the turn-around business, looking to squeeze costs, downsize, etc. In general, they are looking to build companies that swing for the fences–they want ideas generally big and wild and possibly able to make an outsized return. They may do self-interested things, but they’re going to be more aligned with you than any other money you’re likely going to find in the institutional private equity space. (If you think VCs can be difficult to deal with, try working with guys at hedge funds to finance your business. Good luck!)
2. The water-finding stick pitch. VCs are funding ideas sooner than most any rationale investor would–that’s why they’re in the business. While VCs as a group will have different focus, stage, etc., there are many instances where they will give money to people who have nothing more than a powerpoint, a cocktail napkin, sky-writing, whatever. Some of those who get funded have no professional track record to speak of, with unproven models, unproven businesses. (!) Think for a second how crazy that sounds.
Here’s how crazy I think this sounds. When I was a wee pup growing up on the farm in Latrobe, we once needed a new well. (Ours had run dry, and we were literally out of water.) We called up the well digging people, and out they came. Their gear consisted of a huge drilling type rig to drill the well, and a ‘diviner,’ a guy who figures out where to drill. The diviner walks around holding a Y-shaped stick by the Y’s ends in his hands. The bottom of the Y-shaped stick, the theory goes, will point down to the ground when he walks over a spot in the earth where there is water. I’ve not yet seen any scientific explanation for why this exists. All I can tell you is that it worked. Within about 15 minutes, he’d identified 2 spots, and he suggested one that hasn’t run dry in the 20 years since that well was drilled.
So that’s a cool story, but the epilogue is what’s relevant to this. After the drill diggers had left, my dad, an entrepreneur in his own right, shook his head and asked “could you imagine those guys going to a bank looking for a loan? Their pitch would be: ‘we find water using a stick!'”
If the water finding stick guys showed up on to VCs, VCs would at least want to see a demo before telling them they were crazy. Every other institutional money source would likely just throw them out of their office. Remember that. I remember that and think it’s pretty awesome that I live in the US where there’s a whole industry of folks who will do that.
3. “Its not summer camp.” I once worked on a turn-around situation in business. It had a bunch of difficult people issues involved. My boss at the time and I were talking about some of the moves, and whether the team would be comfortable with all the changes. My boss said something that I say a lot on this topic: “It’s not summer camp, Jay.” He meant it both for me and for the team, and he meant that I needed to get tough, and the team did as well. And he was right–we’re responsible to share holders, customers, employees, etc. Getting a VC involved does not mean that we all spend time making hot cocoa and gazing lovingly into each others eyes. It’s a business transaction, and founders need to deliver. You’re not in summer camp.
Now, with that said, know that there will be days that stink. Investors will move goal posts or get squirrelly. Commitments won’t quite be met in the way that we might have thought. Etc. And you can get embittered, or you can pick yourself up and realize point one and two above–these guys are the money, and they’re funding water-finding stick businesses. On the whole, with whatever else goes south, I feel generally pretty lucky to have the opportunity to work with smart people to build a kick ass business.
So those are my 3 key perspective points that I’d share as you think about building your business and working with VCs. Its high level, but I find these 3 points useful to remember. Stay tuned for Part II, where we talk more concretely about how to run a diligence process on vetting and double checking the investors you might be workign with .