The Arrogant VC: A View From the Trenches (full length version)

Below is the summary of all the answers I received to my recent post entitled "tell me why VCs are disliked by entrepreneurs".  There is a shorter and easier to stomach version on Xconomy if you prefer, here.  I have tried to keep my role as editor limited to re-organising, so this remains true to the commentary.  I would add that most or all of these entrepreneurs had real, hands-on experience with (often prominent) VC's, sometimes through multiples companies and fundraising.  And yes, I also plan on writing a feature about the "good side" soon...

The VC - Entrepeneur relationship seems damaged.  Whilst business partnerships gone bad and company failure can lead to fallout, this is dfferent.  I wanted to find out why that was and used the blog to ping the entrepreneur community to try and understand this better, listen to my audience as it were, and share the feedback.

As with all articles of this kind, it is plagued by generalisations and simplifications.  In trying to do justice to the sixty detailed and mostly confidential responses that I got, I probably lost some of the colour and detail.  But for anyone interested in rebuilding the social contract with entrepreneurs and getting our VC mojo back, however, the scale of the problem should be apparent.  Clearly as VC's our job is not be loved but to contribute in building great business and return money to our shareholders.  Read on regardless; as you will see, status quo is not an option. 

A common answer I got was "sour grapes".  As Richard Jordan put it "failures breeds frustration and there is a natural tendency to spray the blame around.  Externalise guilt as resentment, combine it with some old fashioned finger pointing, and there you go."  Many VC's excel at that too.  Sometimes anger stems from the "sheer exhaustion from being told "no" too many times".  Now let's dig deeper.

Poor first impressions

Richard Jordan (read him) says: "probably more than half of the VC pitches I have done have involved participants on the VC side who have behaved in a rude and disrespectful manner".  Arriving late, cutting out early, reading blackberry, constantly interrupting pitches, taking calls, you name it.  Some of the pitching experiences border on the ridiculous, as evidenced by a young founder who got invited to pitch for fifteen (yes, fifteen) minutes with five minutes Q&A, only to find the meeting started ten minutes late and was not to be extended...

The absence of feedback loop is a common theme with entrepreneurs griping about "dozens of unanswered calls and mails, from people they met.  If nothing else works, what are your PA's for ?".  Another common gripe is the need to be dealing with the associate who needs to sell his deal internally and is often insecure and not clear himself on his chances of getting the deal done. 

Even in early meetings, the lack of "empathy with and experience of the startup and the sacrifices involved" can leave entrepreneurs fuming.  Finally, many entrepreneurs complain about a lack of confidentiality with their pitches sometimes "landing on competitors' desks days after the meeting".  In a recent example, a well known General Partner interrupts 50 minutes of cross questioning with this casual statement: "by the way, I am personally invested in a new startup who are targeting this segment ".

Getting strung along or left at the altar

"Raising capital depletes far more energy than investors realize", says one entrepreneur.  "Getting a "no" is actually fine from an entrepreneur point of view (one has to be rejection-proof anyway), but to preserve their opportunities many VC's tend to string along entrepreneurs forever, blatantly lying about deal status only to let it fall apart at the last minute , wasting an entrepreneur's time and energy". 

Many investors appear to be "vague on their decision and engagement process, which tends to be liquid".  Some VC's promise term-sheet which never come, others withdraw at closing (the worst I personally heard was an SMS turndown by a "tier one" VC followed by a competitive investment), others still don't bother checking conflicts of interest.  "VCs are too opportunistic in their behaviour" says one experienced entrepreneur.

A common gripe concerns the lack of clarity (or absence) in the rules of the game.  Some companies are forced to jump through endless hoops to get a tiny round done whilst others raise a ton of money at seed with no substance.  VC's pretend to do seed but then say no to everything that is early and want revenues, customers, a business model and a team.  Entrepreneurs are confused and sometimes angry about this, as they feel fundraising is like a marathon with no end, when the hills keep getting steeper along the course. "The whole process leaves me with this feeling that landing funding is nothing more than getting lucky with the right pitch on the right day with the right person in the room" says D.  It makes you feel like "a sort of magic and certain incantations and artistry is required, yet despite that "investors often still fail to ask the right questions, the hard questions".

Getting a raw deal

"Taking capital does feel a bit like making a deal with the devil after all".   Entrepreneurs fundamentally want to change the world and dealing with the Money Men is often a compromise they would rather do without.

"The entrepreneur is a bit like a child who's just learned the rules of chess - he's studying the current move intently, but he's rarely thinking far ahead.  The VC is an old hand at this game - he knows its patterns intimately and can see how it'll develop far into the future.  The entrepreneur tries to play well, but the terms he fights for often turn out not to be important, while the terms he thinks are innocuous can surprise him in unexpected ways.  Unless things at the company go astoundingly well, the entrepreneur comes away feeling like he was played - taken advantage of by someone far, far more experienced at this particular game."  Clauses like participative liquidation preferences, anti-dilution, aggressive reverse vesting, board control or simply shareholders' rights come up frequently, with good reason.

"My own VC's have been great. That said - like many entrepreneurs, I've only realized some of the longer-term implications of the documents I've signed well after the fact.  This was enough to make me wary".

Great (but misguided) Expectations

"Many entrepreneurs want an investor to fund the idea (equivalent to a tv production house looking for funds from a commissioning editor to make a show, and generate a profit from it). It often takes them a long time to realise that such VCs don’t exist. By which time they are bitter and tired and blame the VCs, rather than their own lack of understanding" of what it takes to get VC funding.

David Smuts believes there are two kinds of VC's: "Careerists VC's" and "Entrepreneur VC's" and two kinds of Entrepreneurs: "Real Entrepreneurs" and "Wannabe Entrepreneurs". "Entrepreneur VC's behave in the best interests of the business they are investing in" whereas Careerist VC's put their own career prospects first". "Wannabe Entrepreneurs either hate all VC's because they reject their business idea", or "suck up to all VCs because they want their money".  Long story short: The goal is to match Real Entrepreneurs with Entrepreneur VC's.

Unwanted advice, poor communication and lack of operational sense

"While VCs are always happy to dish out advice, this feels disingenuous from people who have never actually built a company or had a knockout success as an investor.  Learning from mistakes is far less useful than emulating success".  One entrepreneur goes further in accusing VC's of seeing everything through the lens of money: "often time they have zero operational experience (how to launch a company/product or manage customers), don't understand marketing beyond just building their own brand, and see money as their ticket for everything."

VC's are often ex lawyers or bankers and some have a tendency to feel safe with "experienced suits" that sometimes do nothing but drive the burn rate up and compound cash-flows problems.  Entrepreneurs are often "driven, creative types who want out of larger organizations" and whose traits map poorly to those of many VC's.  Ultimately since many of them don't understand the businesses deeply, they "try to make up this particular information asymmetry with legal enforcement (sic)".   

Some VC's are not that shy about it.  One partner in a tier I fund described his role in this way: "Industry experience is not that important. I see my role on a board is to challenge every decision the management make".  Here's a variant on the same theme: "I don't give a s**t about the company's strategy, my job is to come here once a month and check what you are doing with my money".  QED.

Different objectives and timeframes

"It takes patience and time to build a great business, and target returns and timeframes (e.g. five times in five years) can get in the way. On the other side, entrepreneurs burn out and blow up all the time, so it's tough to keep both sides aligned and together for a long time."

Sigurd says "short investor timeframes to meaningful exits means forcing businesses to scale too much and too fast (and offsetting this risk through a portfolio approach), whereas the entrepreneur must offset the market and product risk by slower movement and something akin to agile development."  David agrees on this natural misalignment of interests: "VCs need home runs, and entrepreneurs need singles at least on their first couple of companies."

The going really gets tough when entrepreneurs lose their original sponsor.  "The new guy is either too junior, does not know the business or feels he has the right to wash his hands of the mess left by his departing partner".

Arrogance and lack of empathy

At the end of the day, most entrepreneurs completely understand that objectives are not always to be aligned, and that VC's work for funds that need to return capital.  What they have trouble with regardless, are "double standards".  One entrepreneur who has raised money multiple times says: "a lot of VCs do things no regular employee would dare to do but are largely unaccountable for those behaviours: forgetting about board meetings, showing up 20 minutes late, bullying the team or CEO, being generally unavailable, paying no attention in meetings because they are arranging a golf game on their blackberry, failing to read the board pack before the meeting, so the actual meeting is remedial in nature."  the message seems to be: "don't treat me the way I see fit to treat you".

Net-net, VC's are too often "out of touch with the reality of entrepreneurs".  "They are often times elitist, clashing with the very scrappiness of their entrepreneurs".  Arrogance is the word.  "I was told forcefully "you will fail" and that I should join another startup ... funded by the very same VC".  "I spent 4 years in poverty ignoring my family and my friends to get the company to this point, and now they want me to vest my shares."  Yet another:  "I have mortgaged my house, I have spent all my money, my family lives on pizza coupons and now you are telling me you want customers and a live product to boot ?  Why don't I call you back when I have gone public, bozo.  You call yourself a risk taker ?  You want 30% of my company when all the risk has been taken out ?"  (I added the pizza coupon piece for effect, but you get the idea). 

Finally, entrepreneurs feel VC's are "crap at sharing the wealth", recognising "how tough it is to create value" or "properly re-incentivising managers who gave up many years of their lives, effectively abusing a position of power and often manipulating entrepreneurs by threatening their reputation".

Bottom line: "VC's really don't take any personal risk but expect everyone else to..".

Add to this some "dumb practices" such as demanding board remuneration and monitoring fees or "submitting ridiculous expenses" to complete a picture that betrays a complete lack of empathy.

Dark Side of the Force

Finally, some ugly business behaviour.  A fairly common practice seems to be what you might call "slow strangulation", whether by design or not.  "An equity investor will knowingly under-capitalize your startup only to gain control of it once the opportunity manifests itself by use of a wash-out round; milestone financing and abusive board control are used for similar tactics.  As a consequence, myself and others now prefer to bootstrap/self-fund rather than taking any amount of early-stage capital that will not *clearly* take the company to the next level."

This is a common gripe with smaller funds, who have badly under-performing portfolios and little follow-on reserves, and who fall back on such slow strangulation of businesses they fund by trickling money, gradually washing every one else out, and hoping that 50% ownership for little money invested will somehow pay back for the rest of their portfolio.  Smaller regional, government-backed funds get a particularly bad rep in this area.  Lacking experience and confidence, they rely on punishing paperwork and self-anointed gurus to help them through the hard process of building successful companies.

Entrepreneurs have come forth with other dubious practices, including outright lying about the state of the business when refinancing, disclosing confidential information or personal confidences, negotiating on behalf of management and forcing deals through, making a mockery of governance rules.  One systemic problem appears to be a failure to represent the interests of the company in board meetings, but rather short-term investor interests. "This is a plague on the industry and makes the board worse than useless to the company." 

Another entrepreneur identifies what he calls "classic VC tricks" such as "firing the team just before an acquisition, term sheet bombs, hiding or obscuring key information, manipulating the team to try to change ownership or board composition, changing deal terms just before closing". He adds: "These destroy alignment and trust, and without some alignment and trust the necessary working relationship and motivation is destroyed".

The worst I got related to VC's pushing to recover shares from the heirs of a deceased co-founder under a reverse vesting provision.  As the contributor put it, "it will take a lot of good karma from a lot of VC's to make up for this one".  I was stunned.

Conclusion

Last words to entrepreneurs from Rory Bernard: "Choose your VC's with care.  Good ones transform your business, bad ones wreck it".  

And to VC's: "tread softly, remember that in a position of power, you can do many sensible things but a few stupid ones and end up with a "George Bush" problem, and as a result the approval rating of Dubya."  

Comments

[Fred Destin]

As much as I like disintermediation, I do not think you are right here. VC is a form of "principal investing" and the personal qualities of the VC as board member is critical to the success of the whole; not middlemen. Not to say you can do with less cash and no institutional money etc, but I don't buy the "direct to accredited investors" path as a wholesale solution at all.

[Carlos Tobin]

VC's are middlemen. Just like every other industry, in this age of freemium software, and technology middlemen won't be around for long. Ironically it will be an entrepreneur and "smart" VC that funds a game changing product that will link individual accredited investors (not groups) directly with entrepreneurs.

[Richarddjordan]

This is a great summary of the debate. I think also David Smuts makes a good comment about the differences between entrepreneurs, which are as big as the differences between VCs

[anonymous]

Till 2007, I had experience of dealing with US West Coast VC's but hadn't raised a finance round. Working on a new venture, I sent emails to a bunch of GP's and they ALL responded. We got 2 term sheets from tier-one VC firms (ie. much higher up the ladder than Atlas Ventures). A series-A deal was concluded within 4 months for around $4m.

Whichever way you look at it the really successful VC's are successful because they don't do what 99% of the other VC's do.

[Fred Destin]

Hi Paul. Got this comment from (I believe) a Republican-leaning entrepreneur who meant (I think) that W. had "mostly sensible" policies but did a few high profile blunders and ended up landing him the with the lowest approval ratings of an outgoing President. I liked the parallel (do the right most of the time, do the wrong a few times and get remembered from that). Did not mean slap in the face at all and thought this quote (not mine) was fairly balanced or at least was a relevant comparison. thanks for reading.

[Paul]

Great article and a must read for entrepreneurs and investors. But did you really have to write that last paragraph? Why slap half your audience in the face needlessly? Leave politics out of it next time, OK?

[Bhavesh shah]

Hi great read .....opened my eyes to Pitfalls I never knew existed .
Keep it up

[Richard Jordan]

Thanks for the nod to the blog - came on my birthday. Nice to know people are reading.

I have to say I think you've summarized the issue about right here. I think at the end of the day entrepreneurs and VCs just need to remember that though there are ups and downs in the relationship we're all on the same team - creating great new businesses against a backdrop of plodding government regulation and stagnant old companies throwing up road blocks.

[John]

great article, thanks fred. very insightful

[Fred Destin]

@Willliam: yes have seen that and think entrepreneurs should keep very involved in fundraising to maintain balance. Did not come up in the comments I received but captured I suppose in fiduciary and governance conflicts.

[William]

Great article. I was expecting to see reference to the inherent conflict of interest of VC board members at the time of subsequent financings; I am surprised it was not mentioned. I have seen too many deals where the company valuation was set unreasonably low by the board during a follow-on round. The new investors were buddies of the VC, who provided a similarly underpriced deal from their portfolio in return for the favor. The losers are the founders who get unfairly diluted by this practice.

[Stewart Alsop]

Caveat emptor in all regards: raising money for your business, buying a house, buying a car, going on a date. You've outlined all the pitfalls of raising venture capital very clearly, Fred. Good job. I try to remind everyone, both VCs and entrepreneurs, that venture capital is classified as an "alternative" investment; ie not mainstream and not the first thing entrepreneurs should look for! (I also tell entrepreneurs that VCs are a lot like user-car salesmen; we do what we do every day and know all the tricks in the book!)

[DavidSmuts]

Makes depressive reading but I do think the times they are a changin (call me a Bob Dylan optimist). As Darwin once said: "Species change or they die". And here we see the old rules of the game are being changed slowly but surely and that change is good!

The old farts will die out to be replaced by an evolved VC with a different mindset and value system to that of his predecessors. The realtime web, Open-Source VCs and the power of the crowd are all helping to educate Entrepreneurs who are now setting their expectations higher. Only VCs who are transparent and who actively engage the Entrepreneurial community will succeed in future. Times have changed: shift happens.

vive l'empowerment!

[Louis Marascio]

Fred, love this and other posts that try to provide some transparency into the venture community. Its unfortunate, but the good news is that I think its becoming easier for good entrepreneurs to find good VCs... many of the best are out there are the web sharing their opinion and participating in the open discussion.

[Fred Destin]

Hi Ed! I am still hoping sometimes it turns out to be a good decision for the entrepreneur. This post is all on the negative but does not capture the whole experience. FWIW I routinely advise people against going VC, it's definitely a steep ride with some loss of control. But for some it works great. You could never have built e.g. Seatwave without VC, nor could Zoopla have acquired PF.

[Ed Freyfogle]

A few years ago when first thinking about starting a company, every friend I had who works anywhere near the VC industry advised me "Avoid VCs if at all possible". So we did, and it's worked out well.

I wonder how many VCs out there would honestly advise a close friend differently?

[Fred Destin]

@Tony well spotted, corrected. Touche :-)...

[leafar]

Great article full of experience...welcome to real life it sucks but you gonna love it. Welcome to entrepreneurship!

PS: I am happy with my VC and did not thought i would so there is still some hope ;-D

[Tony]

Maybe there is a freudian hint in the very first link in the post: "tell me why VCs dislike entrepreneurs" :-)