Entrepreneurs have querulous feelings about their relationship with venture investors. They don’t like the dependency, and too often picture themselves as supplicants. This mental image inevitably generates hostility—which must be repressed if one is to be granted a handout.
I know the feeling. As a rookie entrepreneur, 25 years ago, I didn’t like the idea of falling into the clutches of venture capitalists. While walking by an antique store in Arcachon, France, I found these two turn-of-the-century pigs costumed as cattle merchants, or butchers—take your pick. With great subtlety, I christened them Victor and Charles:
They’re still on my desk. In my decade on the dark, the VC confederacy, I’ve had many opportunities to introduce Victor and Charles to entrepreneurs who give me lip about our trade.
The entrepreneur-VC relationship is clouded by myths and bromides. Today, I’ll attempt to clear up a few.
To start with:
Who needs whom the most?
Entrepreneurs come first, without them, we wouldn’t exist. Yes, we VCs like to brag about our “deal flow,” or even grander, our “exclusive deal flow.” We claim to have access to a secret mother lode of entrepreneurs—that’s what we tell our own investors, our “limited partners” who entrust considerable amounts of money into our hands. (Nota bene: We, too, have to pitch and grovel.)
But we need you to darken our doors, you do us a favor by coming to see us.
Of course, it’s a virtuous circle, entrepreneurs come to us because we have money, and we look for entrepreneurs to spend it in ways that keep the Great Silicon Valley Flywheel turning.
Then we have an old classic:
“I’ll lose control of my company if I take VC money.”
Yes and no. If you look at your percentage ownership after one or two rounds of VC investments, yes, in most cases, you’ll end up with less than 50% of your company. There’s a simple reason for that, stronger than greed. We’re fiduciaries—we promise people who invest in our fund that we’ll be good husbands of their money, that we’ll stay in control of our investments.
We don’t want to run your company, we just want to be empowered to approve key decisions—including firing you if things don’t go well. You should like that. Trust me, being fired can be liberating. But, in the first place, we invest in you because we trust that you have the vision and the skills to translate your idea into a successful company. If we succeed together, you’re in control. If we fail together, we take action to save what can be saved, usually not much.
There are exceptions. If you’re a serial entrepreneur who has made money for your investors in one or more previous companies, our chances of success are higher. Just as an insurance company charges a lower premium for a safer driver, we’re willing to “charge” a smaller percentage of the company for our investment. It’s an actuarial calculation.
Even more exceptional: You’re the next Mark Zuckerberg. Behold what the current one did: After raising $1.5B (yes, billions), he retained 27% of the company, and 54% of the voting rights (his shares count double).
“I don’t need VC money.”
That’s entirely possible. If you’re building a niche company that sells personalized mugs on the Web, feeding a small group of happy people trading on creativity and high-touch service, a small amount of self-finance gets you to heaven, a positive cash-flow.
But if you want to build a large company, you shouldn’t put in your own money, or that of your family and friends. Unlike in some European cultures, we don’t need you to put your own money at risk to prove you have faith in your idea. We assume that you believe your own … story. What matters is whether or not we believe. Let’s clearly separate functions: You provide the idea, the skills, the energy, the leadership; we provide the fuel to build a big business.
Now consider what happens when trouble starts, as it almost always does, and you need more money.
This doesn’t faze us. A professional investor is bound to invest as often, as much, and as many times as needed for the situation to become clear. Here, clear means one of two things: either the company flies under its own power, or “It’s dead, Jim,” broken ribs, failed CPR.
Your family and friends don’t have our deep pockets or our calluses. They’re horrified to see one or more new rounds reduce their percentage ownership to almost nothing. You don’t need that trouble and tension. (See an simplified arithmetic explanation of “downrounds” and dilution after the end.)
Asymmetry: VCs don’t like risk.
The impression is that VCs are risk averse, that we turn down a lot of investment proposals. Yes, we do, for two good reasons.
First, we see a lot of me-too pitches for Cloud applications, Internet of Things devices, e-commerce niches, the X of Y (“We’re going to be the Uber of dog grooming!”). We may have no imagination—that’s your job—but we can recognize its absence.
Second, and more important, no one will see we didn’t invest in Google or passed on Zuckerberg’s pitch, but everyone will remember if we were part of the team that dug the $2B Webvan crater. Your company’s success or failure is our credibility, our professional future, our ability to raise our next fund. This asymmetry makes us cautious, too much so in your eyes.
I want to deal with the real VC, not some young employee of the firm.
This isn’t how things work—and it’s not because the system is against you. Don’t be offended if you’re first seen by someone with less seniority.
Prepare for the meeting as you would for a job interview. Not you being interviewed, but the other way around: You’re interviewing the venture investor. Check references on the individual and the firm. What have they invested in, how do other entrepreneurs describe their experience? Read their blogs, Twitter feeds, media interviews …
At the meeting, politely take control of the conversation. Ask questions about the individual’s background, why did he/she join the firm, what’s the best and worst pitch they’ve ever seen? Always a helpful question: What’s the hardest part of your job?
You think you’re facing a 25-year-old know-it-all graduate from a top business school who can’t possibly grok the crystalline purity of your software architecture. Perhaps. But remember: You’re here to move this individual to feel that you’re the new Facebook, the new Airbnb that they’ve been looking for. Your challenge is to speak in terms this person will understand. You’re here to make this person a hero for bring a big gold nugget to the Important People in the firm.
Never forget that we’re looking for you, but we want to do the looking. Don’t hire a PR firm to make noise on your behalf; we become suspicious.
Instead, roll your own self-promotion campaign. Start a blog, criticize the old guard, explain how you’re going to do things better. You don’t write well? Not a problem, get an editor. Write a draft and then contact a journalist or a blogger whose writing you like and explain that you’re looking for someone to edit your prose. They might do it as a favor or for a small fee, or point you to someone who can help.
After you’ve established your credibility, go to conferences, ask to be on a panel, offer to give a talk or demo. Provide fodder for journalists, bloggers, and analysts. They need stories to tell and sell, a new angle, an industry trend related to what you do, with your name on it.
Make your own fireworks.