The Arrogant Venture Capitalist: A View from the Trenches

12/8/09

The VC-entrepreneur relationship debate has always been heated and has been intensifying of late. Beyond “sour grapes” and “frustration bred by failure,” I wanted to dig deeper, so I used my blog to ping the community and share the feedback. Over sixty entrepreneurs responded and provided the foundation for this writeup.

Poor First Impressions

Richard Jordan says: “More than half of the VC pitches involved participants who behaved in a disrespectful manner.” Arriving late, cutting out early, reading their Blackberry, taking calls, you name it. One young founder got invited to pitch for fifteen minutes only to find the meeting started late and was not extended.

The absence of feedback loops is endemic, with entrepreneurs irked about “dozens of unanswered calls and mails, from people we met.” 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 first meetings, the lack of “empathy with and experience of the startup and the sacrifices involved” can leave entrepreneurs fuming. Entrepreneurs also complain about a lack of confidentiality with their pitches “landing on competitors’ desks days after the meeting.”

Getting Strung Along or Left at the Altar

“Raising capital depletes far more energy than investors realize ,” says one entrepreneur. “Getting a ‘no’ is fine, but to preserve their opportunities many VC’s tend to string along entrepreneurs forever.”

Many investors appear to be “vague on their decision and engagement process, which tends to be liquid.” VC’s promise term-sheets which never come or withdraw at closing, while others don’t check conflicts of interest. “VCs are too opportunistic in their behaviour,” says one respondent.

There seems to be a “lack of clarity (or absence) in the rules of the game.” Entrepreneurs are confused and angry about this. “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 hard questions.”

The Art of Getting a Term-sheet…and a Raw Deal

“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. 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 [...] The entrepreneur comes away feeling like he was played.” Clauses like participative liquidation preferences, anti-dilution, aggressive reverse vesting, board control or simply shareholders’ rights come up frequently. “Taking capital does feel a bit like making a deal with the devil.” “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.”

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 adds: “Often time they have zero operational experience, don’t understand marketing beyond just building their own brand, and see money as their ticket for everything.”

David Smuts believes there are two kinds of VC’s: “Careerists VC’s” and “Entrepreneur VC’s,” and two kinds of Entrepreneurs: “Real Entrepreneurs” … Next Page »

Fred Destin is a General Partner at Atlas Venture, focused on technology enabled businesses and digital media. Follow @

Single Page Currently on Page: 1 2

By posting a comment, you agree to our terms and conditions.

  • Mick

    Many of these sentiments could not ring truer. As an entrepreneur, I have witnessed nearly all of those vices listed (and yes, I have an MBA from a top 5 school like most of them too but also an engineering degree and years of operational experience). The VC industry is like any other – there are a lot of B and C players in it who pretend to be A’s. Few have operating experience or can prove their investment strategy is effective; most firms ‘luck out’ and have a few portfolio companies carry the firm. Few can/know how to run a company, nor have the stomach to be entrepreneurs themselves (hence, they go into VC). The psychographic profile of a VC is inherently risk averse (many would argue otherwise but tough – it’s true), so they simply don’t have the DNA to effectively gauge start-up success. Also, they are trained and adept at valuing equity based on standard investment models (DCF, Black-Scholes, etc), but these don’t apply as neatly to startups. VC investment is meant for proven tech in established markets where the capital is needed to match the scale required for success, and thus can be valued accurately. The more speculative ventures (i.e. new markets or new products, particularly internet) should be reserved for risk capital.

  • http://www.freddestin.com Fred Destin

    Mick, what do you mean with “risk capital”, what form of capital are you referring to ? Superangels ?

    There is one of your assertions that I disagree with: that VCs become VC’s because they do not have the stomach to be entrepreneurs. I have no qualms with doing what I do, because (a) I think it’s the best leverage of my mix of skills (b) I am not a great two-level people manager and have no interest in managing large teams or companies (c) I would probably not have the ataying power and get bored with a single project for 5 or 10 years. I am no frustrated entrepreneur, I am a VC ! :-)

    The fact that folks who do capital deployment are more risk averse than the entrepreneurs is quite natural; you could argue “suspension of disbelief” is the reason why entrepreneurs attempt seemingly impossible tasks and succeed! The issue with VC arrogance for me is more about recognising / appreciating what that takes.

  • http://www.thredup.com James

    Fred,

    Great post. I think entrepreneurs can go a long way by reading the two Freds (Wilson being the other).

    I have a recent post up on my blog (blog.thredup.com) about this very thing (a relational post to Fred Wilson’s herd post about how I see the herd mentality). While most entrepreneurs are scared to offend VCs for fear of risking funding, I think it’s an important conversation to have about challenges in a dearly symbiotic relationship. My experiences have been mostly positive, but boy do the bad ones leave a sour taste in your mouth. Thanks for taking this head on.

  • http://oddfellowstudios.com Shava Nerad

    The symptomatic arrogance is sad, but the strategic arrogance is what keeps me away from VCs.

    When I started my new company last year, I was adamant that I would not touch VC money. Today, after meeting more of the current crop of Boston area VCs, I’m *slightly* less adamant. We have some awfully good people here.

    But I survived the bubble as a successful dotcom exec (in 2003, we were third fastest growing private company in Oregon, 283 on Inc5000,…) — in a privately held, angel-funded company. I saw the bodies of good companies fall around me because of VCs making bad management decisions, up to and including shutting down near-profitable companies, in 2000-2002-ish.

    Panicked VCs lost faith in the sector, when their peers had grossly overextended that faith in earlier years on companies with no reason to exist. The collateral damage was appalling.

    VCs look less arrogant when they try to learn your company/sector, become a team member, and show they care about your success more than a near-term flip.

    Since their near-term flip often depends on the prospects for your long term success, this should be obvious, but somehow it often seems to be shorted.

  • http://www.cstergiou.com Chris Stergiou

    Reminds me of the old joke of “Having the smart guys doing the work and the dumb guys doing the thinking.”

    There are competent and incompetent people on both sides of the fence on this, but too often the VC side thinks they’re doing “God’s work”. Relax guys, you’re just providing the gas to move the vehicle forward, for which you are entitled fair gains and even a significant risk premium, you don’t own the vehicle, you don’t have a clue how it works, you don’t know where its going and finally, you’re just passengers.

    The Entrepreneur is the guy driving the vehicle, and yes you can bring some real value beyond just the money but remember, you only succeed if he succeeds, the rest is academic, no matter how many hoops you make him jump through.

    Makes one wonder about the pitiful success rate of VC controlled start-ups. Most would do well to study the origins of their craft; a VC owned ship, chartered and tasked to bring home the bacon, but with the Captain/Entrepreneur having absolute control once that ship sailed.

    Chris

  • Vinit Nijhawan

    I have been both an entrepreneur and a VC and now I am teaching entrepreneurs how to deal with VCs at Boston University. In the end raising money from VC is a sales process not unlike selling a product/service to a customer. You first have to establish the need: (1) is the VC partner interested in making an investment in the space you are in and (2) how many boards are they on, the fewer, the more likely they need to make another investment. Next you have to identify the targets: this is much harder since VCs needs are dynamic, sometimes as dynamic as what they read in WSJ that morning about a space. Then you have to make the sale: my experience is that VC partners make their mind up to promote your investment within 15 minutes of seeing your pitch–move on if the body language is not totally supportive of you. Lastly and the most difficult is the close: without real or perceived competition it is not in the VC’s interest to close quickly–their risk goes down over time as your company/idea matures. Net net it is a difficult sales process for most entrepreneurs, especially first time entrepreneurs and it is time consuming. Finally it is crucial to manage the post-sales process effectively: my recommendation to VC-backed CEOs is that they have to allocate 15% of their time to “investor relations”. It feels like overhead, but it is crucial to manage your VC investors in good times so that they are supportive in bad times.

  • John Dacey

    Nice post Vinit – spot on!

    As Vinit said, watch the body language and move on if you are getting bad vibes. And if emails and phone calls don’t get returned “he’s (or she’s) just not that into you”

  • Pingback: Entrepreneur Community Online: Starting 12/14 we will be featuring an Entrepreneur of the Day, want to play? | Entrepreneur Community Online, Inc.

  • Angeles

    http://www.clasilistados.org is a startup worth looking at. I have no relation at all with them but I saw them pitch in the Silicon Valley and they were incredible!

  • Pingback: How to know if the VC is ‘not that into you’? « BZNotes!

  • http://www.mcsquare.me Charly Omer

    I’m glad I don’t have to deal with VCs at all, sure not all VCs act like that, but being a bootrapper is a better way to avoid such a slap in the face for something invest your soul in.

  • http://www.freddestin.com Fred Destin

    @ Charly this post is focused on the dark side / issues raised and is not aiming to capture the good side / value add aspects

  • http://www.blank-label.com Fan Bi

    Especially for first-time entrepreneurs, the sex appeal and instant validation of raising venture money cover the fact of improbability. Worse still, deciding to raise money at the wrong time can kill your startup. If you’re too early, it can kill progress, not give you the time to build the product, ship to customers.

  • theslingter

    It seems to me that LPs may have contributed to the state of VCs today. I may be wayoff base, and have never seen or even heard about the contract between a VC firm and an LP, but I bet it is quite different from the contact between a VC and a start up.

    But, perhaps the LP/VC arangement should be more like the VC/start up agreement. After all, VCs are in many ways, entrepreneurs, taking huge risks and betting on huge returns.

    But, the managment fees are so profitable, that there is really no personal risk to the VC- even if he washes out in five years when all his investment fail, they would still have made very good money by most peoples standards, on management fees.

    LPs should get into an agreement with VCs that is similiar to the VC/start up arrangement.

    The VC should get a modest salary like the start up CEO; like the entrepereneur, the VCs pay day should be down the road in terms of equity in the start-up.

    Further LP funding of a VC firm should be subject to downrounds just as with start ups. claw backs and all that stuff should be applied to VCs.

    Some will say that this will deter the truly talented from going into the VC business. I say it will weed out the careerists and attract entrepreneurial VCs who really think that the have the talent to win in this game and are willing to take the risk of real failure (like all entrepreneurs) to enter the game.

    LPs, step to the plate!!

  • Anonymous

    @theslingter,
    You are, indeed, way off base re: LP/VC relationships. Try reading the WSJ. Or use that little known VC-backed start-up to search the web. It’s called Google…

  • theslingster

    well there, superstar, I have followed your advice and used that fancy thing (i think they cal it ping), an lo, on todays PEhub.com is this article which give both side of the story (the side supporting my hypothesis is below).

    You could spend a day searching this subject and not get a clear answer.

    If you seem to know the answer, then do like everyone else does and give a pithy, to the point, summary of your logic here and now. Let us all see your brilliance.

    http://www.pehub.com/57874/so-what-is-it-do-lps-love-or-hate-private-equity/

    To: LPs
    Do you like me? Circle one: YES NO
    From: GPs

    In one study, the LPs circled “no,” and in another, they circled “yes.” So which is it? Will investors back buyout firms next year or not?

    The first was a survey by Coller Capital, which shows investors have lost faith in private equity. According to the study, 79% of LPs will refuse re-ups in 2010 because of fund terms and conditions (vs 57% in the Winter 2008-09 Barometer); 76% will do so because of inadequate GP transparency (vs 39% in 2008-09); and 76% will do so because of perceived conflicts of interest (vs 51% in 2008-09).

    Beyond that, the study showed the ways LPs are making it more difficult for private equity firms to gain commitments from them. Two thirds of LPs have also changed the way they manage private equity as a result of the downturn: 60% of these LPs say they have changed their risk appetite and investment criteria; around half have deepened their due diligence prior to committing to a fund; and another half have demanded improved reporting from their GPs. 40% of LPs have also strengthened their in-house teams.

  • Pingback: Top 10 startup articles of the week « Startup Musings

  • Anonymous

    As someone who has been with multiple venture funded enterprises, I’ve seen both positives and negatives from VC funding. But what concerns me the most is how often VC board members go against their own interests without realizing it. More often than not, in the vein of “questioning decisions”, VC board members seem to want to prove they are the smartest in the room by forcefully suggesting strategy changes during the monthly or quarterly meeting. Now, presumably the VC Board member has paid maybe a bit of attention between meetings, but surely doesn’t understand the business to the extent of the operating mgmt, and presumably the VC has invested because they supported the idea/team, but then proceed to think they can do one better. Result – the suggested “strategy changes” drastically slows down the company as the founders scramble to either find a new niche the VCs will be happier with, or build up a case why the suggested strategy isn’t as good. Momentum suffers. We all know that many of the most successful ventures weren’t successful overnight, but had time to “follow the success” – find out what works, and do more of it – but with constant VC board member steering, very few get that chance.

  • Pingback: What’s in a (venture capital) website ? | New Website Alert

  • Pingback: What’s in a (venture capital) website ? – Big Gov Care – Big Government Healthcare info. « Big Gov Care

  • Pingback: Gren Land Web – GrenLandWeb.com » What’s in a (venture capital) website ?

  • Pingback: What’s in a (Venture Capital) Website? | New Website Alert

  • Pingback: Any good angel sites? - stocks, bonds, mutual funds, trading, market, brokers... - Page 2 - City-Data Forum

  • Pingback: The “Lithium Ion” VC’s: Say “Howdy” to the ACTUAL Illuminati !!! | SOMO NEWS: Snark, Facts, Fixing Public Policy