VCs Are Not Your Friends

2/3/11Follow @sgblank

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their current fund portfolio. Their fiduciary responsibility was to manage a portfolio of investments for their limited partners. And what they promised their own investors was that they would invest money in deals that would grow in value and achieve liquidity. As much as they liked me as the entrepreneur, they couldn’t throw good money after bad when they thought the deal went south.

I wish I could tell you I understood this all at the time. I didn’t. I was angry, took it personally for a long time (past the demise of Rocket Science) until I realized they were right.

While the best VCs treat entrepreneurs like you are their most important customer, and they add tremendous value to your startup (recruiting, strategy, coaching, connections, etc.) they are not doing it out of the goodness of their hearts. Entrepreneurs need to understand that VCs are simply a sophisticated form of financial investors who in turn need to satisfy their own investors. At the end of the day VCs have to provide their limited partners with great returns or they aren’t going to be able to raise another fund.

If you succeed so do they. Great VCs do everything they can to make you successful. But just like your bank, credit card company, mortgage holder, etc. they are not confused where their long term loyalty lies.

It’s not with you.

Postscript
The irony is 15 years later, no longer doing startups, these two VCs truly have become my friends. We have lunch often, teach together and swap war stories of the day they pulled my funding.

It wasn’t an easy lesson.

Lessons Learned

  • You see one VC, they see 20 CEOs
  • Don’t confuse your business with your VCs business
  • Your interests are aligned if you both see the same path to liquidity
  • Don’t confuse being friendly with your VCs with VCs as your friend

Steve Blank is the co-author of The Startup Owner's Manual and author of the Four Steps to the Epiphany, which details his Customer Development process for minimizing risk and optimizing chances for startup success. A retired serial entrepreneur, Steve teaches at Stanford University Engineering School and at U.C. Berkeley's Haas Business School. He blogs at www.steveblank.com. Follow @sgblank

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  • http://www.shanghaivest.com bruno bensaid

    excellent post, Steve. when the shit hits the fan, this is really when you see it all clearly. but did not you guess, when signing your term sheet, that the relationship was already unfair (anti-dilution, double dipping etc) etc? anyway, I am going to re-post this to my startup clients, I keep telling them about alignment, but it takes them time to get it.