08 1 / 2010

Five lighthearted reasons why VC’s should not drive your strategy:

From A VC, Fred Destin:

  • We forget 50% of what we said at the last board
  • We don’t know the people inside the company and hence have no clue what the team can really execute
  • We meet many smart people and hence we have way too many ideas that you cannot possibly implement
  • We are focused on the 5 year vision, yet we are focused on the quarter too, even we are confused
  • We don’t need to deliver on it, you do.  We come and collect when the job is done.

    • He has a great blog for Entrepreneurs seeking or already getting venture capital funding.  Actually, I wished all the VC’s out there read his blog.  Excellent warnings to both sides of the table Example:

    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”.

    Hope none of the above stuff ever happens to me. =X

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