The Arrogant Venture Capitalist: A View from the Trenches

Opinion

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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.

Some VC’s are not that shy about this. One VC partner describing his role: “Industry experience is not that important. I see my role on a board is to challenge every decision the management make.” And another: “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 (sic).” QED.

Different Objectives and Time Frames

“It takes patience and time to build a great business, and target returns and time frames (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 “Investor timeframes often force businesses to scale too fast, whereas the entrepreneur must offset the risk by slower movement and something akin to agile development.”

Arrogance and Lack of Empathy

Entrepreneurs despise “double standards.” “VC’s do things no regular employee would dare to do but are largely unaccountable for those behaviors: forgetting about board meetings, showing up late, bullying the team or CEO, being unavailable, paying no attention in meetings because they are on Blackberry, etc.” The message is: “Don’t treat me the way I see fit to treat you.”

VC’s are 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.”

Finally, entrepreneurs feel VC’s are “crap at sharing the wealth,” recognizing “how tough it is to create value” or “properly re-incentivizing managers who gave up many years of their lives, effectively abusing their position of power.” “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.”

Bottom line: “VC’s really don’t take any personal risk but expect everyone else to…”

Dark Side of the Force

Some behavior deeply damages alignment and trust, and “without these the necessary working relationship and motivation is destroyed.” Planned gradual washouts of founders, lying about the state of the business when refinancing, negotiating on behalf of management and forcing deals through, firing part of the team pre-acquisition, changing deal terms at the last minute and generally making a mockery of governance —all are common behaviors by venture partners, to judge from entrepreneur’s comments. The worst story was that of a VC pushing to recover shares from the heirs of a deceased co-founder under a reverse vesting provision. “It will take a lot of good karma from a lot of VC’s to make up for this one.”

Conclusion

For any venture partner interested in getting our industry’s mojo back, the scale of the problem should be apparent. Many entrepreneurs are angry. Like politicians too long in the Senate, we appear out of touch with our constituency. While it’s clear from some of the comments that taking venture capital is simply not the right path for many companies, it is also clear that we need to rethink our relationship with entrepreneurs if we want to continue to attract the best of them. Now is the time for that rethink.

For entrepreneurs, I will leave the last word to Rory Bernard: “Choose your VC’s with care. Good ones transform your business, bad ones wreck it.”

A longer version of this post has been published at Fred Destin’s blog, A VC In Europe.

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

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26 responses to “The Arrogant Venture Capitalist: A View from the Trenches”

  1. Mick says:

    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.

  2. 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.

  3. James says:

    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.

  4. 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.

  5. 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

  6. Vinit NijhawanVinit Nijhawan says:

    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.

  7. John Dacey says:

    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”

  8. Angeles says:

    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!

  9. 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.

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

  11. Fan Bi says:

    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.

  12. theslingter says:

    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!!

  13. Anonymous says:

    @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…

  14. theslingster says:

    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.

  15. Anonymous says:

    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.