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Information is the (other) currency of venture capital

September 1st, 2009 | startups, venture capital

Many seasoned entrepreneurs have had the following experience.  A VC eagerly wants to meet with you.  You have what seems like a very good meeting, and yet the VC’s excitement level drops noticeably in follow up conversations. Then he says “No” in VC language.  What just happened?

The answer is that besides cold hard cash the other currency in venture capital is information.  A VC will meet with pretty much anyone they deem “serious” in order to gather more information, which they can then use to discover interesting investments, do better diligence on potential investments, impress entrepreneurs and other VCs with their knowledge, gossip with other VCs about recent deals and trends, and give seemingly informed advice to their portfolio companies.

I’m not saying VCs are trying to take your trade secrets and give them to competitors.  The vast majority of VCs would never do this.  Instead, they are after much more general, innocuous information, like the rough valuations of recent financings, what companies and markets are “hot,” what products are getting popular, what marketing tactics are proving successful, and so on.

Imagine you were a professional sports bettor but none of the existing information sources – Internet, TV, etc – existed.   The only way you could get information was by talking to people who actually saw the sporting events live. This is kind of what it’s like to work in venture and why VCs are so desperate for information.  There is very little publicly written about what’s really going behind this scenes. Occasionally juicy tidbits will come out on blogs like TechCrunch, and some moderately useful stuff appears daily in peHUB and other VC newswires – but crucially missing are the valuations, cap tables, competitive offers, companies’ performance, and pretty much everything else people really want to know.

In the way they cross-polinate information, VCs play a role with startups similar to what consulting firms like McKinsey play in the Fortune 1000 world.  They spread best practices around from one firm to another, in the end, on average, making everyone more efficient and informed, while also reducing informational advantages

My advice to entrepreneurs is not to run and hide.  Instead, you need to learn to play the game.  Meet with as many VCs as you can.  They are great sources of high level information.  Such and such assets are cheap right now.   Startups are having success with a such and such marketing channel.  A certain venture firm is eager to deals in your space.  Staying in the information flow is one of the main reasons many serial entrepreneurs angel invest on the side.

Just go to these meetings with the proper expectations – the VC’s eagerness probably has more to do with gathering information than investing in your company.

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  • Interesting post. I have always found that one of the most valuable things a VC does it tell you about competition that is about to appear. Lots of times, companies remain in "stealth mode" before they launch and knowing about them is incredibly helpful. Both to plan your product (to differentiate) and to adjust your pitch
  • Chris, valuable insights for entrepreneurs. I would add a caution though because the VC grapevine can also really work against you if you play it wrong. The word that your deal is a turkey gets around much faster than you do.

    If you give one VC a lousy pitch, you can overcome that. Two maybe. Beyond that, once your deal has become "shopped" and has not generated any buzz, it is very difficult to recover. You can imagine the conversations very easily, "Yeah, I've already seen that guy, but I don't think he is going to get any traction." It becomes a self-fulfilling prophecy.

    Try to play the same information game the VCs play. Talk to as many VCs and entrepreneurs as you can before you try to raise money. Use that information to improve your plan and your pitch, and then go out with your game face on. VCs can be hard to get to outside of the deal context, but thefunded.com and venture blogs are easy enough and should be required reading.
  • Reid - absolutely agree. As I'm sure you know, the grapevine can cut both ways. I've seen deals that for no apparent reason suddenly become "hot" and everyone wants in. Good subjects for future blog posts - thanks.
  • Chris, good post, well written (sorry, the English teacher in me). To what extent do you think the asymmetrical information network you describe -- I'm tempted to call it an analog version of twitter, where you laboriously have to make every contact face to face and you can only parlay each singular reaction into another individual encounter -- will persevere, and to what extent will renegades disrupt it, by opening up the backchannel? Don't bloggers like @fredwilson and @thefunded portend a more democratic transparency?
  • Thanks, WIlliam. Re disruption. I love Fred's blog and he's more transparent than anyone, but notice how he never talks publicly about valuations, revenues, deal dynamics, backstories, etc. This is the stuff you need to know in this business if you are investing or raising money.

    @thefunded is trying to make public one critical thing - the reputations of VCs - and I applaud Adeo for that. In the past you had to get that solely via the gossip network. The only thing I worry about there is simply it's accuracy - many of the ratings don't jibe with what I think most experienced entrepreneurs would say. Maybe this is due to some selection bias - people who had bad experiences are more likely to rant..?
  • Chris, you're right about the line that gets drawn. I don't know as much as you about the accuracy of thefunded as I've just started following it, but what you say there makes sense, too. Maybe to the extent more participate -- the content, the malcontent, and those of us moving between those two poles by turns -- there can be something approaching the liberation of transparency that is being delivered/promised in other fields.

    But I do think what you do, what Fred does, what thefunded does, all
    move us closer there, because these efforts shock and amaze and
    challenge the (I'll call it 40+ and be age-ist about it) generation
    that yet grew up in professions that took as axiomatic that information should be guarded jealously.

    It's hard, because the best example I can think of of an industry that is moving to transparency, sharing what was once regarded as competitive information, I can't talk about (due to client confidentiality)! So there is the vision, co-existing with the 20th Century norms and mores we stll labor under day to day.
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