Information is the (other) currency of 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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