Over the last decade or two, the supply of venture capital dollars has increased dramatically at the same time as the cost of building tech startups has sharply decreased. As a result, the balance of power between capital and startups has shifted dramatically.
Some VCs understand this. The ones that do try to stand out by, among other things, 1) going out and finding companies instead of expecting them to come to them, 2) working hard on behalf of existing investments to establish a good reputation, and 3) just being friendly, decent people. Believe it or not, until recently, #3 was pretty rare.
As a seed investor in about 30 companies, I’ve been part of many discussions with entrepreneurs about which VC’s they want to pitch for their next financing round. More and more, I’ve heard entrepreneurs say something like “I don’t want to talk to that firm because they are such jerks.” In almost all cases these are well-known, older firms who come from the era when capital was scarce.
Every experienced entrepreneur I know has a list of “toxic” VCs they won’t deal with. (Often because of horror stories like the “partner ambush“). There are so many VCs out there that you can do this and still have plenty of VCs to pitch to get a fair price for your company and only deal with decent, helpful investors. It sounds kind of crazy, but being a reasonably nice person has become a competitive advantage in venture capital.
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Ive always looked to our investors, especially our VCs as partners. As we raised money for Graphic.ly (http://graphic.ly) it was important to ask the question “Could I work with this person closely for the next X years.” It was amazing how many people I decided that it wasnt the case.
I think in many ways we as business people have done ourselves a disservice in convincing ourselves that mean people are the most successful. Its amazing what the words “how can I help you?” can do.
This is so true. I've never had to really face taking an investment from a jerk, but I'd be really reluctant to do it. You're going into business with them, for crying out loud.
Great post.
My dad was never big on direct advice, but after listening to me talk through a problem some years ago he offered this: “I suggest that you try very hard to not be an asshole.”
I still occasionally think about marketing a corporate “desk accessory” that has this little pearl of wisdom engraved on both sides.
It's amazing how many seemingly nice people become assholes after being VCs for years. I guess controlling hundreds of millions of dollars is kind of like the ring of power in Tolkein. The stories I've heard/experienced… Wow…
I am out raising a seed round for my startup, Chug. After having raised a bunch from traditional VCs in the valley for past startups, I am finding that same group of VC's are acting more like equity firms. I have absolutely experienced the partner ambush. We are just starting to find funds where they actually are pitching me, which is always a good sign when both parties are selling.
So, while I agree with you that the flood of capital into VC has made it a seller's market, I wonder to what extent that feedback loop that is presented (albeit it in a very flawed fashion) by TheFunded has contributed to this dynamic?
TheFunded's only been around for 2.5 years or so…but I know that at VMware, when we got bad reviews of VMware Fusion on Amazon or Apple.com or VersionTracker, we got our ass in gear to address valid complaints (of course, we had to do this because we had a strong competitor in the space: Parallels Desktop.)
Reputation is a non-trivial determinant of these sort of things…
I would buy a baker's dozen to hand out…what's your paypal addy?
In my first company, I went for the dough and didn't care that much about the skills and dispositions of my future partners. Note to everybody: do not do this at home.
You're really getting married to these people and the premium that the jerks have to pay to get a deal (5, 10 sometimes 15% better valuation) is, if you believe markets are rational, less than the value that they will destroy as your hot-headed, dim-witted, lead-footed partner.
At every stage of growth at TheLadders, we've never picked the highest bidder, but always the best bidder. Which for us meant being in the top quartile on valuation, but #1 or #2 on character.
One of the smarter things we've done.
(Interestingly, it's not the jerks that are the most dangerous of VCs. Though pleasant to deal with, it's the very, very friendly guys who have learned that it never pays to actually, really, and truly say “no”, who are the most dangerous. It's only after you've been around the block for a few years that you realize the nicknames and the joshing and the ribbing and the friendliness have actually led you absolutely nowhere.
From an ecosystem evolutionary perspective, though, it is a very clever adaptive behavior.)
Chris
As someone who has been on the other side, raising capital from VCs for a while, you have a point. There are of course exceptions and I know a few super smart and friendly VCs that I count as friends.
But many VCs are difficult, dismissive and cantankerous. And the definition of smart money used to be the pedigree of the firm and their track record with the belief that somehow that infrastructure of connections became yours through funding.
That I believe has changed. Smart money is from folks who have wisdom and sleeves rolled up to assist in figuring it out. Board meetings with smart money become working sessions rather than presentations.
And to be helpful, be 'smart money' ,you've got to be a friendly or this won't work.
So yeah… this is a simple and important truth.
By the way, also think that the transparency of information generally has basically started to make people friendlier and more social altogether. No one likes an asshole and there is nowhere to hide anymore;)
Everyone is nice when they're selling — even some VCs. The problem is “nice” generally expires during difficult times such the common, multiple near-death experiences at startups or it may be a debate over a strategic issue such as what kind of customers to target and my perennial favorite, what's the business model. You want to do your due diligence on your VC by asking *former* not necessarily current funded entrepreneurs. Did the VC add any value during the tough times? Did they fire/hire who they should have? How did they behave at the down round? You get the idea.
I find it very reasonable to give weight to “having a friendly VC”, since it's a team effort in the end. And here it's important to include the VC into your “team”. Often enough it's the case that founders have the knowledge and the VC the money. So the one can't create a product without the other (as opposed to giving capital for expansion purpose only). So choosing by who you like is a valid factor, since you are going to spend some time together. Ask yourself: Do you want to work with jerks 24/7 (or even being judged by jerks after working 24/7 for weeks)? After working some years in I-banking I can't suggest anyone to work with jerks so closely. It definitely gets you mad.
From my own experience, when making the decision between two investors we went for the one we got along better. Even though the monetary valuation was slightly higher with the other one. Not everything is about money.
dontbeanasshole.com is available. I too would have to buy a handful. Sounds like a new start up!
Hidden jerks – very good point. I guess I was assuming a bunch of veterans sitting around the table who knew the affable evil guys from the affable nice guys, but of course that's not a safe assumption. I do think this is (selfishly) an argument for taking money from experienced angels in that we can help point out who's truly good and bad.
I do think the world has changed. If I were an LP, I'd be investing in scrappy VCs who are hustling around SF and NYC and not the lazy guys sitting in office parks expecting the good deals to come begging.
Yes, very true.
Hi again Chris
You might like this: http://blogs.fluidinfo.com/terry/2008/04/03/ind...
In which I wrote about the competitive advantage to VCs from displaying their own character on their blogs. The advantage is a strong one, as you have an industry of (at least formerly) straight-laced buttoned-down serious people trying for the attention of some seriously wacky & eccentric entrepreneurs. The old mix doesn't work as well in a market where the VCs are more in competition for deals – so, like being friendly, showing your normal human idiosyncracies – no matter the details – can be a powerful attractor. Etc. See the comment from Fred W.
Terry
Words to live every day by, whether you're a poor startup founder or a well compensated VC: “A pinch of sugar goes further than a pound of salt.”
Also, if someone is a jerk BEFORE you take “their” money, just imagine what they'll be like after!
True since the dawn of time, and particularly acute in those who find themselves in positions of some power…. Some are nice, some are nice as long as it does not cost them anything, some are not nice, and some are truly assholes.
Definitely agree. You catch more bees with honey. The more barriers in the way of open, comfortable dialogue the harder it is to effectively communicate. The dynamic is challenging enough that you don't need to feel like you're on separate teams. The real pro's know how to communicate without playing the intimidation card.
I agree with you and it comes as no surprise that Fred Wilson is as successful as he is. He's both a mensch and the kind of guy who has the common courtesy to turn you down with an honest no (which he gave me). You know, with a guy that straightforward, if he ever changed his mind in the future and we were looking for money, I'd take him in a heartbeat over all the guys who did not have the courage to have an opinion.
The network, mentoring, and advice from seasoned angels/VC (even more than the money) is really interesting to me these days…this all just sort of enforces how important the people part of the equation is in trying to raise money (just like it is in all situations where you are dealing with people really)…
Has the power balance really changed? There may be more money in the system but there are also more people chasing it.
This is a great topic, Chris. I did a blog post last year “Why Do Asshole VCs Survive” that looked at the flip side to your post and got similar comments. http://bit.ly/dmiCne. As Marc Cendella observes, yes-men VCs who think their advantage is solely by being your buddy are also dangerous. The ideal is to take a page from both American Idol judges Simon Colwell and Paula Abdul – be a truth-teller, but be nice.
I think we're living in an age of friendliness now. With the social media phenomenon it's moving to a time where every company has to have a good personal brand to work. Gary Vee is the epitome of an amazing personal brand.
Hey Jeff – Agreed. I think the word “friendly” was a bad choice. I didn't mean superficially affable, but actually decent, ethical, hard working people. I think this is where having experienced advisors/seed investors can be really helpful (bias alert! obviously that's self serving as I pitch myself as one of those).
Good post
Friendly VCs that value their rep are the archetypes of investment I'd like to sit down at a table with to discuss terms. Looking forward to getting their. The first hurdle is nailing the right tool/service fit. Fun hustling times.
Hah, the gratuitous self pitch. We're likely sold on Founder Collective if we hang out here Chris. My partner Tyler and I have been busy reworking/developing tools. When is a good time to talk over options for a seed business? I wasn't going to approach outside investors until we proved to ourselves (with metrics) that are site/services have real market traction.
How timely. Just yesterday I met a UK VC for what was supposed to be a friendly meeting as it was setup by a common party. The VC turned up 25 minutes late; didn't apologize; spent the rest of the meeting Blackberry'ing; pontificated about this and that; generally rude, arrogant and dismissive.
Having a thick skin helps but you just wonder what was the VC expecting as the outcome as I wouldn't have him anywhere near my startup now.
I completely agree that being friendly goes a long way. My business coaching clients are looking more and more for *culture fit*, whether it's with VCs, a management team or employees. When a startup is comparing multiple VCs, and with all things being relatively equal, being friendly really stands out! Being a reasonably nice person is definitely becoming a competitive advantage in venture capital.
Good post Chris. This is where it helps to have good insight into the local VCs – partner style and fund stage. A seed investor plugged into the ecosystem can be very helpful navigating these waters. – Chris
Great topic Chris (sorry, just catching up). I wrote a blog post after reading yours, definitely made an impact.
Wake Up Call: Getting of our asses (Thanks @cdixon) http://bit.ly/9DQcRo
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What I like about small business owners is that they are not afraid to take huge risks and lay it all on the line. But, I agree they do need a lot of help with their marketing. I think having them go the social media and email route is not only the least expensive but its also the most effective. Thanks for the stats!
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[...] From the perspective of VCs and entrepreneurs, VC brands rise and fall very quickly. Given the excess supply of venture dollars, top tier entrepreneurs are frequently selecting their investors, not vice [...]
[...] From the perspective of VCs and entrepreneurs, VC brands rise and fall very quickly. Given the excess supply of venture dollars, top tier entrepreneurs are frequently selecting their investors, not vice [...]