Venture Hacks

“Some managers are uncomfortable with expressing emotion about their dreams, but it’s the passion and emotion that will attract and motivate others.”

– Jim Collins

“People will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

– Maya Angelou

(Both quotes are from The Presentation Secrets of Steve Jobs by Carmine Gallo.)

I’ve started reading Emotions Revealed by Paul Ekman, a consultant to the television series Lie to Me. It’s an excellent and accessible catalog of emotions. For example, Ekman describes the differences between 10 or so different kinds of enjoyable emotions: sensory pleasures, contentment, excitement, relief, wonder…

It’s a good complement to The Definitive Book of Body Language (a fun and easy read), which you can find in our bookstore.

Mark Suster, entrepreneur turned VC at GRP Partners:

“When I was at BuildOnline (my first company) and things went ‘pear shaped’ we called all of our customers and said, ‘I know that we signed contracts with you. The reality is that the market has changed and I need to change to the new realities. We committed to product features. I can’t ship those as promised. I’m sorry. Do you like our product & service? Yes? Ok, thank you. Listen, I know that if you like what we do then you’ll want a healthy supplier/partner. I need to be able to earn a profit and with the contracts we’ve signed I cannot. I either need to cut product development staff (and therefore can’t ship products as promised) or I need to be able to charge you slightly more for our service or for features you want to see so that I can make ends meet. Help me understand which you prefer.’ I lost zero customers. In fact, we built tighter relationships. I had no choice and as they say, ‘necessity is the mother of all invention.’”

From What Makes an Entrepreneur (2/11) – Street Smarts. You can also find my favorite negotiation book, Bargaining for Advantage, in our bookstore.

Thanks to Atlas Venture for supporting Venture Hacks this month. This post is by Fred Destin, one of Atlas’ general partners. If you like it, check out Fred’s blog and tweets @fdestin. – Nivi

In Part 1 of The Arrogant VC, I discussed 4 reasons why VCs are disliked by entrepreneurs:

1. Poor first impressions
2. Getting strung along or left at the altar
3. Getting a raw deal
4. Great (but misguided) Expectations

This post contains 4 more reasons why VCs are disliked by entrepreneurs. Both of these posts contain direct quotes from entrepreneurs with real, hands-on experience with (often prominent) VC’s, sometimes through multiple companies and fundraising.

5. Unwanted advice, poor communication, and lack of operational sense

“While VCs are always happy to dish out advice, this feels disingenuous from people who have never actually built a company or had a knockout success as an investor. Learning from mistakes is far less useful than emulating success.” One entrepreneur goes further in accusing VC’s of seeing everything through the lens of money: “Often times they have zero operational experience (how to launch a company/product or manage customers), don’t understand marketing beyond just building their own brand, and see money as their ticket for everything.”

VC’s are often ex-lawyers or bankers and some have a tendency to feel safe with “experienced suits” that sometimes do nothing but drive the burn rate up and compound cash-flows problems. Entrepreneurs are often “driven, creative types who want out of larger organizations,” whose traits map poorly to those of many VC’s. Ultimately, since many of them don’t understand the businesses deeply, they “try to make up [for] this particular information asymmetry with legal enforcement.”

Some VC’s are not that shy about it. One partner in a tier I fund described his role in this way: “Industry experience is not that important. I see my role on a board as to challenge every decision the management makes.” Here’s a variant on the same theme: “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.” QED.

6. 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 “short investor time frames to meaningful exits means forcing businesses to scale too much and too fast (and offsetting this risk through a portfolio approach), whereas the entrepreneur must offset the market and product risk by slower movement and something akin to agile development.” David agrees on this natural misalignment of interests: “VCs need home runs, and entrepreneurs need singles at least on their first couple of companies.”

The going really gets tough when entrepreneurs lose their original sponsor. “The new guy is either too junior, does not know the business, or feels he has the right to wash his hands of the mess left by his departing partner.”

7. Arrogance and lack of empathy

At the end of the day, most entrepreneurs completely understand that objectives are not always aligned and that VC’s work for funds that need to return capital. What they have trouble with regardless, are “double standards“. One entrepreneur who has raised money multiple times says, “A lot of VCs do things no regular employee would dare to do but are largely unaccountable for those behaviors: forgetting about board meetings, showing up 20 minutes late, bullying the team or CEO, being generally unavailable, paying no attention in meetings because they are arranging a golf game on their BlackBerry, failing to read the board pack before the meeting, so the actual meeting is remedial in nature.” the message seems to be, “Don’t treat me the way I see fit to treat you.”

Net-net, VC’s are too often “out of touch with the reality of entrepreneurs.” “They are often times elitist, clashing with the very scrapiness 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.” “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.” Yet another: “I have mortgaged my house, I have spent all my money, my family lives on pizza coupons and now you are telling me you want customers and a live product to boot? Why don’t I call you back when I have gone public, bozo. You call yourself a risk taker? You want 30% of my company when all the risk has been taken out?” (I added the pizza coupon piece for effect, but you get the idea).

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

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

Add to this some “dumb practices” such as demanding board remuneration and monitoring fees or “submitting ridiculous expenses” to complete a picture that betrays a complete lack of empathy.

8. Dark Side of the Force

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.”

The worst I got related to VC’s pushing to recover shares from the heirs of a deceased co-founder under a reverse vesting provision. As the contributor put it, “it will take a lot of good karma from a lot of VC’s to make up for this one.” I was stunned.

Conclusion

Last words to entrepreneurs from Rory Bernard: “Choose your VC’s with care. Good ones transform your business, bad ones wreck it.”

And to VC’s: “tread softly, remember that in a position of power, you can do many sensible things but a few stupid ones and end up with a ‘George Bush’ problem, and as a result the approval rating of Dubya.”

If you like this post, check out Fred’s blog and his tweets @fdestin. If you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. Thanks. – Nivi

David Anderson, VC and supply chain master:

“Billy is perhaps best known for his Oxi Clean commercials, where one softball size ball of detergent, chucked into your washing machine and forgotten, will do 25 loads of laundry. Simple messages, great customer testimonials and products that really worked were Billy’s forte. He rejected perhaps 99% of the hundreds of inventors/companies that approached him, choosing only those products that met his three key metrics. And he and his inventors made millions in the process…

“Address clear customer needs: Billy wanted products that anyone could use, not just a select market segment–who does not have dirty clothes (Oxi Clean)? Needs a knife to cook (Samurai Shark)? Want shiny clean floors (Orange Glo)? or, my favorite, who has ever wished they could permanently cement their mother (or father)-in-law to a chair (mighty putty)?

“Have believable customer testimonials: Billy did not use actors, but recruited users who were true believers. Who could not like the housewives who had orgasms over their newly waxed floors?”

(Italics mark my emphasis.)

That’s a great set of requirements for picking startups: simple messages, great customer testimonials, and products that really work — that anyone can use. (You can also take the opposite approach on the “products that anyone can use” requirement.)

Bonus: Also see David’s post on Hiring the Right Sales Guy:

“So what’s the best type of sales guy for a start up? To be honest, none of the above. The founders are the best sales guys, supported by the correct marketing and sales support technology, processes and people. They know their solutions and vision best and should be the one who lead the charge in the marketplace.

“Instead of hiring a very expensive super sales guy, for example, use your board members to get introductions at target customers. That’s a prime role for board members and should be a key criteria in choosing them. Want C-Level introductions? Try cold calling at 8am in the morning when the C-levels get in early to check their emails. Need a group of specialists to sell the solution?  Assemble the team from current employees to make the pitch. Everyone should be a sales person in a start up.”

This is consistent with Steve Blank’s advice that founders should be on the customer development team and, if necessary, complemented by a ’sales closer’.

Chris Dixon, serial entrepreneur and seed-stage investor:

“… You should try to answer the question: what is the biggest risk your startup is facing in the upcoming year and how can you eliminate that risk?  You should come up with your own answer but you should also talk to lots of smart people to get their take (yet another reason not to keep your idea secret).

“For consumer internet companies, eliminating the biggest risk almost always means getting ‘traction’ — user growth, engagement, etc. Traction is also what you want if you are targeting SMBs (small/medium businesses). For online advertising companies you probably want revenues. If you are selling to enterprises you probably want to have a handful of credible beta customers.

“The biggest mistake founders make is thinking that building a product by itself will be perceived as an accretive milestone [emphasis added]. Building a product is only accretive in cases where there is significant technical risk — e.g. you are building a new search engine or semiconductor.”

Read the rest of Chris’ What’s the right amount of seed money to raise? Also see our post, How do we set the valuation for a seed round?

If I had to stuff my answer to this question into one sentence, I would say: “As much as possible while keeping your dilution under 20%, preferably under 15%, and, even better, under 10%.” Raising as much as possible is especially wise for founders who aren’t experienced at developing and executing operating plans.

I really wanted to be a cool cat and make a list of the most popular outgoing links for 2009 —a top 10 list of other people’s posts. But it wasn’t meant to be — we don’t have the Javascript installed to track those clicks.

And so, we present our 10 most popular posts of 2009:

1. How IMVU learned its way to $10M a year. A talk by Eric Ries.
2. What is the minimum viable product? An interview with Eric Ries.
3. The Startup MBA. Links to the best startup blogs.
4. My visit to American Apparel. How American Apparel gets lean.
5. How to pick a co-founder. Also see the accompanying interview.
6. Sell it before you build it. Fliggo’s minimum viable product in action.
7. We don’t pay you to work here. A review of the book Hidden Value — you can find it in our bookstore.
8. Customer Development: How to develop your customers like you develop your product. Videos and slides from Steve Blank, king of customer development.
9. It’s very easy to underprice your product. A short talk by Steve Blank.
10. How to bring a product to market. A very rare interview with Sean Ellis.

Use this list to catch up on great posts you missed.

When we started Venture Hacks in 2007, we were all about hacking term sheets. In 2008, we continued to write about raising money and expanded to general startup advice — for example, see our posts on job offers. Looking at the top 10 list above, 2009 was clearly the year of customer development. It was also the year of monetization, as we created more free and paid products — here’s a list of them.

What’s coming in 2010? Wait and see…

Thanks to Atlas Venture for supporting Venture Hacks this month. This post is by Fred Destin, one of Atlas’ general partners. If you like it, check out Fred’s blog and tweets @fdestin. I’ve also generated an MP3 version of this post. Let me know if it’s useful. – Nivi

Below is the summary of all the answers I received to my recent post, “Tell me why VCs are disliked by entrepreneurs”. There is a shorter and easier to stomach version on Xconomy if you prefer, here. I have tried to keep my role as editor limited to re-organising, so this remains true to the commentary. I would add that most or all of these entrepreneurs had real, hands-on experience with (often prominent) VC’s, sometimes through multiple companies and fundraising. And yes, I also plan on writing a feature about the “good side” soon…

The VC-Entrepeneur relationship seems damaged. Whilst business partnerships gone bad and company failure can lead to fallout, this is different. I wanted to find out why and used my blog to ping the entrepreneur community to try and understand this better, listen to my audience as it were, and share the feedback.

As with all articles of this kind, it is plagued by generalizations and simplifications. In trying to do justice to the sixty detailed and mostly confidential responses that I got, I probably lost some of the color and detail. But for anyone interested in rebuilding the social contract with entrepreneurs and getting our VC mojo back, the scale of the problem should be apparent.

Clearly as VC’s our job is not be loved but to contribute in building great business and return money to our shareholders. Read on regardless; as you will see, the status quo is not an option.

A common answer I got was “sour grapes”. As Richard Jordan put it, “failures breeds frustration” and there is a natural tendency to spray the blame around. Externalize guilt as resentment, combine it with some old fashioned finger pointing, and there you go.” Many VC’s excel at that too. Sometimes anger stems from the “sheer exhaustion from being told ‘no’ too many times”. Now let’s dig deeper.

Poor first impressions

Richard Jordan (read him) says: “probably more than half of the VC pitches I have done have involved participants on the VC side who have behaved in a rude and disrespectful manner“. Arriving late, cutting out early, reading their blackberry, constantly interrupting pitches, taking calls, you name it. Some of the pitching experiences border on the ridiculous, as evidenced by a young founder who got invited to pitch for fifteen (yes, fifteen) minutes with five minutes Q&A, only to find the meeting started ten minutes late and was not to be extended…

The absence of feedback loop is a common theme with entrepreneurs griping about “dozens of unanswered calls and mails, from people they met. If nothing else works, what are your PA’s for?” Another common gripe is the need to be dealing with an Associate who needs to sell his deal internally and is often insecure and not clear himself on his chances of getting the deal done.

Even in early meetings, the lack of “empathy with and experience of the startup and the sacrifices involved” can leave entrepreneurs fuming. Finally, many entrepreneurs complain about a lack of confidentiality with their pitches sometimes “landing on competitors’ desks days after the meeting”. In a recent example, a well known General Partner interrupts 50 minutes of cross questioning with this casual statement, “By the way, I am personally invested in a new startup that is targeting this segment”.

Getting strung along or left at the altar

“Raising capital depletes far more energy than investors realize”, says one entrepreneur. “Getting a ‘no’ is actually fine from an entrepreneur point of view (one has to be rejection-proof anyway), but to preserve their opportunities many VC’s tend to string along entrepreneurs forever, blatantly lying about deal status only to let it fall apart at the last minute, wasting an entrepreneur’s time and energy.”

Many investors appear to be “vague on their decision and engagement process, which tends to be liquid.” Some VC’s promise term-sheets that never come, others withdraw at closing (the worst I personally heard was an SMS turndown by a “tier one” VC followed by a competitive investment), others still don’t bother checking conflicts of interest. “VCs are too opportunistic in their behaviour,” says one experienced entrepreneur.

A common gripe concerns the lack of clarity (or absence) in the rules of the game. Some companies are forced to jump through endless hoops to get a tiny round done whilst others raise a ton of money at seed with no substance. VC’s pretend to do seed but then say no to everything that is early and want revenues, customers, a business model, and a team. Entrepreneurs are confused and sometimes angry about this, as they feel fundraising is like a marathon with no end, when the hills keep getting steeper along the course. “The whole process leaves me with this feeling that landing funding is nothing more than getting lucky with the right pitch on the right day with the right person in the room,” says D. It makes you feel like “a sort of magic and certain incantations and artistry is required,” yet despite that, “investors often still fail to ask the right questions, the hard questions”.

Getting a raw deal

“Taking capital does feel a bit like making a deal with the devil after all.” Entrepreneurs fundamentally want to change the world and dealing with the Money Men is often a compromise they would rather do without.

“The entrepreneur is a bit like a child who’s just learned the rules of chess — he’s studying the current move intently, but he’s rarely thinking far ahead. The VC is an old hand at this game — he knows its patterns intimately and can see how it’ll develop far into the future. The entrepreneur tries to play well, but the terms he fights for often turn out not to be important, while the terms he thinks are innocuous can surprise him in unexpected ways. Unless things at the company go astoundingly well, the entrepreneur comes away feeling like he was played — taken advantage of by someone far, far more experienced at this particular game.” Clauses like participative liquidation preferences, anti-dilution, aggressive reverse vesting, board control or simply shareholders’ rights come up frequently, with good reason.

“My own VC’s have been great. That said — like many entrepreneurs, I’ve only realized some of the longer-term implications of the documents I’ve signed well after the fact. This was enough to make me wary.”

Great (but misguided) Expectations

“Many entrepreneurs want an investor to fund the idea (equivalent to a TV production house looking for funds from a commissioning editor to make a show, and generate a profit from it). It often takes them a long time to realize that such VCs don’t exist. By which time they are bitter and tired and blame the VCs, rather than their own lack of understanding” of what it takes to get VC funding.

David Smuts believes there are two kinds of VC’s: “Careerists VC’s” and “Entrepreneur VC’s” and two kinds of Entrepreneurs: “Real Entrepreneurs” 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.

Continued in Part 2 with unwanted advice, arrogance, and the dark side of the force… (I’ve also generated an MP3 version of this post. Is it useful?)

If you like this post, check out Fred’s blog and his tweets @fdestin. If you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. Thanks. – Nivi

David Skok, serial entrepreneur turned VC at Matrix Partners:

“In the many thousands of articles advising entrepreneurs on what they have to focus on to build successful startups, much has been written about three key factors: team, product and market, with particular focus on the importance of product/market fit. Failure to get product/market fit right is very likely the number 1 cause of startup failure. However in all these articles, I have not seen any discussion about what I believe is the second biggest cause of startup failure: the cost of acquiring customers turns out to be higher than expected, and exceeds the ability to monetize those customers… [emphasis added]

“A quick look around all the B2C startups shows that, although viral growth is often hoped for, in reality it is extremely rare. When it does happen, the associated businesses are usually extremely attractive, provided they have a way to monetize their customers. (For more on the topic of Viral Growth, refer to my blog post on that topic here.)

“Far more common is a need to acquire customers through a series of steps like SEO, SEM, PR, Social Marketing, direct sales, channel sales, etc. that will cost the company significant amounts of money. What shocks and surprises many first time entrepreneurs is just how high the numbers are for CAC [Cost to Acquire Customers] using these kinds of techniques.”

Read the rest of David’s excellent post: Startup Killer: the Cost of Customer Acquisition. But don’t worry about it too much until you’ve built a product people want. It’s hard to know what the CAC is before you know what the product is. And check out the rest of David’s new blog — his post on Viral Cycle Time is great.

You can always get our interviews — with Eric Ries, Sean Ellis, Naval Ravikant, Hiten Shah, and others — on the Venture Hacks Podcast.

iTunes users: Click here to subscribe to the podcast
Everyone else: feeds.venturehacks.com/venturehacks

Put the podcast on your iPod and listen at the gym, in the car, on the train. If you’ve been skipping class, catch up on all the interviews in our Podcast category.

We’re going to try to do more interviews in 2k10. Hopefully with guys like Don Reinertsen, Al Ries and Jack Trout, and Steve Blank.

Matt Mireles, Founder of SpeakerText:

“More than anything, being secretive, being stealth and making people sign NDAs up the wazoo sends a message that you don’t trust them, that you think they might fuck you. And when people get that vibe, they assume (consciously or not) that you yourself are not trustworthy, that you might fuck them. This is not the message you want to send to people you’re gonna ask to commit to a journey filled with hardship and that will probably fail.

“As they say, you want missionaries, not mercenaries.”

Read the rest of Hiring & The Benefits of Radical Transparency to learn how Matt inspires people to join SpeakerText.

Related: Our posts on NDAs.