I’m going to reveal to you several serious and deep Venture Capital secrets on the condition you don’t tell anyone. These are the secrets you must remember when you are dealing or thinking of dealing with Venture Capitalists in any form: dead, alive, in hibernation, etc. It’s all the same.
Seriously, this is between you and I with our VC secret handshake. Okay? Okay.
VCs are not your friends
If you remember nothing else in your entrepreneurial life remember this: VCs are not your friends; people are. I can’t count up the number of times entrepreneurs get kicked off boards, get the boot, or get diluted into the Twilight Zone and every one of them screams in shock: “I thought you were my friend.”
For example, RHO Canada currently has invested in my company (Fixmo). Jeff Grammer is the RHO partner managing the investment. RHO Canada is not my friend. Jeff Grammer on the other hand is my friend. If RHO Canada senses this is a loser of a company and/or CEO (me), they will drop me/the company like a bad dream. That is a fact I happily live with everyday. If I suck or this company blows, I own that and I’m responsible for the results.
There’s a seriously important point to this humor. Treat the relationship for what it is, a business endeavor. It’s a business, not a popularity contest. Do not fall into the friends trap as it will come back and bite you when you least expect it.
Dilution doesn’t matter, Speed does.
If your business was worth one billion dollars would you be happy with 50 million dollars upon selling the company? Do you believe a billion dollar exit is possible for your business?
If you answered to yes to both of those questions, you are totally fine with owning 5% of your business. FIVE PERCENT.
So tell me there, peppy, why the hell are you running up legal bills, wasting time, and creating deal fatigue over 2x liquidation versus 1.5x or pre-money of $9.5 million versus your $11 million ask? Right. While you are screwing around, the other guy is getting funded. I brag about my dilution because it’s in the same paragraph about the weeks to a close not months. ‘I’m funded he’s not’ should be your goal.
I admit this is a gross exaggeration but the macro point here is focus on speed to closing.
VCs want to ignore you; let them.
Oy Vey with the Rolodex, we’re here to help, and all the rest. Look here’s the single most important deliverable after a 100x return on the money: Fire and Forget. Seriously. When Fixmo is sold, done, and in the bag, I hope that my investors say that I was Fire and Forget. This silly notion you have of VCs being up your rear and interfering with your business is almost always nonsense unless you either a) ask for help or b) the business is going off the rails.
In your agreements, there will be this list of things called “Matters Requiring Special Approval” (MSAs). These MSAs will be things like salary caps meaning you can’t hire somebody over $xxxx or you can’t sell the business or spend over $xxxxx on a capital item. You can’t do any of that without your VCs approval. Every time this list comes up the entrepreneur and his/her lawyer goes all nuts arguing over what should be the board’s responsibility versus this MSA for the venture firm.
Simply put: stop worrying about it. Yes, there will be stories about investors screwing things up by not approving a salary of some executive but it is rare and normally this happens when some non-VC goof you let into the round goes all “I’m in charge” like. Professional investors (VCs) don’t normally do stupid stuff.
In fact, they do the opposite. You’ll be the person trying to hire a CFO for 60 grand and they will be telling you to up the salary requirements.
The point here, like above, is get it done and get on with running the business. If we are doing a great job, we’ll be encouraged to keep going and if not, well, we should both get fired. You will find “Yeah, sure, of course” will be the response from your VCs when you ask, and after about the third time you ask about the MSA, you’ll be told to just do it and stop bugging them. You’ve arrived when that happens and you’ll have saved the legal fees in the process.
VCs are know-it-all and know-nothing types
Think about it. You walk into, let’s call him “Roger’s” office for a one hour (or less) meeting. Ol Rog, here, has to know enough about your business to actually speak intelligently on the spot while at the same time probably has a thimble full of actual knowledge on the topic. Plus he is dealing with 20 other “killer” deals on his desk.
What usually happens is the VC draws the wrong conclusions about what you are doing, you get pissed because you think the guy is a goof, and everybody is unhappily wasting time. This is 90% your fault and 10% Roger’s fault.
In the 90% category, you failed to look Roger up, check out his firm, his investments, speak to other CEOs, etc. You didn’t make your pitch simple enough with the right amount of problem/solution/who pays right up front.
It’s not “dispersive variations on secure data transmissions”, it’s Defense Grade Bit-Torrent. Roger doesn’t have a PhD in technology nor does he stay up reading research papers – he’s downloading movies. He’ll get in 90 seconds what the implications are around somebody using a defense grade bit-torrent solution for good and not evil.
Roger owns the 10% by not telling you before the meeting to send a one page summary so he could say no before you show up with a simple “not in our wheel house” explanation. Roger owns giving you the hour and setting you up to waste it but you took the blue pill (or was it red) so most of the issue is on you.
The point here is doing your homework, prep and then prep again.
VCs never lie; you just don’t hear the whole thing.
Let me give you a few examples:
You hear: We have reserves for follow on investments.
What they said: We have reserves for follow on investments but we are not going to give you a dime if your business isn’t performing to the point we can see a great return come out of it.
You hear: This is interesting; let’s continue the dialog.
What they said: This is interesting; let’s continue the dialog as I’m going to need more information, stats, market size, who’s using it, and your shoe size so I can get my head around this enough to do the real work required to get the partners on board to actually take this investment seriously.
You hear: This shouldn’t be a problem.
What they said: This shouldn’t be a problem but we operate as a consensus, only have partners meetings on Mondays, and sometimes my partner Kevin/John/Will/Bill can have a brain fart which will mean this actually is a problem so stay tuned and don’t commit until I get back to you with the firm answer.
VCs are people too. Really.
There’s this guy out there named Lorne Abony who doesn’t much like me. He doesn’t have to, he’s been killer successful. He’s not a fan because one day he came in to pitch my firm on a deal and I stared at him the entire time. Probably looked like I was almost scowling. What Lorne didn’t know at the time was I had just come off a redeye flight back from a problematic investment, was both tired and in a crappy mood. I should have gone home but I was trying to be supportive of my partners. Ooops. I suspect there is some level of mutual respect these days, but there you go.
I’ve seen deals get killed for less. VCs being sleep deprived (me), Dog just died, kid crashed the car, maid starched the shirt, tennis racket popped a string, are all real episodes I can point to where a pitch/deal went sideways. Remember you are dealing with humans and humans are, wait for it, human.
Now go forth with this secret knowledge, be successful, and help the next guy/gal with your brand of VC Secrets.