Financial commitments send a message
Investing in the start-up world has many facets. There are all different types of investors; angels, VC’s, micr0-VC’s, private equity etc. Most investors have different strategies, thesis’ and levels of involvement. Some change over time and others remain consistent.
At the VC level there are a few unwritten rules that go under the heading “it is the right thing to do”. The number one rule, IMHO, is to treat the entrepreneurs you invest in with respect. You might not necessarily approve of the way that they run their business or some of the decisions that they have made but if you have made financial commitments to that business and the business is succeeding then it is important to continue your financial support.
I have seen one business that was moving the needle upward, was early to the game and had an opportunity to sell. The entrepreneur passed on selling the business for several reasons. After that happened the investor deciding to not support the entrepreneur going forward and in the process bled the company dry. That in turn left the entrepreneur in a place of having to rebuild without support. That sucks. I know that the investors reputation was mildly hurt but when someone has millions and millions to invest it is hard for people to not attempt to go to that well if need be. You don’t have to continue participation but don’t fuck the entrepreneur. The entrepreneur has had a much more difficult time. I hope that the entrepreneur has insane success because success is the best kind of revenge.
Over the last few years more than a handful of VC’s have put money into the first round (seed) of capital in a company essentially as a placeholder. I get it. You learn from those businesses, you spread the wealth, etc. Here is the thing. Those companies end up growing and when they go out and get their next round, particularly when it is well deserved, those VC’s have decided for whatever reasons that they are not going to lead or even participate it sends a terrible message to the next set of investors who are excited about what they see.
You would think that it would be irrelevant but it isn’t because it is human nature to question yourself. If a top VC is not going to support the next round then new investors start to wonder…am I making a mistake? That is the signal being sent from the VC. I believe the VC’s that had made that first round commitment to a company should be supporting the next round if the entrepreneur has proven that they have the ability to raise cash because of their successes. Walking away is not the right thing to do. Also, entrepreneurs generally remain entrepreneurs. The next time they build a company you want them to go back to you because you did the right thing by supporting them, not necessarily leading, but sending a financial signal of support.
Most angels put money in the first round. I like to continue putting money in as the company grows and raises more money. At one point it becomes expensive but I want to participate in follow-on rounds. It shows everyone involved that I support the growth that has taken place. It sends a clear signal of support to the entrepreneur too. It takes time for these companies to grow. To me, it is the right thing to do.
Brad Feld wrote a similar type post about this called What Happens When Your Actions Don’t Match Your Words. His post is just a different dialogue about what I am writing about today. I firmly believe what goes around comes around. People work really hard in this business to build their own personal reputations. Entrepreneurs work really hard at building their companies. There should be a happy medium working together and always doing the right thing on both ends. I try to live by that rule. There are so many others who I believe to be great investors and I would hope that they would live by that rule too.