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.
I found myself agreeing with everything you said.A top VC who decides to screw the entrepreneur that way is not such a “top” VC after all.
you go it!
.Having been around the VC business for a long time and spending my time recently advising entrepreneurs/founders/CEOs, I am surprised at what a blind spot investors have as to their reputations.Of all the blindspots in the world — politicians being the other big one — VCs have a huge misinterpretation as to how they are perceived.There is no question as to how they want to be perceived as they constantly tell you but the reality of it is quite different and entrepreneurs/founders/CEOs often find themselves laughing up their sleeves at the substantive difference between self-perception and reality.The “soft sell” of the value add that particular investors bring to a deal is primarily a work of fiction promulgated by the investors themselves. There are some helpful investors who do bring a bit more but they are very few and far between.At the end of the day, VCs inventory money not personality.The distribution of interesting and charming and “nice” people amongst VCs is quite a bit slimmer than the general population but the number of delusional VCs is quite high.Having drifted into the business as an angel before that term was widely used, I catch myself often justifying certain behaviors with a crude assertion. I often hear myself telling complaining entrepreneurs/founders/CEOs — hey, it’s their money and the money always makes the rules.Entrepreneurs/founders/CEOs get that earthy sense of the order of things and go compliant which VCs may misinterpret as being embraced.The subtleties that you describe are very real but they are not nearly as damning as you suggest as there are many ill behaved VCs. It is almost expected behavior.One has to remember that VC is a business of 75% failure with OPM. There is a lot of negative energy.There is a huge difference between being a “banker” or a “backer”.JLM.
i like that. banker vs backer. very very true.
“VC is a business of 75% failure with OPM” Well said.
Amen to success as best revenge. You also bring up a great point for startuppers to look for (and ask directly about) when researching seed/angel investors: rate of participation in follow-on investments within their portfolio. It would be interesting to hear how such an investor would frame the “whys” of a low follow-on rate, especially if much of the portfolio companies from time period X are alive and growing (presumably with money from elsewhere).
it is hard to manage many companies, be involved, etc. big checks are generally methodical decisions. it is easy to spread the wealth early on. the checks just aren’t so big but the impact across the board is regardless of involvement.
True. And of course I can see the argument that spreading the wealth early on was necessary to ensure a few wins. In a context where the company’s doing well though, one would think the investor would follow-on (even if with the barest minimum amount and lowered involvement) to send positive signal to other VCs and thus, boost/protect their own initial investment.
Very thoughtful insights, indeed. It’s about relationships in the end, and good result for all involved. JLM’s comment about reputation is key as well – don’t we all need to think about what we put out in the world as it becomes part of who we are, especially when our actions match our words over time.
Interesting thoughts. I wonder how syndicates affect this thought. For example, Foundry Group has a syndicate. Suppose it seed invests in Acme Startup. What if in the next round neither the Syndicate or Foundry invest because company doesn’t fit with Foundry-and deal terms not right for next round by Syndicate? To be clear, I am not picking on Brad Feld but using their VC/Syndicate as an example because it’s unique. Most VCs don’t do syndicates.
syndicates are totally different. most do not do follow-ons at least that I am aware of
too new. no rules or etiquette. I honestly don’t know the answer. In the case of a small fund, if they are out of capital, they better help actively organize capital.