VC Litmus Test: Are you in It for the Venture or the Capital?
There are basically two types of venture capitalists. The first wants to make a difference by building something. The second just wants purely to make a financial gain.
I was thinking about that recently during a classic waiting-in-the-wings moment. I was about to go onstage at the Kickstart Seed Fund CEO Summit in Salt Lake City, hub of Utah’s burgeoning tech scene.
I was invited to address the summit specifically for my deep experience as an entrepreneur and founder of both tech ventures and a venture capital fund. There is a term in venture capital called “both sides of the table,” meaning the founder side and the investor side. As I said to Kickstart Seed Fund Founder Gavin Christensen just before heading onstage, “I know what it’s like to be on both sides of the table. You can be cowering under it or strapped down on top of it. Take your pick.”
Gavin got the joke. For the best VCs, venture capital isn’t about chasing easy money. It’s about taking risks outside the norm. It’s not hard to find 10 reasons not to do a deal. But sometimes the deals that check the boxes on “no” are the best.
You’ve just got to throw reason by the wayside and trust your gut. Gavin once funded a kid who was so young that after they signed the term sheet and the kid needed to open a bank account, his parents had to cosign because he only had a driver’s permit
That kind of instinctual investing has worked out spectacularly well for Gavin, and VCs like him. Kickstart is now the most active investor in the area with more than 85 investments.
To Be a Successful VC, You Have to Invest More Than Money
Gavin exemplifies everything that’s right about a venture capitalist. He’s done a great job building a community around his fund. The New Yorker dubbed Utah “the next Silicon Valley,” and Gavin has fueled a lot of that growth.
For many of these entrepreneurs and investors, the fact that Utah is not Silicon Valley is the whole point. Utah entrepreneurs don’t have huge egos. They don’t flex their beach muscles trying to raise more money than they should. Also, because they’re not in the epicenter, they’re more open to being coached. Some might take a little longer to get up to speed, but it’s worth it because that’s part of building the right culture and loyalty in a relationship. And the culture in Utah couldn’t be more right. I’ve never seen a gathering of happier, well balanced and fitter-looking entrepreneurs in my career.
On the Other Hand …
And then you have the other kind of investor. I have always said venture capitalists aren’t all bad, it’s just the 99% who give the 1% a bad name (to repurpose an old joke about lawyers). They’re the ones who get into venture capital for purely financial gain. A lot of them are starry-eyed younger people who think it’s a sexy job that makes you rich overnight. The reality is that it probably won’t. As others have said, it’s a get-rich-slow program. It can take eight to 10 years to build and mature a portfolio, and along the way, most of them get beat up and devalued.
VC is a hits-driven business. Your biggest winners will be 10% of your deals. And they have to make up for the other 90% that either fail or just do OK. Investors like Gavin and me accept that equation as part of building blocks of relationships, of loyalty, of commitment — of brand. The other kind of investor looks at the entrepreneur as nothing more than a commodity to be used for financial gain. They apportion good time only against good deals and they abandon anyone who’s not overperforming. That’s very shortsighted.
So, Which One Are You?
If you’re already into a deal and you’re not sure which type of VC you’re in business with, you’ll find out the minute something goes slightly wrong — and it always does. VCs who value the capital more than the venture are the ones who turn the board meetings ugly. They pull out the blame gun, create conflict and hurt their investment.
That always astonishes me. It’s never their fault. They made a reasoned decision, with all the time in the world to do their due diligence to make that investment, and yet the second something goes wrong it’s everybody else’s fault.
They’ll also be the first to try to bail on the deal. And that’s just as well. Good riddance. Or, even worse, they try to leverage the situation with other investors for their own gain. When opportunity controls your loyalty, you have a serious character flaw.
If the entrepreneur is struggling, the VC should be helping them. Yes, venture capitalists have to make their investors money and, along the way, they make themselves money. But they should also try to build a community around the core ideas that they and their entrepreneurs believe in.
They see their entrepreneurs not as a commodity but as the greatest renewable asset in the game. You can keep funding them in multiple deals and often fail early to then hit later. And if they hit big they can become investors in your fund themselves. They can also be evangelists and referral sources for the lifeblood of a deal flow. They can provide the VC all kinds of rewards beyond financial gain.
Gavin Christensen proves that approach to venture capital can be successful. Just ask those 85+ companies that he’s funded in Utah’s burgeoning tech community. It’s a healthy example of the 1-percenters the other 99% should emulate.