A few days ago Vinod Khosla commented that in his opinion, the vast majority of VCs did not add value to their portfolio companies — and in fact most added negative value. I don’t know if he exaggerated purposely for a provocative talk (seems like it), but there is certainly a message in there that I agree with: many VCs don’t provide as much value to their portfolio companies as they possibly could. And I think entrepreneurs are just as much to blame for that as the investors.
Too many entrepreneurs have a ‘lazy relationship’ with their investors. What I mean is the relationship, post-investment, is taken for granted and the bare minimum is done to keep up a semblance of “engagement”. Such lazy relationships are, unfortunately, encouraged by the perpetuated myth that great entrepreneurs don’t really need help from VC types. That is not true at all. VC is not a spectator sport.
Lazy VC/CEO relationships are fairly common in our industry. And many VCs and CEOs don’t even realize that. CEOs and investors sometimes don’t even talk between quarterly board meetings — both sides often assuming no news must be good news. In other instances, conversations don’t extend beyond high level updates, or quite frequently even if strategic issues are discussed, no actionable steps are laid out for either side to commit to. In my opinion, most often everyone is well-intentioned, but just doesn’t know how to be best partners.
Here are some thoughts on how to not have a lazy CEO/VC relationship:
1. When a new investor comes on board, CEOs should spend some time understanding the individual partner and the firm, and what they bring to the table. What other companies does the firm have in its portfolio, what large corporates do they have close relationships with, who else in their partnership is familiar with the domain and/or may have contacts, and what aspects of business are they most concerned about? This level sets what can, and cannot, be expected.
2. Board meetings are not to catch up on regular business. That should happen in off-line conversations. Board meetings should be used to:
· make important formal decisions — but every member should come prepared in advance of the meeting so time is not spent learning about the issues, but instead on critical topics that can only be best addressed in person
· set key priorities for the business — usually a dashboard with key metrics and issues helps focus the discussion
· identify specific ways in which each board member can help the company starting the day after the board meeting
3. CEOs should have an easy & direct line of communication with their investors at all times, especially if it’s a professional VC. If your VC is too busy to pick up a call from you, you need re-start on your relationship. You think Square’s founders have to wait for several days before Vinod returns their call? Or same for Twitter, Facebook, Pinterest or Stripe? Investors return these entrepreneurs’ calls faster than they would return calls from their homes…and you deserve such attention yourself, no matter how well-known your investor may be. You are no less than any of those other rock stars.
4. Communicate early and often to demonstrate trajectory and velocity of your progress and to also identify potential problems early on. Entrepreneurs or VCs sugar-coating their communications makes for bad partnerships. Be respectful but honest, and suggest solutions instead of just identifying problems.
5. If your VC lets several weeks or months pass by without even talking to you or learning how the company is doing, something is wrong. Take them to a dinner and have a heart to heart conversation. Why do they seem to be disengaged? Did you not provide good reasons/opportunities for them to spend more quality time on your company? Do they not care enough about this company any more? Are you in the lower left quadrant of their team vs outcome potential 2×2 plots? Is your relationship strained for any reason.
6. When you take money from a VC firm, the entire firm commits to you and not just one partner. You should then know that the entire firm is available to you as a resource. You don’t have to over-exploit that, but too often I’ve noticed other people in the firm sometimes don’t even know by name some of the CEOs, or other top leadership of portfolio companies. If another partner at your VC firm is an expert in an area of your interest you should ask for — and expect to get — engagement from that partner as well (barring any conflicts). Too many entrepreneurs don’t realize they have such access, or feel shy or hesitant to ask. I am fortunate to have observed numerous instances already at Lux Capital where several partners have teamed up to help a company in particular situations — some important and some not so important.
7. Talk to your peers frequently to learn the myriad ways in which their investors have been able to help them. You will be surprised what investors can do for you when they roll up their sleeves and get to work. Here are just some examples:
· Help in recruiting. Not just at the highest levels, but sometimes also interviewing and helping sell your company to VP and Director level candidates, to lawyers, design firms, PR firms, HR, accounting firms etc.
· Benchmark information on all kinds of things from executive compensation to 409A evaluations
· Introduction to interesting strategic partners, business development relationships, vendors
· Developing dashboards to monitor progress and institute better/efficient reporting techniques
· Provide guidance, support, mentorship, and some times direct involvement in managing difficult people, relationships or career transitions
· Feedback on website, PR, presentations, and collateral
· Assist in fundraising. Introduction to potential investors, provide side-channels of communication with potential investors, introduction to investment banks and help in managing them
· Help your ex-employees find other positions elsewhere
VCs invest in a company because they believe in the team, the idea, and the opportunity. There is a lot of blocking and tackling on the path to success, and great teams win. VCs should be a part of the team, not spectators. VCs are smart people, many of whom co-founded and built companies of their own, and have experiences to drawn upon. Even VCs without operational experience are sharp shooters who did some things right in competitive environments to get to where they are.
VCs are also paid a lot of money to build networks, accumulate knowledge, and distill information from a variety of sources. All in all, they have tremendous resources at their disposal (relative to any young startup), and it is only in the best interest of an entrepreneur to find ways to maximize utilization of those resources on their company. Similarly, VCs would find their job more fulfilling, and their investments to be more successful, if they were more engaged on an ongoing basis, and frequently sought out ways to bring their resources to the table in an organized fashion. There is no room for laziness in our industry and the VC/CEO relationship is no exception.