About that valuation vs. bad VC tradeoff…
You have surely heard some of the world’s best known VC’s tell you to optimize for investor quality, and not valuation. You’d think that’s pretty self-serving, right? Maybe, maybe not. Have a serving of ICO whilst you ponder the tradeoffs; I’m not sure I can answer that question for you.
Defeat starts from Within
What I do know for sure is that this old Silicon Valley proverb is grounded in age-old wisdom that still applies today:
“Good boards don’t create good companies, but a bad board will kill a company every time.”
Value add is elusive but value destruction can be extremely tangible — this is because venture investors hold real, measurable power. VCs usually have the power to block a financing, a sale, a senior appointment. They must approve budgets and can usually fire the CEO.
Usually trouble starts with VCs investors who only have a superficial understanding of your startup. Many don’t go deep enough in understanding where the business is *really* at. Budgets are often set as unrealistic levels and anxiety ensues when targets are missed. Patience is not a virtue many exhibit. It gets worse when companies are supposed to be scaling as issues take more time to fix.
Too tough, too soft, off the mark either way
It is easier (and sometimes needed) to play the role of the *tough* board member who insists on accountability. But all too often this ends up creating mistrust at the board as management teams scramble to deliver impossible outcomes. A vicious circle.
Cheerleader VC’s (is there a gender neutral term for this?) are often no better — they support you until, suddenly, they don’t — leaving founders dumb-founded by the sudden change of atmosphere at board meetings — and again destroying alignment.
What are needed are engaged conversations grounded in the reality of what a team can deliver and where the business is really at — with a willingness to iterate fast on strategy, team and targets given we operate on fundamentally sparse and flawed data. Roger Ehrenberg put it well here.
You’ve got to learn to love chaos and embrace your own ignorance. If you’re interested in that whole topic head over to Buster Benson to read more about Antifragile systems.
A Confederacy of Dunces
If you think I’m overstating the point, let me tell you, I’ve seen all kinds of deviant behavior over the years — for example:
- The Budget is The Budget! An insistence on hitting top line targets at all costs for the sake of discipline when this company really needed to focus hard on one of its verticals to become more successful long term, at the expense of a single years’ revenue objectives. CEO held firm and company is thriving.
- Information Asymmetry Anxiety: an investor setting unreasonable burn targets on the grounds that “management has more info than we do, and they are playing you when they say they can’t cut” in an infrastructure heavy / fixed cost business where the request was clearly absurd given impact on headcount
- I want to know the Truth! A paranoid investor setting up traps for management members invited to present to the board — he would literally break them down publicly — because he thought this was the best to “get to the real truth”. We had to work hard to stop folks from resigning.
- Of course you can rely on our money! An investor completely misleading a management team about his partnership’s willingness to support the next round — because he was afraid of getting wiped out on a recap — only to let the company hit the wall and laying the blame squarely with management
- Le Coup d’Accordeon: Investors blocking a reasonable sale, only to recap a company, dilute the founders to hell and sell a year later for the same price in what they later boasted of as a “great investor prowess”
A Coalition of the Willing
This is not to say I haven’t worked with great investors who can really make a difference (hello Robin Klein, Martin Mignot, David Frankel, J-David CHAMBOREDON and others) but that toxic or hardball investors can’t be fired and will hurt you.
This is not to say “VC is evil”, either. The kind of stuff I describe above is plain vanilla and routine in the world of business. VC’s are, comparatively, softies. But that is just as it should be, given we back fragile organisms, experimental organizations “in search of a repeatable and scalable business model”, to quote Steve Blank.
So whilst the rethoric of “optimise for the quality of investors not the pre-money” is clearly self-serving, it is absolutely key to build a “coalition of the willing” at your board that fosters the right environment for success.
As a founder, you’ve got to think about what that’s worth to you.