I thought about these two words recently before realizing that the acronym was accurate and resonating well with my recent readings and thoughts, so I figured it was about time to write a post on the subject, especially in an industry of collusion :)
First things first, a quick reminder: Venture-backed entrepreneurs are here to build companies, not muses nor small businesses. They must accept that the opportunity they are jumping on will soon become a responsibility if not a liability towards their employees, users, customers, partners and as a consequence their shareholders. As founders, they are expected to grow-up and perform alongside their organisation in order to actually earn the shares they own. They should not fool themselves because they started something someday… Ownership and Leadership are mostly earned rather than due, to the extent that the company’s interests always go first.
So what’s the responsibility of Venture Capital firms in all this?
Well, I often get this same question from all sort of entrepreneurs who have either experienced great stories with decent to superb outputs, lived awful events with or against their investors, or haven’t even started to work with venture capitalists or business angels yet: What make so many investors look like amateurs, at best being neutrally useless, at worst completely screwing companies and entrepeneurs over with few or no consequences?
Before all, be aware that the very true stories rarely become public, because there are a lot of asymmetrical informations and interests at stake. By the time the shit really hits the fan, it’s too late and the only output is to make up a simpler story rather than trying to tell the real, long, tortuous truth. Also, it’s preferable to sometimes cover up a gigantic mess where all parties share responsibilities.
Now, about the Venture Crap you so often ask about…
If only I could tell you that entrepreneurs bring this to themselves, that they should learn and apply their lessons. Unfortunately, even though entrepreneurs must understand that there are always strings attached to accepting venture money, investors know better than anyone else the rules of the game and therefore should bring them to the entrepreneurs’ attention. I’m sorry that entrepreneurs have to learn those things by themselves, some investors are failing at taking the time and providing the right resources to make them understand what they are jumping into. I don’t think it’s intentional, but it’s a costly mistake that founders might someday pay the price for.
Investors are failing at their mission, wait but why…
First, it’s a natural law that applies to most industries. In any sector, a lot of people aren’t good at what they do, for various reasons, often because they landed there by accident and stayed by hazard, laziness and opportunity. People either try to anticipate, improve and over-deliver, or tend to zero. This is especially true in constraints-free environments where people can organize their work as they please most of the time. So don’t be surprised that some investors don’t have the level of excellence of fighter pilots or super-heroes. They just want to have a good time.
Second, Venture Capital is a people business. I mean it. It requires a high dose of emotional intelligence, something that is often annihilated by our social education, misplaced ego and growing unconsciousness. Yet, it’s what allow investors to build strong and trustworthy relationships with founders, a key to reflect, exchange and build a common path with very little asymmetry. And by the way, the lack of diversity and transparency in our industry contribute to the lack of emotional intelligence. Warning: this also applies with great magnitude to founders.
Third, there is a structural chain of causes and consequences from the scheme on which the venture capital model is built. To make a long story short, it allows the investment teams to receive guaranteed revenues for roughly 15 years or more at least (1). The result is that you provide relative comfort to the people in charge of investing the money. You might think that it allows to focus on the mission but actually some of them become pretty lazy from having this recurring source of revenue while their set of constraints is pretty much limited to marketing and paperwork towards their own investors rather than a review of their actual work. Those lazy people tend to become mediocre as a result of their inconsistency and lack of discipline. Ultimately, a mediocre person in a position of power because of all the money she has to invest, might at worst just turn into a gigantic asshole.
Fourth, Asymmetrical agenda. Founders are responsible before their investors and they can only totally fail once in a company’s lifetime. Venture Capital is a different game, failures are part of the plan that is presented to LPs (the organisations investing in the funds) and they are often cover up by the presentation of a J-Curve (Congrats to the person who came up with that and made everyone swallow that concept for losers) or the unrealized gains from portfolio companies which have raised money at higher valuations. Therefore investors aren’t held accountable until the game really ends. Your agendas don’t match, sorry.
Fifth, Loss of interests. Returns in Venture Capital come from just few investments. Investors are after the high output result of a power law. From a business perspective, it’s a very risky and counterintuitive bet. Nobody is ever prepared for hyper growth and managing very high expectations. Some people succeed incredibly, but some people don’t. Overall, it’s just freaking hard and intense. And in the meantime some investors tend to loose interest for the companies and entrepreneurs they don’t believe in anymore.
Sixth, Re-action versus Pro-action. It is a very highly unpredictable job. Investors are trying to build self-fulfilling prophecies in highly uncertain environments. The more advanced is the company and the easier it is to envision a probable future. But before that, it’s all about empowering people investors deeply believe in who target large and exciting market opportunities, making them reflect on what they are building, connecting them to the right people for them to accelerate the company’s path to success… And frankly, very few investors actually do that. Probably because entrepreneurs are not asking but more importantly because too many investors tend to be reactive rather than pro-active.
Now, here is my take
I like to believe that the job of investor is paved with simple decisions and actions in complex environments. And in order to do that, it requires a clarity of vision, a very high dose of faith and conviction, curiosity and patience, emotional intelligence compound with intelligibility, consistance and discipline, both determination and flexibility, as well as ambition and humility. From my perspective, it’s not easy.
We would hope that more investors would try to do their job accordingly, with a slight dose of excellence. It’s certainly frustrating and disappointing for many entrepreneurs but it doesn’t change the fact that they have to cope with it and take responsibility for the fate of their company.
Good Luck :)
(1) Venture Capital is a long term play even though too many people tend to forget it… Therefore, most investors raise money (from what we call LPs, Limited Partners) that they will manage for approximately 8 to 10 years thanks to guaranteed management fees (2.5% or more per year of the money under management, for a limited number of years). The trick is that while the valuations of their portfolio companies are on the rise from following investment rounds, they go raise another fund, giving them another 8 to 10 years of management fees. Add to this potential performance fees if they succeed (called Carried Interests, it’s roughly 20% of the performance above a certain rate of return).