Venture Capital Investments Are Like Puppies
Venture capital firms come in all shapes, sizes, and cultures. One organization with which I’m familiar started in the early 2000s and was known for celebrating each time it completed a new investment. The firm would throw a lavish, self-congratulatory party for each new startup added to the portfolio. Not surprisingly, this investment firm is no longer in business.
In my opinion, this is because making an investment is the easiest part of the venture capital job. Anyone can find a startup and write a check. Generating a return by growing and exiting an investment is the tough part. Making an investment is actually the start of the race, not the finish line.
It’s a lot like bringing home a new puppy, which has apparently been a trendy thing to do during the Covid-19 pandemic. The entire family is excited. The puppy is adorable. The kids are enthusiastic to play. Parents are proud that the kids have promised to help take responsibility for the new member of the family.
Of course, the honeymoon period typically ends quickly. The new puppy is adorable, but needs to be trained. The kids are still kids, after all, and don’t quite pull their weight with puppy-related chores. The dog wakes up at 5:30am and needs to be walked. The puppy chooses your favorite shoes as a chew toy. Someone needs to collect the puppy’s “deposits” from your neighbor’s lawn.
It’s not any different for venture capital investments: someone needs to be responsible. These deals present obligations requiring the equivalent of care and feeding, so they can grow up to be strong and healthy. Just to be clear, I believe that investments are like puppies, not entrepreneurs themselves!
That means adopting a stewardship mentality, assisting entrepreneurs with growing their businesses. Being a steward of the business is an active role, as explained by Georges Doriot, who is considered to be the “father of venture capital” by industry historians:
“There is always a critical job to be done. There is a sales door to be opened, a credit line to be established, a new important employee to be found, or a business technique to be learned. The venture investor must always be on call to advise, to persuade, to dissuade, to encourage, but always to help build.”
These roles don’t perform themselves, and VCs who invest passively may get lucky, but are not following Doriot’s value-creating principles. Especially at the earliest stages, startup businesses are fragile and need support. Along with support also come accountability and sometimes consequences. Note that Doriot includes “dissuade” on his list of jobs that must be done. It is impossible to train a puppy without discipline, and businesses require discipline as well.
In the past decade, entrepreneurs like Mark Zuckerberg of Facebook, Adam Neumann of WeWork, and Elizabeth Holmes of Theranos have helped popularize the notion of the unleashed startup led by an entrepreneur who retains extraordinary levels of control — with investors and board members relegated to passive roles. Because most investors I know seek to be “entrepreneur friendly” and cultivate this reputation explicitly to gain access to the most competitive deals, it’s tempting to go along with this trend. After all, most entrepreneurs understandably want as much control as they can get. As Reid Hoffman of Greylock explains when advising startup CEOs how to select board members, “[a] mistake that many entrepreneurs make is to pick passive, do-nothing board members as a way to minimize the hassle of dealing with the board.”
But the venture capitalist’s loyalty — especially for those serving on the board of directors — shouldn’t be just to the founding entrepreneur, no matter how talented or charismatic. Investors seeking to build sustainable, long-term value owe a duty to all business stakeholders, including employees, other shareholders, customers, business partners, and even the general public. While Facebook, WeWork, and Theranos have each enjoyed media attention and stratospheric valuations, there is increasing evidence that a “free range” approach to venture capital has its downsides. Theranos has been liquidated and its founder indicted for wire fraud and conspiracy. WeWork and Facebook have recently inspired well-researched articles with the following titles, respectively: How Venture Capitalists Are Deforming Capitalism, in The New Yorker and Facebook Is a Doomsday Machine, in The Atlantic. Surely this is not the intention of enthusiastic and optimistic venture capitalists upon funding a new deal, but nevertheless, these three companies are among the most highly visible examples of the potential consequences of this approach. As an investor, I find these articles uncomfortable, but not inaccurate. One wonders if a more active role, in the spirit of Georges Doriot, could have curbed some of the damage at, and caused by, each of these companies. As Fred Wilson of Union Square Ventures notes:
“Boards should not be controlled by the founder, the CEO, or the largest shareholder. For a Board to do its job, it must represent all stakeholders’ interests, not just one stakeholder’s interest.”
Thankfully, the bulk of the investor’s role focuses on the positives of building value, but the job is even tougher for corporate venture capital investors (“CVCs”) because investments are often accompanied by a commercial relationship between the CVC’s parent corporation and the portfolio company. These extra “chores” also require active engagement from a responsible party, as described by my colleague Beth Kearns.
While we live in an era of plastering recognizable logos on web sites and in pitch decks, venture capital investments are not trophies in and of themselves. These startup investments are obligations, like a puppy, that require attention and management. In my experience, and according to the lessons of Georges Doriot, success in venture capital requires an active stewardship role to train, manage, monitor, and most of all, to build.
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