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I often get asked how I ended up becoming a venture capitalist. When people ask me how they can become a VC, I point them to my partner Seth Levine’s excellent blog posts How to become a venture capitalist and How to get a job in venture capital (revisited). But it occurred to me today – after getting another email asking me how I’d become a VC, that I wasn’t really answering the question.
Amy likes to remind me that when I was an entrepreneur, I used to regularly give talks at MIT about entrepreneurship. I’d say – very bluntly – “stay away from VCs.” I bootstrapped my first company and, while we did a lot of work for VCs, I liked taking money from them as “revenue” (where they paid Feld Technologies for our services) rather than as investment.
Feld Technologies was acquired in November 1993. Over the next two years, I made 40 angel investments with the money I made from the sale of the company. At one point in the process, I was down to under $100,000 in the bank – with the vast majority of our net worth tied up in these angel investments and a house that we bought in Boulder. Fortunately, Amy was mellow about this – we had enough current income to live the way we wanted, we were young (30), and generally weren’t anxious about how much liquid cash we had.
Along the way, a number of the companies I had invested in as an angel investor raised money from VCs. Some were tough experiences for me, like NetGenesis, which was the first angel investment I made. I was chairman from inception until shortly after the $4m VC round the company raised two years into its life. Shortly after that VC investment, the VCs hired a new “professional” CEO who lasted less than a year before being replaced by a CEO who then did a great job building the company. During this period, the founding CEO left and I decided to resign from the board because I didn’t support the process of replacing this CEO, felt like I no longer had any influence on the company, and wasn’t having any fun.
But I still wasn’t a VC at this point. I was making angel investments with my own money and working my ass off helping get a few companies that I’d co-founded, like Interliant and Email Publishing, off the ground. I was living in Boulder at this point, but traveling continuously to Boston, New York, San Francisco, and Seattle where I was making most of my investments. During this time, I started to get pulled into more conversations with VCs, helping a few do some diligence on new investments, encouraging some to look at my angel investments, and investing small amounts in some VC funds whenever I was invited to invest in their “side funds for entrepreneurs.”
One of the VCs I overlapped with while in Boston was Charley Lax. Charley was a partner at a firm called VIMAC and was looking at some Internet stuff. I was one of the most prolific Internet angel investors in Boston at this point (1994 – 1995) so our paths crossed periodically. We never invested in anything together, but after I moved to Boulder, I got a call from Charley one day in early 1996. It went something like:
“Hey – I just joined this Japanese company called SOFTBANK and we are going to invest $500 million in Internet companies in the next year. Do you want to help out?”
Um – ok – sure. I didn’t really know what help out meant, but on my next trip to San Francisco I had a breakfast meeting with Gary Rieschel and Jerry Yang. SOFTBANK had recently invested in Yahoo! and presumably the breakfast was to vet me. I remember it being pleasant and ending with Gary saying something like “welcome to the team.”
I still didn’t really have any idea what was going on, but I was making angel investments and having fun. Charley proposed being a “SOFTBANK Affiliate” which had a small monthly retainer, a deal fee for anything I brought in, and a carry on the performance of any investments I sourced. Informal enough for me to play around with it for a while.
I was in Boston the following week so Charley emailed me and said “can you go check out this company Yoyodyne and tell me what you think?” So I went to a generic office park near Boston and met with two people who would become close friends to this day. The first was Fred Wilson, who had just started Flatiron Partners (SOFTBANK was an investor in Fred’s fund) and the other was Seth Godin, the CEO of Yoyodyne. I vaguely remember a fun, energetic chat as we met a few people at Yoyodyne, ran through the products, and talked about how amazing the Internet and email was going to be as a marketing tool.
My formal report back to Charley was short – something like “Seth’s cool, the business is neat, I like it.” SOFTBANK and Flatiron closed an investment in Yoyodyne a few weeks late.
Suddenly I was a VC. An accidental one. And it’s been very interesting since that point back in 1996.
VCs love to say things like “we are entrepreneur friendly.” It’s trendy, catchy, and looks good on a blog post. But, as I’ve said in my post Your Words Should Match Your Actions, one can “damage their reputations by having their words not match up with their actions.”
Now – this post isn’t about responding to emails. Nor am I trying to be preachy. I’m not trying to explain a new behavior. Rather, I’m making an observation about something I’ve experienced – both as an entrepreneur and investor – since my first angel investment in 1994.
Here’s the situation, as reported this morning by an experienced CEO of a company we are investors in.
“We’re raising money. I have a good intro session. Prospective investor wants to meet in person, see a demo. We have a good 2nd meeting. We agree on action items. I go away and follow up.
Follow up again.
Radio silence still.
The first time it happened I was inclined to think it was the investor and that they just couldn’t find the time to send an email response saying, “sorry – no longer interested”. Then, it happened again this month.”
Now – initial non-responsiveness – whatever. Lots of people don’t respond to emails, intros, or requests for meetings. But after two in-person meetings, to be non-responsive is just plain rude.
How hard would be it be to say “Hey – great spending time with you – but this isn’t something I want to pursue.” Or maybe “Sorry for being slow – I’ve been swamped – I don’t have time for doing this right now.” Or – well – anything.
I’ve had this situation come up so many times that I’m immune to it. I assume that the VC isn’t interested. But I’m amazed at how the reputational damage follows the person around. And then – at some point in the future – that VC is looking for a response for something. Hmmm …
I’ve had this happen with LPs. When we went and raised our first fund in 2007, plenty of people wouldn’t meet with us. That’s fine. Lots said they weren’t interested after a first meeting. Totally cool. But some met with us but then were completely non-responsive after the meeting. Ok – whatever. But when those non-responsive LPs call me today asking for something – whether it’s to get together to “get to know me better”, or to get a reference on someone else they are looking at, or to learn more about what I think about the market for hardware investments, it’s really hard to get on the phone and spend time with them. I do – because that’s my nature – but I always remember their non-responsiveness.
I hear – and say – “No thank you” all the time. Every day. 50 times a day. That’s just part of the role I play in business. But I always try to say “No thank you.” It’s just not that hard. Especially when I know someone, or have engaged with them in some way.
Are you the guy the experienced CEO just encountered? How would you feel if your name – and your firm’s name – just went out via email to 60 CEOs attached to this story? Maybe you don’t care, but if your message is “we are entrepreneur-friendly VCs” you just undermined the reputation of your firm in a major way.
Some of my favorite VC posts are ones that say what the VC posts that say what the VC thinks about how it all works. And – importantly – how it impacts the entrepreneur, his choices, and the dynamics between the entrepreneur and the VC.
Fred Wilson does this regularly. For example, see his post today on Valuation vs. Ownership.
My partner Jason Mendelson does the same. See his recent post The “VC Bargain”. Of course, Jason and I aspired to do the ultimate version of this in our book Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist.
You don’t have to agree with them. That’s what the comments are for. But they each say what is on their mind, why, how they think about it, and what the implications are for them.
If you want another example, take a look at my partner Seth’s post from last year titled I’m getting sick of the bullshit. And then reflect on the post from the anonymous entrepreneur that I highlighted yesterday titled My Startup has 30 Days to Live.
This shit is really hard and really complicated. It’s easy to have a surface view of it, to romanticize it, or to fall in love with the idea of it. Don’t. Do it because you love it. And find partners who want to go on the journey with you.
Last night Amy and I watched the movie Something Ventured: Risk, Reward, and the Original Venture Capitalists. This was my reward (I got to choose) since she watched both football games yesterday (and today). We have a 15 minute and 30 minute rule on any movie – after 15 minutes the chooser asks “still into this movie?” If the answer is no, we stop. This question gets asked by the chooser again after 30 minutes. If the answer is yes, we go for the duration, even if someone falls asleep. For example, after 15 minutes the other day, Amy said “still in” on my choice of The Hebrew Hammer. After 30 minutes, we were both “no’s” and that was the end of that.
I figured Amy would veto Something Ventured after 15 minutes. I’d heard from a number of VC friends that it was really good, but the idea of watching a documentary on the history of the creation of the venture capital industry doesn’t sound like an awesome Saturday night movie choice. But after about ten minutes, Amy said, “Wow – this is great!”
As I’m deep into writing book three of the Startup Revolution series (titled Startup Boards: Reinventing the Board of Directors to Better Support the Entrepreneur) I’ve been thinking a lot lately about what makes a great board of directors, and what characteristics of different VCs contribute to this. It ended up being super helpful to see direct interviews with a number of legendary VCs, including Arthur Rock, Tom Perkins, Don Valentine, Dick Kramlich, Reid Dennis, Bill Draper, Pitch Johnson, Bill Bowes, Bill Edwards, and Jim Gaither. They covered a wide range of experiences, but were all there at the beginning of the VC industry and shaped many of the fundamental structures of venture capitalists, VC firms, how they interact with entrepreneurs, how the companies (and investments) are structured, and how boards work.
The entrepreneurs who were in the documentary were equally awesome. They included Gordon Moore (co-founder of Intel), Jimmy Treybig (founder of Tandem), Nolan Bushnell (founder of Atari), Dr. Herbert Boyer (co-founder of Genentech), Mike Markkula (president/CEO/chairman of Apple for many years), Sandy Lerner (co-founder of Cisco), John Morgridge (early CEO of Cisco), and Robert Campbell (founder of Forethought). The interplay between VC and entrepreneur as the story of the founding and funding of their companies was told was very powerful.
After 30 minutes, when asked if she was still in, Amy emphatically said “yeah – definitely.” While I thought I knew all of the history, I learned a few things I’d never heard before, but more importantly I got the nuance of the stories directly from the participants. And all of it was rolling around in the back of my head this afternoon as I spent three solid hours on Startup Boards.
If you are a VC, or aspire to be a VC, do yourself a favor and watch Something Ventured right now. And, if you are an entrepreneur who is interested in how the VC industry got started, I think you’ll also find this fascinating. The film ended with all of the VCs echoing the powerful reminder that without the entrepreneurs, there would be no VCs. It made me happy that it ended on that note.
Rajat Bhargava and I have been working together since 1994. We’ve been involved in creating seven companies together (the most recent ones are MobileDay and Yesware) and, while most have been successful, we’ve had a huge number of positive and negative experiences along the way. We’ve mostly had a lot of fun and, when we haven’t, we always made sure we figured out what went wrong.
Minda Zetlin just put up an interview with us on the Inc. Magazine site titled 4 Signs You Should Say ‘No’ to a VC which I thought was excellent. She explores the entrepreneur – VC relationship and suggests four warning signs for an entrepreneur when interacting with a VC.
- The VC isn’t fascinated with your product
- He (or she)’s just not that into you
- You can’t be completely honest
- The VC doesn’t treat you like an equal
The paragraph on “you can’t be completely honest” is a seminal moment in my relationship with Raj. It also was a key point in my work career where, upon reflection, I completely and totally grokked the importance of being honest in the moment, clear about my reasoning, and willing to change my perspective based on new information, rather than feeling stuck in simply delivering a message. The section from the article follows:
“The important thing is to be completely transparent,” Bhargava says. “It’s very, very difficult to be transparent about your business, but it goes a long way toward building that relationship. ‘Here’s what I’m going through; here’s what I’m struggling with; here’s what I need help with.’ You have to know if that will spook the investor or if they’ll want to dig in and help you.”
That ability to be honest was a great asset in Feld and Bhargava’s relationship when they worked together on Interliant, the only one of their ventures that did not survive. After some politicking by a different executive, Feld removed a part of the company’s operations from Bhargava’s oversight. Bhargava took a few days to calm down, but then he explained forthrightly how disappointed he was and why he believed Feld had made the wrong decision. “Being open and directly confronting the issues, you get through it,” Bhargava says now. “I felt hurt, but I think our relationship is that much stronger.”
As for Feld, he recalls returning to his hotel after discussing the matter over dinner and feeling physically ill. “I knew I had completely screwed up,” he says.
I count Raj as one of my closest friends and trust him with my life. He’s had an enormous influence on how I behave as an investor and how I interact with entrepreneurs. Raj – thanks man – I look forward to many more years working together.