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On my run today I was thinking about GP – LP interactions. This line of thought was prompted by a contrast between two interactions, or rather one interaction and one non-interaction, that I’ve had in the past few days.
The interaction was I had with one of my LPs over the last 24 hours. They emailed asking for a reference on someone who indicated they knew me and had invested with me. I didn’t know the person, but knew a few people who did, and quickly sent emails getting addition info for my LP. With a small amount of effort I was able to generate some useful feedback, including triangulating on the deal he was suggesting we were investors in together (it was a true statement prospectively as it’s something I’m working on.) I was also able to get some specific one degree of separation feedback for my LP.
I contrasted that with the non-interaction that I’d recently had. I’m an investor in about 30 VC funds (so, in addition to being a GP in my funds, I’m an LP in a bunch of other funds.) I’m a very easy LP – I basically try to be available for the GP whenever they want, be supportive, make my capital calls on time, and be low maintenance. I invest in VC funds for several reasons, including my belief that long term it’s a good investment (and my overall performance across this category of investment bears this out.)
In the case of the non-interaction, I made an intro between an entrepreneur and the GP. I do this sparingly (per my Don’t Ask For A Referral If I Say No policy) – I’ll only do this if I think the fit is a good one. I think most of the people I’ve invested in and work with know this, but who knows. Anyway, in this case I haven’t heard anything back from the GP. When I thought about this, I realized there were several GPs I’ve invested in that are terrible at responding to me. Now, this might just be me, and not their LPs in general, but my guess is that the dynamic is a typical one given my knowledge of their individual tempo and work patterns.
I realized as I was thinking about this that I have very little respect for this type of behavior. I think you should treat your investors with the upmost respect, be extremely responsive to them, and to go out of your way to try to be helpful when they interact with you. When I reflect on the interactions I’ve had with my investors over the last 25 years, I always tried hard to be responsive, even if we had a disagreement, difficult conversation, or difference of opinion.
I tried to come up with a rationale for blowing off an LP. None of the obvious ones – I’m too busy, it’s not a priority, it’s not what I’m paid to do, I’m not interested – made any sense. And I couldn’t come up with any non-obvious ones that did either.
In every GP / LP relationship I’ve ever been involved in, there comes a moment in time when the GP needs something from the LP. This is true at the beginning of the relationship when the GP is asking the LP for an investment. It seems incredibly short sided to me for GPs to forget that they will once again need something from the LP and, instead of being responsive through the life of the relationship, only pay attention when the GP needs something.
Congrats to my friends at Avalon Ventures on raising their new $200 million fund. I’ve been friends with and co-invested with Rich Levandov, one of Avalon’s partners, since the mid-1990′s, most recently in Standing Cloud, Zynga, and NewsGator. I’ve gotten to know several of Rich’s partners over the past few years and recently had a wonderful Do More Faster book tour dinner hosted at Avalon’s San Diego office by Kevin Kinsella (a fellow MIT-grad turned VC.)
In conjunction with their financing, Avalon just rolled out a new website designed by Slice of Lime. Slice of Lime is a Boulder-based firm that we work closely with that was founded around 2000 by Kevin Menzie and Jeff Rodanski and then joined by my brother Daniel Feld a few years ago. We love their work (they designed our Foundry Group website) and they’ve done other VC firms sites, including Bridgescale.
If you are a VC firm and want a refresh on your website, drop the guys at Slice of Lime an email – I’m sure they’d be happy to hear from you. And keep your eyes out for some fun additional news from Avalon soon.
There have been a number of thoughtful “early warning sign” posts in the past few days including one from Fred Wilson (Storm Clouds), one from Mark Suster (What Angel Investing & Florida Condos Have in Common), and Roger Ehrenberg (Investing in a frenzied market).
The seed investing phenomenon of 2010 has been awesome to watch and participate in. The velocity of activity from individual angels, angel groups, seed VCs (the correct phrase for most of the “super angels” which have now raised actual funds), and even traditional VCs has been on a steep climb throughout the year. When the numbers are tallied up at the end of the year (I’m sure someone will do it – and it won’t be me) I expect there will be all kinds of new records set.
But the warning signs from Fred, Mark, and Roger are worth reading and pondering carefully. I have a few choice quotes to add to the mix that I’ve heard over the past thirty days.
- Prolific Seed VC: I only expect that 30% of the companies I funded this year will raise another round.
- Established VC With A New Seed Program: We are planning to make 30 seed investments out of our new fund. We’ll do follow on investments in 10 of them.
In both cases, when I speculate on the next sentence they would have said if they were being direct and blunt, it would be something like “I expect the balance of them will go out of business after thrashing around for a while.” The optimist would have a different view (e.g. that they would be quickly acquired or they would never need additional capital), but anyone that has been investing for a while knows this isn’t the likely outcome for any but a small number of these companies.
Mid-year I felt compelled to write a post titled Suggestions for Angel Investors. When I reflect on that post, my fear is that most seed investors aren’t implementing a “double down on the first round” strategy. Some percentage of seed deals will quickly raise their next round (30% if you believe the two anecdotes above.) Some percentage of seed deals will fizzle out. But some percentage will get stuck in the middle. They will be interesting ideas with solid teams that realize their first idea out of the gate needs a pivot. Or they’ll be in the middle of a pivot when they run out of cash. In the absence of the existing seed investors stepping up and writing another check (without any new / outside validation) it’s going to be hard for these companies to get to the place where they raise a next round financing.
While all entrepreneurs are optimistic on the day they raise their seed round that they’ll be one of the hot deals that easily raises a significant next round, it’s worth starting to plan from the beginning for the case where you “are interesting, but not unambiguously compelling.” In these cases, you need more time and the only place you are likely to get it is from your existing investors. If they are willing to keep investing on their own without a new outside lead, you’ll at least have a chance to get to the next level. But if they aren’t, you could find yourself in a very uncomfortable situation.
I’ll end with Fred’s money quote:
“Anything that is unsustainable will eventually stop happening. And when it stops happening, there will be a dislocation event that will cause people to change their behavior. ,,, When will it stop? Who knows? But be prepared for it to end. And when it does, things will be different. And we should all be prepared for that time.”
Having worked alongside Fred for a long time in a number of companies through several cycles, I can assure you these words come from a place of wisdom, experience, and shared pain.
I’ve been in several board meetings over the past month where the companies are having a killer Q2. A year ago everyone was still pretty rattled from the financial crisis and there was plenty of belt tightening, consternation, and general anxiety. By Q409 we’d had a number of companies we are investors in end the year strongly and their growth has continued into Q1 and Q2.
Over the past 15 years, I’ve sat through plenty of good meetings and plenty of bad board meetings. I always try to acknowledge the efforts of individual executives when they’ve exceeded expectations and the full team when they’ve crushed it. I’m not afraid to be direct and critical and I always speak my mind, but I try never to forget to praise people for their efforts.
When I reflect on my peers, some of the best VCs I’ve worked with are amazing at acknowledging the efforts of the entrepreneurs and management teams, especially when they are dealing with complex situations. This praise isn’t gratuitous – it’s targeted, focused, and appropriate. And over the years I’ve occasionally seen it offered up at exactly the right moment.
Unfortunately, the opposite is more common. I often sit through a board meeting and watch in amazement as the VC investors socratically pick away at the management team, asking question after question but offering no substantive suggestions. If the business is having an issue, or the CEO is specifically looking to try to work through a problem, this can be helpful. But in the cases where the company has performed well, this is at best a tedious exercise in wasting everyone’s time. At worst, it’s insensitive and offensive to a management team that has performed well, especially in a tough situation. And often, it’s incredibly deflating and demotivating.
So, fellow VCs and board members, take a moment and remember that when people do a great job, it’s worth spending a moment acknowledging them. Most of the folks I’m working with are busting their asses to create real companies. They are making many sacrifices and tradeoffs to do what they do. A little pat on the back will go a long way, especially after three hours of questions.
I was in a meeting with Rich Miner from Google Ventures on Friday with some entrepreneurs we are working with on a potential investment. While the team isn’t a rookie team, they’ve never worked with VCs before and they’ve been wrestling around the dynamics of how to interact with the two VCs in the room (me and Rich) and the various angels that are part of the seed round we are planning to do.
In the middle of the discussion, Rich used a brilliant metaphor of “VC as produce suppler”. The CEO was talking about how she realized she was the lead chef in the kitchen, but viewed us as some combination between sous chefs, owners, and the diners in the restaurant. This was apparent in the interactions – was she trying to “please us”, listen to us and do what we said, or put us to work? This was made even hard with the handful of angels involved – where did they fit in? And, it was clear that the kitchen was getting crowded.
In this middle of what was a rambling conversation, Rich said “think of us as produce suppliers.” He said something like: “We bring you produce. Some of it will be awesome and you’ll want to use it immediately. Some will be moldy, or won’t fit in your recipes, or you won’t need any more of it. And sometimes we won’t show up. Occasionally you’ll want to put us to work in the kitchen teaching you how to make a new dish with our produce. Other times you’ll politely ask us to get out of the kitchen so you can get some work done. And – ultimately – all of us – the investors (VC and angels), the entrepreneurs, and the employees are the owners!”
I’ve editorialized, but I stopped, wrote it down, and asked Rich if I could blog it. It’s one of the best, freshest, and crisp metaphors for the VC / CEO relationship that I’ve ever heard.