Oversyndicated, overprotected and underperforming



I had written a post previously about the sometimes excessive fascination for West Coast style VC but it of course it made me realise that I should really be talking about how to get more of a West Coast spirit in the way we do deals in Europe.  Johns_1

I was fortunate in my early VC career to work alongside people like John Shoch at Alloy Venture (pictured) or Stephan Dolezalek at VantagePoint.  Whilst John is less known than say fellow Kasenna board member Steve Krausz (a Midas List regular),  the reason I mention him and Stephan is that these guys were both deal fiends who would not abandon that win-win California attitude.  In other words, they would write extremely tight term-sheets that provided all the protection an investor could want and thoughtful ways to align interests, whilst at the same time providing a stucture where management and the board felt empowered to run their business.

In Europe by contrast, and in particular in the French market, I have noticed certain behaviour patterns that can be associated with a lack of risk appetite, a single-minded focus on downside control and a tendency to be extremely paternalistic with management.  Needless to say I cannot recall one of these companies ever making it big …

Some of the "Sins of the Seriously Risk-Averse" include:

  • Low ownership, oversyndicated deals with too many investors on the board.  I hear you saying that is a self-serving comment coming from a relatively large fund; but I would wholeheartedly disagree.  Ownership matters, so if you are a small fund do fewer careful deals that you can significantly impact.  Local market leaders, as measured by number of deals, often belong to incoming syndicates of 4 to 6 investors.  As all of us in venture know, consensus among a broad group of investors is a surefire way to kill off any originality or boldness of vision, so you end up with middle of the road companies with a structural incapacity to reinvent themselves.
  • Excessive vetos and in particular board and investor vetos.   This is when investors protect themselves against just about any eventuality by forcing through a nice long list of investor / board vetos, whose result usually is that the board / management cannot take any decision without formal consultation.  I have seen a n investor veto on spend in excess of €50,000 in one deal… Sure, any areas of conflict should be covered by investor vetos (since as a board member your fiduciary duty is to the company), but you have got to let management run the company !
  • Ludicrously detailed reps and warranties.  No, dear investor, that €5,000 limit on compliance with labour laws will not fundamentally change your risk profile…

I would go as far as saying that some venture players seem to see their USP in their ability to generate and then manage extreme documentation complexity.  In my experience this desire to create paperwork worthy of Indian public servants is a way to exert power by using jargon and technicity, usuallt because said player has little to add on the business side.

If you don’t think this is hurting our competitive position in the industry, see what Rodrigo, who is sowewhere between a VC and an operator himself, had to say on the topic:

Other European funds need to start thinking globally when they invest; I’ve met a *lot* of European VCs in the past year for vpod.tv. And I can see the difference between a globally minded player, and a local player. Between a risk-prone co-entrepreneur (I like that way of describing your investor), and a fund manager employee… And that’s not even touching upon some ethical concerns I’ve heard / seen on the market.

Sadly it is only one more reason why the US has been kicking our butts for such a long time …

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One Response to Oversyndicated, overprotected and underperforming

  1. Hi Fred,

    I couldn’t agree more with this. Complexity is the enemy in the docs, in the capital structure and in board decision making.

    Nic