Tell me why VCs are so disliked by entrepreneurs



You have to listen to your audience right ?  I would like entrepreneurs to help me understand what it is about VC’s that irks them and what behaviour they have witnessed that makes them a poor development partner.

One of my (blunter) posts was recently reposted on Silicon Alley and generated some aggressive commentary, some of which seemed to stem from people who actually had extensive experience in building succesful companies and had built a really deep sense of, how shall I put it, hatred for the VC community in general.  Not just sour grapes from losers then… (that was joke, I feel I have to highlight them these days).

Now I am not a naive newcomer who thinks money grows on trees or that all VCs are really nice guys just trying hard.  In fact a fair portion of my industry irks me too.  I have done my fair share of screwups (typically saying no too late and dropping some balls). I also recognise that the fabric of some deals (e.g. raise a ton of dilution-protected money at high prices on inflated expectations) fundamentally lays the foundation for some serious investor – entrepreneur fallout when the market turns (as has been happening this year and nasty washout rounds come into play).  And if I was the founder of, say, Glowria, effectively robbed of my company, I would not be feeling any love for my brethren right now…

But going beyond that, there seems to be something broken in the entrepreneur-VC relationship even though both parties should want the same outcome (to build a great business), even though no one does this (purely) for money but in large part because of the pleasure derived from working with innovation and creating successes, and even though long-term reputation matters.

What is going on ?

I would love for people to share their views back to me in complete anonymity to my fdestin at gmail account.  I will summarise, edit, keep the warts and spew back.  I want precise, actionable items, the more detail the better (legal clauses, board behaviour, issues experienced by the commentator) as well the softer qualitative aspect of what makes the relationship fall down.  It would be helpful to understand what kind of VC you were dealing with (big name firm, regional fund, VCT or FCPI or other tax enhanced etc).

I have received the first few answers and am discovering some completely new aspects…

<— self-deprecation (a Belgian pastime by default)

This entry was posted in Uncategorized. Bookmark the permalink.

22 Responses to Tell me why VCs are so disliked by entrepreneurs

  1. Dizzy says:

    Often time they have zero operational experience (how to launch a company/product or manage customers), don’t understand marketing beyond just building their own brand, and see money as their ticket for everything. Oh, and they are often times elitist, clashing with the very scrappiness of their entrepreneurs. Oh, and they really don’t take any personal risk but expect everyone else to..

  2. Paul says:

    Because I spent 4 years in poverty ignoring my family and my friends to get the company to this point, and now they want me to vest my shares.

  3. Anthony says:

    “both parties should want the same outcome (to build a great business)”

    This is almost never true.

    It takes patience and time to build a great business, and target returns and timeframes (eg 5X in 5 years) can get in the way. On the other side, entrepreneurs burn out and blow up all the time, so it’s tough to keep both sides aligned and together for a long time.

    The only real solution is that entrepreneurs need to know what they’re getting into. When you take money, you have to deliver, or no one will be happy, including yourself.

  4. nice post – i do wonder sometimes why so many entrepreneurs are so angry towards VCs… agree with Anthony’s comment

    my comment became way too long and rambling so i blogged it here http://richardjordan.tumblr.com/

    but in a nutshell it’s communication and expectations… mixed into the fact most startups fail and blame is sprayed around… IMHO

  5. Now this may be way out of left field (quas-literally, I’m a labor organizer), but this is basically about the person with the idea (the entrepreneur) and the people with the money (the VCs), correct?

    The post by Paul, pretty much sums up every dreamer’s nightmare, they pour their heart and soul into something and then *poof* all gone.

    My dad was the CEO of a company called Inova back in the early ’80s (before start-ups were being created by every up-start, haha, funny, not really). It was in the semi-conductor industry and from what I remember had some early successes. He then quit the company (his original explanation was that the industry just didn’t have a future). He told me Inova actually grew in size before completely failing (mid 1980s), which is kinda scary if you think about it.

    Well, I asked him about it again recently (in light of my: 6 year career as an organizer coming to head with my ensuing divorce after 2 years living with my baby mama), because i felt like there must’ve been more to the story. Upon the second telling, he said that Inova could have gotten past its initial problems, but he could not move the money people.

    This touched on something I had heard from one of the lectures by Catherine Fitts (sp?) from solari.com about organizing/understanding wealth within a given community. A lefty asked at her at one of her lectures “How do we take back the government?”. And she actually prefaced her answer by saying “well, I really don’t think we have real governments in the US because the elected leadership only manages the money it is given but does not have independent authority over it. For that, you need to talk to the bankers in your community/whoever controls the money.” Now this speech is ~2004 and she used to work for, I think, the U.S. treasury under Bush I.

    So how does Fitts fit in with Union organizing and your entrepreneur vs. VC conundrum?

    In the end it comes back to money. Money, money, money.

    I graduated with a bachelors in computer science and engineering from ucla, spent 6 years+ in the non-profit world, and, I hate to admit this, but I am an idiot when it comes to managing my own money.

    No one should have to bankrupt their family for a dream. I know Hollywood is made on stories of people risking it all and then succeeding, but REAL wealth is created by people that understand cashflow.

    I hope to one day take partial credit for saying our 2 million members of seiu are totally 100% financially educated. So that an RN, a janitor, security guard, librarian, etc. etc. know how to manage their portfolio and that any future ideas of privatizing social security will be a non-debate because by then the “people” will know their money so well and be so invovled in their local/federal/global communities that it will be a non-debate.

    Either entrepreneur or VC will abuse this relationship if they do not have a well balanced lifestyle at home. This might sound obvious, but with the money that floats around Silicon Valley it amazes me, AMAZES me, at how disparate the wealth is, how immigrants (like my dad) have been exploited to work longer hours with less rewards and at how people in the Bay, I believe, are much less happier than let’s say their so-cal counterparts or the South (read Texas, Florida, Arizona, Tennessee, etc.).

    The South learned through survival and centuries of being oppressed that if you do not understand how money flows in your community, you will get crushed.

    If you really want to crack this riddle, I would study what classes entrepreneurs generally come from and what classes VCs come from. ( i would guess bourgoise vs. aristocracy)

    Finally, to Paul, it’s sad to say, but in America, unions are seen as “working class” organizations and so the IT world has continually failed to understand why having a healthy community at the workplace (i.e. a ‘union’) is so essential to long term success.

    Okay, I think I’ve pissed off enough people with the offhand suggestion that unionization is the solution, but one day, y’all will see…

  6. Casey says:

    Rahul, that was the longest post I’ve ever seen.

    Start a blog if you want to write novels.

    Otherwise, it detracts from the value of the post rather than adds.

  7. sig says:

    I’m afraid that I agree with Anthony.

    A VC’s strategy as in “what value are you going to deliver, and to whom” normally translates to a “savings product” for investors – the interest in the start-up would then become secondary, like one’s supplier relationship. Or if you will, the VC has his back to the entrepreneur.

    In practice it means two things:

    1) Due to the lifespan of a fund a VC has to calculate backwards, meaning he’ll have to take a chance on being right about target market and features early (often much too early), then push the start-up to invest accordingly in operational costs (infrastructure, marketing).

    2) Portfolio approach follows 1) as the VC must accept those risks he will have to offset them by a portfolio.

    The entrepreneur, strictly speaking, should never take such risks, he must offset the market and product risk by slower movement and something akin to agile development. But that seldom fits the short life spans of the funds, especially if he gets in late in the cycle.

  8. Rory Bernard says:

    Good (Operational):
    Seed investors extremely supportive, loads of great biz dev leads, relaxed about exit, left it to the management team to decide, supported staff options etc
    Good (Raising) :
    Will re-direct you to another more appropriate VC, will give you short, sharp comments/criticisms

    Bad (operational) :
    VC’s wanted finance reports in greater detail than the board more frequently, argued to can staff options the day before the exit, no biz dev leads.
    Bad (Raising) :
    Usually never return calls and emails even to say no.

    Moral?
    Pick your VC’s with care – Good ones transform your business, bad ones wreck it.

  9. Alex says:

    Like any other situation in life, you can be lucky, or you can be unlucky.
    When you are a kitchen-table startup with an ambitious business plan, and after much banging-heads-against-walls and several rejections someone offers you the investment in what seems like a friendly offer, you take it.

    You have a great idea, and suddenly someone has offered the money you need to make it a reality. You take it. Your idea can fly! Wow! So you take the deal.

    Naturally, like any salesman, the VC has claimed to be knowledgeable, smart, and well-connected. He is unlikely to tell you that he only knows about the industry he made his money in, and nothing else. He won’t admit to being a megalomanic control freak, and at first you won’t notice that he talks and talks, but doesn’t absorb a word you say (if you manage to get a word in). You believe all this because he has made a lot of money, so he must be smart.

    You are not fazed that he wants to multiply his stake by 20 in as many weeks – after all, he’s taking a big risk, isn’t he?

    You’re deliriously happy with your good fortune, it’s a once-in-a-lifetime opportunity and you get to work. Everything is a beautiful dream for a couple of months, your product is developing nicely, and you’re reporting back, warts and all, just as you promised.

    Then the cracks start to appear. It seems they don’t like warts – “but we agreed we would tell you everything”. Promises about support are broken. Then they discover a product already out there that looks just like yours, to them. It’s totally different, but you now learn how little they understand about your product and its potential.

    Because they think it is no longer unique (even though it still is) they insist on re-writing the agreement, and it’s their way or the highway. What do you do now? Well, you still have some kind of deal and you don’t want to start again from scratch with no other promising contacts, so you take a deep breath and soldier on.

    Now remember, this is a concept that makes Chrome look like Stephenson’s Rocket (it really does), so when they say that it’s time to sell the company, even though you haven’t even run a public launch yet, you have to go along. You know it’s not the right time, and you argue, but they counter “This is what we’re in it for, we’ll all make a lot of money”.

    It turns out, of course, that they don’t have the contacts they claimed, can’t even get the meetings with the majors they promised, and meanwhile you waste 6 months of what should have been development time on preparing closed demos, NDAs and sale documents.

    You always knew it wasn’t the right strategy, but they wouldn’t listen. Now the money is running out and you know the logical course is to revert to product development, forget selling, and find some second-round funding. You know it makes sense.

    Oh no, Mr VC knows best. He would rather continue to fund hand-to-mouth from his own pocket than admit he was wrong, and there’s no way he will countenance a second-round partner (who might be better informed and better connected) even though a partner might bring not just cash but expertise and valuable contacts.

    Choose the right VC? In your dreams. Maybe in California it’s possible to get three or four investors excited about your project and you can choose. We should be so lucky (and, crazy though it seems, one of us still thinks we did have luck of a sort).

    I hatched a second-round plan that would (should have) pleased everyone – a multiple payback to the investors, a little cash to the founders, and sufficient working capital to complete development and launch. Would they listen? No. Is the world able to move into a future that looks way beyond Stephenson’s Rocket? Not yet, it isn’t. Maybe that’s one reason why we’re suspicious of investors. Once bitten, twice shy.

    Guess we’ll just keep on truckin’ . .

  10. Fred

    I have observed there are TWO kinds of VCs: “careerists” and “Entrepreneurs”. Entrepreneur VCs (yes they can exist, and do) are generally well liked by fellow Entrepreneurs because they behave in the best interests of the business they are investing in. Entrepreneurial VCs are however RARE.

    Then there are “careerist” VCs who put their own financial well-being and career prospects first. Regrettably there are more Careerist VCs than there are Entrepreneur VCs. It also seems to be the case that the longer a VC is in the industry the more he becomes a careerist VC. (the old farts).

    Then there are TWO kinds of people who call themselves Entrepreneurs. These are “Entrepreneurs” (the genuine ones) and the “Wannabe Entrepreneurs”. Entrepreneurs loathe/hate “careerist VCs” (of which there are far too many) and admire and work well with “Entrepreneur VCs” (of which there are far too few).

    On the other hand, Wannabe Entrepreneurs either hate all VCs (careerist & Entrepreneur VCs) because they reject their business idea, OR, they merely suck up to all VCs (careerist & Entrepreneur VCs) because they want their money.

    Long story short: The goal is to match Real Entrepreneurs with Entrepreneur VCs.

    Unfortunately both are in short supply!

    I’m going to write a blog about this very soon.

    David

  11. @Alex. Pretty much spot on.

    I’m still looking for my first round of funding and have been rejected more times than I can count. VCs and angels are a hard lot to read and their criticism of my plan/slide deck often conflicts with one another from pitch to pitch. The whole process leaves me with this feeling that landing funding is nothing more than getting lucky with the right pitch on the right day with the right person in the room. There’s no standardized way to prepare your slide deck. There’s no standard strategy for conveying your idea. In the end, you make so many revisions to your plan that the entire process begins to feel like luck and nothing more.

    The optimist in me sees a day where I land the funding round I need to get started. I can’t see competing offers coming at me. That seems to be unique to the TV show Shark Tank and/or Silicon Valley. So in all likelihood, when an offer comes in, I’m going to take the offer. I’ll probably take the offer no matter how bad it is for me and my business. Afterall, with the money I can work towards my vision. After I get one successful startup behind me as president of the startup, I’ll be able to get a better deal the second time, I tell myself.

    What I’m pitching about, I’m very passionate about. I’ve poured time, effort and my retirement money into making this happen. I’m not sure if I’ll ever be as passionate about something else, so while working on my dream is better than not working on it, a bad deal would soil that passion. I want to grow my company to be the biggest player in the market and to do that requires a singularity of focus that is at odds with being just another company in the VCs portfolio.

    I’m hoping our experience is better than the average experience you read about on the Internet. I genuinely want to make myself and my investors significant money. If only there was a better way to cut through all the crap that takes place in the process of matching entrepreneurs with entrepreneurial VCs. Until then, I hope I get luck or win the lottery; whichever comes first.

  12. Alex says:

    @ Derek. I know exactly how you feel, from my own experience, as you have read.
    I still believe we were lucky to find a sponsor to take us seriously – it really is the hardest part. If there’s any constructive advice I can offer you and any others out there with a good project it’s this:

    Follow all the conventional avenues you can (as you have, refining your plan, trying to meet VCs etc), and then look to your own personal contacts. Somewhere in there you might find somebody who knows somebody.

    If no contacts are forthcoming, try this: all HNWIs use management companies to help them invest their portfolio. The ones with a really HNW will always have a chunk set aside for high-risk/high return ventures, and they have to invest that money somewhere. It’s not always easy for these management types to find good vehicles. Get to the management companies whose job it is to invest the HNW portfolios, pitch them, and you may solve your problem by offering them a solution to theirs.

    Just a suggestion. But don’t give up trying – if it’s good the more you promote it the more chance it will eventually stick.

    Very good luck, and if you succeed in finding a partner, make sure both sides have a very clear understanding of the ground rules.

  13. @Alex Thanks for the words of encouragement. Our experience hasn’t been all negative but what we have done hasn’t stuck yet so we’re still looking. That said, looking in November is probably not a good time so I’ve lowered my expectations a bit while waiting out the storm that is the holidays. Nothing worse than the complete and total lack of movement in business through the months of November and December. If I can get meetings setup for mid-January at this point, I’d call my efforts a success over the holidays.

  14. Sean Murphy says:

    Fred, you might also take a look at the Funded.com they have a database of comments where entrepreneurs critique VC interactions.

  15. what david smuts said

  16. Frederick A. Taylor, Jr. says:

    I am a business broker in Florida and I have not had great success getting funding for my clients from VC sources. As a practical matter, it seems to me that it is a combination of entrepreneurs who are misguided on what VCs offer and super-conservative VC firms. It would be most helpful if VCs produced a list of the 10 most common reasons for denial of VC. Then my clients could review the list and see if they can produce what it takes to get VC. On the other hand, it would be nice if VC companies produced a record of the most recent funded ventures [unnamed] and why they did get their funding.

  17. Here is the biggest problem, even if everything else was perfect: Financial interest is *not* aligned between the VC and the Entrepreneur.

    VCs get to spread their risk between many bets, and in any case typically have no skin in the game themselves (they make money off of management fees no matter what). Entrepreneurs are *all in* to one company at a time.

    This means that a VC is typically trying to run many bets each with a low chance of a huge return (where that huge return is large enough to offset all the failed bets and then some) whereas the entrepreneur would rather run their one bet with a reasonable chance of a merely large return.

    Joel Spolsky has a good article on this here: http://www.joelonsoftware.com/articles/VC.html

  18. Carlos says:

    First, I have to say that I’m an european entrepreneur with just a VC round behind. As an entrep. my experience with VCs started 2 years ago, so I can’t presume to have lot of experience.

    Having said this, in my opinion if VCs are disliked by entrepreneurs is because we (entrepreneurs) failed in the initial exercise of identifying the right VC for our endeavour. As a result of this failure, the expectations turn into non-satisfaction and then into dislike.

    That’s my case: Small technology start-up in Europe looking for a 1st serious round of 2M€. It has taken 2 years to realize that we made a bad election. We were more interested in getting money and less in looking for a real partner. The result: business under-performance, management issues and VCs dislike.

    The feeling that we have as founders, is that VC will soon sell us to get the return required to appear nicely in the overall-portfolio picture without considering our financial downside, professional appetite or personal interests. As entrepreneurs, we’ll have to start from the very 1st beginning. Once again. But this time, with 2 million less and 2 years after.

  19. Co Enzyme says:

    I agree with Michael that VCs get to spread their risk between many bets, and in any case typically have no skin in the game themselves.

  20. joseph B says:

    Our company had a term sheet from 2 Silicon Valley VC’s but we walked from the deal when it became clear they wanted to change the entire management team and replace it with people they knew who had worked at big companies in Silicon Valley for many years. Best decision we ever made, instead of destroying the company by replacing founders with “old hacks” we took the company to extreme levels of growth and profitability without any further funding even though it was touch and go for a while.
    Overall, I found the typical VC to be extremely arrogant, rude, and disrespectful towards entrepreneurs. They are typically young in their 30’s have an MBS from a brand name university then worked in a limited role for a very large company and perhaps worked in a startup or 2 but never as the CEO, so their operating experience is very limited, their street smarts is poor, and their understanding of the dynamics of a startup is poor even though if you asked them, they would tell you they add incredible value when the opposite is true, they are often a negative. Personally, I believe it is better to bootstrap and get funding from friendly angels who don’t want to try and run the business.

  21. Pascal says:

    Perhaps part of the problem comes from the following vicious circle:
    – VCs have difficulties to judge the “sincerity” of entrepreneurs & business plans
    – an poor entrepreneur ready to “bullshit” his figures will show a higher ROI than a no-nonsense entrepreneur
    – VCs will fund the first entrepreneur, frustating the second one
    – the failure rate will be higher, forcing in the future the VCs to demand higher ROIs on new projects
    – higher ROIs means increased probability of overhyped figures, so increased probability of failures

    So a competent entrepreneur in his twenties able to deliver a 40%-annual ROI will not be funded, when a poor, bullshitting one will get (and usually waste) VCs’money. This does not improve VCs’ROI (the historical ROI of VCs is lower than an index-tracking fund, under 8%…). But it does irritate the good entrepreneur, who will waste 5 more years of his life to initiate the business.

    One of the problem with pattern-recognition behaviors is that it focuses on extreme points, when less impressive but less risky figures (more difficult to “pattern” since they are not extreme) fail to pass the test.

    I believe there is a market opportunities for VC funds focusing more on execution abilities of entrepreneurs (so VCs would need more operational profiles besides financial ones), and able to prefer a less risky 40%-expected ROI to an overhyped 70%-one.

  22. Jason Webb says:

    Great article. I enjoy hearing about entrepreneurs who triumph potentially devastating situations and rise from it with a leaner, more efficient business and go on to achieve everything they desire.
    Thanks and Regards/-
    Jason Webb