What’s the best way to draw attention to something you don’t want attention drawn to?
File a lawsuit.
That’s what the folks at VC fund EDF did.
Not smart.
Some of this I agree, some of it I don’t… but Adeo Ressi has a front-row seat at Thefunded.com, so it’s all worth noting:
The only time your lawyers will be honest with you in the venture raising process is when you interview them. After that don’t trust anything they say because their motivation is to close the deal and get the fee.
Everyone needs to go and pitch a VC first and expect it to fail. That first pitch will suck no matter what. Bring a business partner who is silent. Have him or her watch the interaction. Every time the VC falls asleep or makes a derogatory statement, your partner writes that down, and you go and fix it.
All you need is a PowerPoint. Make it 20 minutes. Do not throw in detailed financial statements. You are basically throwing a giant hunk of steak into a lion’s den and rolling around in it. Numbers is their business. They will tear you apart.
VCs talk amongst themselves. Most entrepreneurs fall into the classic mistake of pitching serially. There is no such thing as confidentiality. Your materials will be seen by dozens of VCs the second you pitch. It gets worse, if a VC likes you, they will tell the other VCs that you suck. You want to hit as many funds as you can,. I recommend trying to hit 30 funds in two weeks. Typically, you will get one term sheet per 10 pitches.
I guarantee you your first term sheet will be bad. They will lowball you, then they will pressure you to sign it quickly. Hold off. Your goal now is to get the second or third term sheet. Without other offers there is no market.
VCs say we will co-invest. They are trying to share the offer. Tell them, “No. Why don’t you make me an offer? I will evaluate the offer separately.” Do not let them syndicate the deal or merge the term sheets.
There is no confidentiality. Everything you send out will be seen by your competitors.
Courtesy of Tech Crunch. Come to think of it, most of that is 100% right.
For our previous coverage of TheFunded, including interview with Adeo, click on the TheFunded tag below (because I am sure you’ve never come across a tag in your life).
Reading about how VCs are threatening to sue TheFunded.com to shut it up, I wondered:
- If you want something to go away, the worst thing you can do is take legal action: nothing adds more credibility to something that when you throw a $500/hour lawyer at it.
- If VCs don’t want a bad reputation, they should avoid doing bad things. Not all of them do bad things, some of them do… word would get out, one way or another… so if not on a centralized location like TheFunded.com (where they can access the info and see what is said about them) then it would be in back-channel places; trust me, that will hurt them more.
- Every thing about VCs boils down to control: control in a company, control in a fund, etc. VCs need control to be relevant (hence one reason they seek Preferred Shares and want veto on a number of things). I think they dislike the site in general but they hate the fact that they cannot control what is said about them on such a site.
- VCs have all of the power in the world thanks to their money. In other words, with enough investing power they will be able to mend bridges and get over anything one pissed-off entrepreneur will say. Smart entrepreneurs take the good, bad and ugly into account but they make their own conclusions, by throwing a fit, VCs are showing that they give entrepreneurs less credit than we deserve.
- All entrepreneurs work with and co-exist with other entrepreneurs, so we know that not everything that an entrepreneur says is 100% accurate, but not all entrepreneurs work or interact with VCs. So net-net, chances are that we will realize that some of the entrepreneurs’ feedback on TheFunded is not 100% accurate or at least, biased.
- Lastly, wouldn’t it be funny if VCs teamed up and started to give feedback on businesses and entrepreneurs… oh, wait, they already do!
Anyway, this seems like much ado about nothing… and I think net-net, TheFunded.com is something that VCs and entrepreneurs should welcome, after they take everything on the site with a grain of salt.
Read more on TheFunded:
- My 15 minutes with the Founder of TheFunded.com
- TheFunded Adds Term Sheet Info, All Hell Breaks Loose in VC-Land
Read more on VCs:
- Mistakes VCs Make
- Why do Entrepreneurs Accept Some VCs Draconian Terms?
- The Biggest Mistake VCs and Entrepreneurs Make: Hogs get Slaughtered
TheFunded.com, a site entrepreneurs love but VCs absolutely hate, has pushed the envelope considerably by adding a feature that allows entrepreneurs to upload term sheets for others to view. A term sheet is essentially a letter of intent, a non-binding, revocable, starting point that is not final and culminates with a business transaction.
Short Term Repercussions
On the surface, yes, this does seem to violate some confidentiality clauses found in such agreements, but TheFunded.com has taken some measures to address those concerns, such as removing the names of the companies and investors and only publishing the actual terms, and not the sheets themselves.
But VCs have long funded companies that bundle private and confidential data to anonymously profit from it, this is basically the same practice, so I do not see what the big deal is.
I see a bigger practical shortcoming, which is most entrepreneurs won’t update recently obtained term sheets they intend on accepting (the ones that are fair and reasonable) out of fear of upsetting the party that made them the offer (the investor). If entrepreneurs end up submitting accepted-but-old term sheets or term sheets they passed on, then there is a risk that the sample of term sheets will not be accurate. But by the same token, the same was said about TheFunded.com initially… yet entrepreneurs gladly submitted reviews about meetings that took place recently, describing good and bad experiences.
Mind you, would I upload a term sheet’s details? Not if there was a confidentiality clause. I like to be very ethical, more importantly: if an investor of mine would ask me if I uploaded a term sheet, I would not be able to lie, so I would personally avoid getting in that situation (hey, just being honest). I would ask the investor if they minded, arguing, well, arguing what I am about to argue. Read on.
VCs Reaction: Thunder, Lightning and Hail
VCs - who have long been critical of TheFunded.com - will probably not like this one bit. Entrepreneurs on the other hand are probably smiling some more and asking themselves how they ever survived before Ted, aka Adeo Ressi, launched the site in 2007.
In fact, VCs have asked Ted to:
- allow VCs to comment; he has refused, allowing them instead to certify their profiles.
- refuse to allow anonymous comments on the site; which Ted claims is necessary to make entrepreneurs confident and comfortable on the site.
He is right on both points.
On the first: VCs have their own inner circles to comment on entrepreneurs, they should not be allowed to create shouting matches on a public forum such as TheFunded.com. The best way to avoid bad reviews from being written is not to have lawyers or hired PR people write comments defending VCs, it’s by VCs to become more ethical and fair.
On the second: keep dreaming. I’ve never posted anything on the site but trust me, as an entrepreneur, I’d not be 100% honest if I had to sign my name.
What TheFunded.com Has Done: Address the Subjective Nature of Funding Process
Does this create room for personal beefs to be aired on TheFunded.com? Yes. But what you see on TheFunded.com should not be taken as “the truth”. It’s one side of the story, the entrepreneurs’ side. Then, there’s the VC side. Somewhere in between is the truth.
What TheFunded.com Will Do Over Time: Create Efficiency
But since leverage and power are stacked clearly on the VC’s side, a service like TheFunded.com is indispensable. It also helps VCs weed out bad apples by cutting off their funding and encourages institutional investors to fund good VCs: Business Week reported that Ted claims the site is profitable, with revenues well into 7-digits, going on to add that his main clients are institutional investors who end up investing in VC funds. This is a very important mechanism: bad VCs won’t get money from big investors. Good VCs with bad reviews (it happens) will be able to let their track record, ethics and their side of the story prevail. Horrible VCs will be forced out of the industry.
What TheFunded.com Will Do Now By Adding Term Sheets: Address the Objective Nature of Funding
But allow me to take this argument one step further: VCs should not complain about term sheets being disclosed on the site, they should welcome it.
That’s not a typo. Let me explain.
TheFunded.com does not prevent me from working with a VC, it simply gives me a sense of what to expect.
TheFunded.com adds information to the marketplace in the sense that it levels the amount of information that entrepreneurs have relative to VCs.
In other words, because VCs have more information, they can earn “abnormal profits”. This is efficient market hypothesis, in fact. Any VC that says they welcome TheFunded.com is lying unless they are fine with making less money. The truth is, as VC Paul Kedrosky says, it’s a surprise such a service didn’t launch sooner. As such, VCs who say “it’s great” say so reluctantly.
But hitherto, TheFunded.com has been a limited tool for entrepreneurs (it’s only been a year, mind you). TheFunded.com gives entrepreneurs a sense of what to expect after an initial contact is made. But everything that happens from that contact onwards is pretty subjective.
If you let VCs comment on TheFunded, you’d see that surely there was a reason the VC:
- was slow to get back,
- showed interest only to suddenly lose it,
- asked for confidential information then shared it with competitors,
- was on their Blackberry during meetings, etc.
We don’t care about these details. It is a VC’s prerogative to be lack tact (not all do) and do those things. TheFunded.com exposes bad manners insofar as it allows entrepreneurs to voice their criticism.
But where TheFunded.com fell short, frankly, was in the objective side of things. While the initial back-and-forth is important, it is secondary to the term sheet. The term sheet is what VCs have to answer to. The term sheet is the black and white document that cannot be distorted: if a VC asks for a 3x liquidation preference in a booming market on your average, healthy company (or if you ask me, anything over 1), that’s unfair. End of story. TheFunded.com needs to expose such brazen robber barons. In fact, good VCs should also want to weed out such criminal activity because in the end they will only be hurt by the practice.
In other words, if they are vulture capitalists, then the term sheet will reflect it.
If the VCs are fair, just, ethical etc., then the term sheet will reflect that, too. There’s no need to have them commenting on the site.
As such, adding the ability to view term sheets will actually do exactly what VCs want: their voices will be heard, but not through words alone (comments on TheFunded.com) but actual actions, measurable actions. Isn’t that what VCs ask for from entrepreneurs?
The Main Reason Why Entrepreneurs Will Benefit From Seeing Term Sheets: Managing Expectations
Last year I spoke to a VC regarding a potential Series A investment. The VC asked me what I thought our company was worth. I proposed a pre-money valuation using about 10 recent comparables in the marketplace, in both funding rounds and M&A deals. He came back and said “nope, that’s too rich”, arguing that he had seen “funding deals in Series B rounds that came in at that value.”
I asked him “which deals?” to which he answered: “sorry, it’s confidential”. I asked him for comparables that he was not involved with to back whatever figure he had in his mind. Sorry, no answer there, either.
So we played a song and dance that went nowhere, fast.
First off, his argument about the Series B valuation was poor because as founder/investor, I’d served as the initial investor when we launched two years ago, investing an amount that is awfully representative of an initial VC round these days (but that’s not the point I’m making here so I shall digress).
More importantly, talks broke down because this VC was making me jump through more and more hoops to show validation of what we were doing and forced me to spend 6 months living in a spreadsheet - which I refuse to do. I instead focused on signing more deals and generating sales. But he was making me do all of that to justify my valuation (which is somewhat meaningless in some ways, relative to other items in a term sheet anyway).
Had I been able to see existing term sheets in the market, I would have been able to quickly see if he was being honest about my valuation being too high or he was trying to low-ball me. Since then, seeing a lot of deals take place, I can tell you I was not being unreasonable. He was in fact trying to low-ball… not because he’s a douchebag (I actually liked the guy quite a bit, and no, he does not read this blog) but because that is what all VCs do!
In other words, up to now, TheFunded.com helps set expectations of what to expect from initial contact to the term sheet (assuming you will get one). But once you got a term sheet, TheFunded.com helped entrepreneurs in a very vague and ambiguous way (”the term sheet was a bad one” is very vague compared to “we got $2M in funding on a $8M pre-money with a 1x liquidation preference”).
It is often said that entrepreneurs are unreasonable with their requests and expectations. That is a fair criticism to be leveled against us, and in turn, by allowing the information in term sheets to be added into the ecosystem, then VCs should be happy because entrepreneurs will have an objective barometer to sense where the market is at.
Reducing Cycle Time of Financing Deals
Valuation is not about what an entrepreneur thinks his or her company is worth, it’s about the market. In fact, it’s not even about a term sheet we get, because term sheets are not final. This is why I don’t understand VCs beef on the confidentiality matter. VCs are not even bound by term sheets, oftentimes they change the terms. By allowing term sheets to become part of the information ecosystem, even if they remain anonymous, then it helps shorten the funding process too: a VC has to be in line with the market, as does an entrepreneur. More companies will get funding, more opportunities will be capitalized on, and there will be less frustration in the process.
Ultimately, VCs won’t welcome this
Despite all of these advantages, VCs won’t be happy and the reason is simple: VCs are in the business of maximizing their earnings, which means their objective is not really in line with an entrepreneur’s goal, it is in fact almost inverted!
For VCs to achieve their goal, it usually start at the term sheet by getting unfair advantages. TheFunded.com addresses this, it’s a welcome and indispensable tool in the equation. If VCs don’t like it, it says a lot more about them than it does about you.
End Game for TheFunded.com
Interestingly, Ressi mentions that if he wanted to raise money, it would be a challenge, but I disagree. He could raise money for this or any other venture easily. I can see TheFunded.com remaining private and independent, especially on its current run-rate. But I also see TheFunded.com selling to a company like Thomson Financial, News Corp. or Bloomberg. Maybe non in the exact incarnation it is in today, but I can see it evolving to a place where such financial information companies could help it become a clearinghouse of data (and maybe money if they can overcome some major conflict of interests) in the private financing space.
Related:
- My 15 minutes with TheFunded.com’s Ted
- Why do Entrepreneurs Accept Draconian VC Terms?
- Biggest Mistakes VCs Make
More on VentureBeat, TechCrunch, Business Week.
[Scroll down for the Q&A - or sit back and enjoy.]
If you are an entrepreneur and unfamiliar with TheFunded.com, shame on you! Visit the site and sign up, you’ll be glad you did, it will give you an insight into one of the most important aspects of growing a company.
TheFunded.com bills itself simply as a Resource for Entrepreneurs, but it’s so much more. In fact:
TheFunded.com is a community of 2,832 technology, life science, security, and sustainability CEO’s. Each CEO Member of TheFunded.com can research, rate, and review over 3,600 funds worldwide and over 16,700 investment professionals. The open nature of the 3,680 reviews posted on the site has attracted a steady readership from venture capitalists, limited partners, and executives worldwide in the six months since its launch.
If you are a venture capitalist, chances are that you are very well familiar with the site: a mesmerizing, jaw-dropping, insightful and no-holds-barred community that gives entrepreneurs a chance to share their experiences in the much dreaded financing process.
At a time when Web 2.0 companies with misspelled URLs and questionable business models are starting to fizzle, TheFunded.com is an example of everything that is great about the Web in general and why the trends and opportunities underlying the so-called 2.0 craze in particular are indeed powerful and oh-so promising.
Of course, critics of TheFunded.com would be quick to point out that the service does eschew all that is wrong with the Web, too: hollow and bitter commentary by flustered entrepreneurs who take solace in the anonymity of the service to inflict a vengeance onto otherwise well-meaning and unassuming investors, who’s reputation has been sullied due to a few bad apples.
Who’s right? Well, like most of the fine questions in life, both sides are, of course.
In fact, TheFunded.com, it should be stated, is not all about exposing bad apples, it’s also to showcase the better ones too, who sometimes don’t get much respect amongst their more rock-star reputation toting peers.
After all, the truth is, for all we know, TheFunded.com could very well be run by a VC who is trying to really get the inside scoop on investors at competing firms, though I don’t really believe that… Inc.com’s Max Chafkin recently tried to unveil the identity of Ted, the operator of the site. The magazine narrowed it down to a few of the usual suspects:
Suspect No. 1: Kevin Rose
Founder of Digg, Pownce, and Revision3
He’s young enough to do something semi- crazy; plus, The Funded feels like a Digg for business.Suspect No. 2: Evan Williams
Founder of Twitter, Odeo, and Blogger
This blogging pioneer once returned funds that his company had raised rather than deal with his VCs.Suspect No. 3: Jason Calacanis
Founder of Mahalo and Weblogs
An über networker prone to public squabbling, he recently raised VC money for his search start-up.Suspect No. 4: Nick Denton
Founder of Gawker Media
The gossip king’s Valley Wag blog has been oddly silent on The Funded. Why is he holding back?
I don’t think it’s any one of those, though I did think Nick Denton was Fake Steve Jobs. I don’t think it’s any one of those guys, mainly because it always turns out to be someone that we don’t expect, and largely, don’t know.
Arguably, the anonymity of the founder of the site adds to the intrigue, much like Fake Steve Jobs’ appeal was guessing who could be behind the site. Of course, given venture capital’s enormous reach, the stakes are much higher than they ever were with Fake Steve. Inc.com relates:
As a successful venture capitalist, Howard Hartenbaum had grown accustomed to some measure of deference from the entrepreneurs who pitched him. So when one particularly brash CEO called him a “nut case” and then said that a meeting with him “made me want to vomit,” Hartenbaum was livid.
Hartenbaum, a partner at Draper Richards in San Francisco and an early backer of the online phone service Skype, stumbled upon those comments, posted by an anonymous entrepreneur, on a website called TheFunded.com. Incensed, Hartenbaum fired off a series of e-mails, threatening litigation and demanding to know who ran the site. He also expressed interest in investing.
If this reaction seems a tad schizophrenic, it reflects the mix of indignation and curiosity that The Funded has sparked in the world of venture-backed companies. The site, which was launched in March, is at once a Zagat guide to VCs and a place for disgruntled entrepreneurs to gather. More than 350 funds have been ranked and reviewed, with the juiciest postings sending BlackBerrys buzzing throughout Silicon Valley. Although the site is ostensibly off-limits to all but the founders of fast-growing companies, they’re not its only readers. “We all have friends who have passwords,” says David Stern, a partner with Clearstone, a venture firm in Santa Monica, California.
Complaining about VCs is a practice nearly as old as venture capital investing itself, of course. But the VC world is small and entrepreneurs have had to keep their complaints under wraps if they hoped to attract future rounds of funding. Now the 1,500 company founders who have signed up for The Funded feel liberated enough to share opinions (most often anonymously) that range from balanced to harsh.
Ted agreed to sit down with us, in a darkened room, our eyes covered, to chat about his background, where he dreamt up the concept and his plans for TheFunded.com
1. What’s your background and are you alone in running the property?
I am a venture funded CEO with 5 start-ups under my belt (maybe 6 with TheFunded.com). I built, designed, and programmed the entire site, and I currently run it alone, reviewing between 25 and 200 CEO applications per day currently. Thankfully, I was wise enough to build a lot of easy-to-use administration tools early on, otherwise I would be completely overwhelmed, which still happens on days where Membership applications exceed 500 CEOs. Unfortunately, the majority of applications get rejected because they are improperly completed.
2. Where did you get the idea and why did you decide to launch TheFunded?
The fundraising process has traditionally been extremely difficult to navigate with little insight into funds that you pitch. Reputation and quality are not heavily correlated, and there is almost no way to do background checks on your investment prospects without cold calling other CEO’s from their portfolio. How many funds reveal their failures for you to do research on? Facing the prospect of raising more capital, I wanted to know the inside story on funds that I would be pitching. I tried to solve the problem of transparency in this oblique market with enlightened self interest in mind.
3. Did you have any bad experiences with VCs?
Yes, of course. I think that bad experiences are par for the course in fundraising. This does not mean that every experience is bad, but I have had my fair share of the bad.
4. Surely there are good and bad apples, but a critic of the site would point out that the likelihood of negative comments is much higher, because someone who is bitter or offended that a VC passed is more likely to write something than someone who has something good to say. Any comments on that statement?
There are 3,000 CEO’s writing comments and feedback on TheFunded.com from all around the world in many different industries. The majority of the reviews, approximately 60%, are both constructive and positive. If you read the site, you will see that the above statement is incorrect. Venture capitalists are not used to criticism, so, in some cases, they are reacting badly to hearing criticism for the first time. This leads to false statements like the one above. Furthermore, even the most negative criticisms on the site have the rationale explained in detail, usually within the Private Member-only areas. I have seen badly phrased reviews, but I have never seen a review that was not justified in one way or another. Remember, we are talking about reviewers comprised mainly of CEO’s, over 80% of which have built at least one previous venture funded business.
5. How often does a VC email in and complain about something that is written?
Not very often, maybe once or twice every couple of weeks.
6. Any qualms or regrets about the fact that some of the statements could seriously hurt a VC’s career?
I see this question differently. TheFunded.com helps venture capitalists improve their performance by providing vital and lacking feedback that, in most cases, they have never heard before. For example, I have never been asked by any financier to evaluate their performance after a pitch meeting or liquidity event. How can you do better if you never ask about your performance?
7. You’re preaching to the choir, I did just pen 10 Mistakes VCs Make. Have you thought of raising VC and building out TheFunded even more?
TheFunded.com was not designed to be a commercial entity, though it has been making revenue, strangely enough. I have no plans or desire to raise venture capital for the site. The site provides a pretty clear roadmap on how to be a great venture capitalist if you read it diligently, and it has been a real education for me. And, no, I have no plans to become a venture capitalist either.
8. All right, what are some site metrics: uniques, pageviews, subscribers and revenue figures?
TheFunded.com is about 7 months old and has been growing quickly with about 45,000 unique visitors per month. The readership is limited to CEO’s, venture capitalists, and investors in venture funds. Keeping this focused readership in mind, TheFunded.com has captured somewhere in the range of 50% of the target audience today, maybe more.
9. What is the plan with TheFunded. In other words, is what you see what you get or are there expansion plans?
The expansion plans are simple: grow distribution and add really cool features that everyone will love.
On the distribution side, TheFunded.com just released an alpha of the Fundalizer. This allows every web site that writes about venture funds to pull up contextual information on a specific fund in a JavaScript pop-up window. I would expect that this will have gradual adoption, but lead to further traffic growth over time. I thought it was a cool idea, and it works great.
In terms of the features, there are three things in the works: advanced fundraising research, individual partner ratings at venture funds, and the “Elevator Pitch.” The last is pretty interesting. Imagine if you could post your brief elevator pitch on TheFunded.com, have thousands of CEO’s help you refine it, and then have these same CEO’s help you get introductions to the most applicable venture funds for the idea. Qualified introductions make a big difference in closing rounds. By keeping it to the level of an “Elevator Pitch,” you have a lot less worries about other CEO’s “borrowing” the idea. As a Member, you get to see Member contributed feedback to posts, and the Member CEO’s have forged a community where they are helping one another. This has been the best positive surprise to date.
10. Seeing all of the comments etc., what advice do you have for VCs to improve their game? For entrepreneurs?
Members have already told VC’s what they want, there are five things:
(1) It’s OK to say “No.”
(2) My materials are confidential, please!
(3) Tell me something, anything!
(4) A little manners goes a long way…
(5) I am not a source of free research!
For more on each point, click here.
11. Don’t forget #6 - VC’s track record, as a whole, is so shoddy that I’d lose the swagger, but I digress… Tell me, what is the biggest misconception about VCs?
Right now, I think entrepreneurs do not appreciate how hard it is to be a VC and how hard most quality VCs are working to keep pace with the changes in the market. This does not excuse some of the bad behavior, but it is often overlooked.
12. Agree, a good VCs adds quite a lot to the business… the challenge is being able to draw those to your company, which takes me to the main question I have: how much of your desire to build and maintain TheFunded is about ego / power trip?
I am anonymous. TheFunded.com is about the Membership and not me, which is why my identity is not important.
13. True, fair enough. Have you had any payoff proposals to make the site disappear?
No. But, for the right eight figure sum in cash, I may accidently hit the delete key. 
14. You just opened a Pandora’s box; I’ve seen some damning reviews, trust me, those eight-figure offers are on the way. Jokes aside, are you worried about libel and / or defamation lawsuits?
Yes. However, TheFunded.com carefully complies with Communications Decency Act (CDA). I do not editorialize on posts, nor delete posts, nor edit posts, which means that TheFunded.com is not liable for what is said by the Membership under the CDA. To elaborate, in the history of the site, I have deleted one legitimate review by an entrepreneur that was an investor in the fund that he reviewed, admitting it in the review. Many Members requested that this post be removed for fairness reasons. I have also deleted duplicate posts, one misquote, and some advice posted about adding features to the site after the features requested have been released.
15. What has been the biggest surprise?
The success of TheFunded.com has been surprising across the board. My focus is to make the site better, more useful, and “cooler.” The best part of the site is the Membership. Once accepted as a Member, everything is COMPLETELY anonymous. No names are logged. No emails are logged. No IP addresses are logged. However, I can say that most CEO’s of note have applied and are Members.
All right, that tap on my shoulder means my time is up. Thanks Ted, your identity is safe with us… you provide a great service to entrepreneurs, and VCs… keep it up.
Related on HipMojo.com:
- 10 Mistakes VCs Make
- Next Wave of Interest from VCs
- Biggest Mistake Entrepreneurs and VCs Make?
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