Dave McClure posted a rambunctious article last week on things VCs need to change in terms of process and procedures. It was spot on.
Today the Mercury News looks into the interesting career of Guy Kawasaki, who by his own accounts is not the most successful VC, but who everyone would agree has had a very successful career (and life). In the article, Kawasaki relates how over the past few years, it dawned on him that “the problem was the venture capital model itself, which seemed out of whack.”
Like everything else, VC has gone through ups and downs. With the excesses and misfires of the late 1990s, it took a few years for the sector to catch its breath and get its mojo back. Problem was, in a nutshell, that indeed a lot of startups don’t need the traditional VC backing to launch and scale. Over the past few weeks I’ve had the pleasure of chatting with half a dozen VCs and I’d say that like any other subset of the population, there’s good, bad and ugly.
Frankly, there are many reasons why you should raise VC, and admittedly, there are many reasons you should not.
Here are some things I don’t really agree with the average VC mindset, these are probably not The Top 10 Mistakes VCs make, but ten mistakes that would be up there on any such list. Feel free to add more.
#1 - Unless you can skate, drop the hockey stick curve metaphor/expectation.
Much the same way that any two points make a straight line, any startup can technically whip up projections that conjure the hockey stick phenomenon VCs so typically look for in investments. But, many of the most wildly startups probably did not anticipate having that explosive growth, because if they did, they would have faced much more competition.
Google, Yahoo! are two of the most successful companies of the past 10 years and I am sure neither really ever expected sizable revenues or profits, let alone a hockey shape growth trajectory in revenues or profits. Yet many of the companies that so loudly boast about explosive growth fizzle.
Is that a coincidence? I think not.
# 2 - Carpet Bombing is Not a Sound Investment Strategy
Most VCs admit that they invest relatively small sums of money across many companies hoping for a grand slam. In baseball, you are a great hitter if you connect and get on base 3 times out of 10… VCs - for better or worse - adopt the same mantra, which is nonsense… it’s one of those institutional imperatives that over the years become entrenched in a VC’s mindset but is, in fact, madness.
This isn’t baseball!
As a VC, why not have 7 hits instead of 7 failures?
Instead of aiming for 7 failures, 2 relatively successful companies and 1 grand slam, why not go for 5 successful companies, 1 really successful company, 1 grand slam and 3 misses?
But what exasperates this is that even the Hail Marries don’t always connect… so in my humble opinion, since many of the extraordinary companies started off as largely ordinary… shouldn’t VCs learn from history? The most high-profile, pie in the sky business plans imploded (Iridium, anyone?)
# 3 - Management Team vs. Founders
Yes, a strong management team is paramount to executing a business plan, but with all due respect, this is theoretical mumbo jumbo because the most successful companies, the grand slams so to speak, were rarely the product of teams of founders…
In fact, it is almost always the product of:
- one driven, maniacal founder (Oracle, Facebook, Amazon, KaZaa, Skype) who will literally leave his body and soul on the playing field to win (since VCs love sport analogies), or
- duo (MySpace, Google, Yahoo!, Apple) where the co-founders have a good mix of skills and personality and both founders have a lot of creative and/or financial control, or
- a hybrid of one founder and one lieutenant (Microsoft, eBay) where the founder owns a lot of stock and the lieutenant has a good chunk of stock.
The instant you have founding teams of 3, 4 or 5, no single executive owns considerable equity to risk his life for success…
I see this everyday, where an executive who is a co-founder does not have enough to get him to stay and persevere through the tough times, so he leaves to start his own thing, probably having under-estimated what it takes to succeed, fails at his new venture, and returns to a corporate gig accepting even less equity. Guess how long he’ll last there? Yeah, not long.
#4 - Age vs. Youth
Something very interesting is happening in management ranks: young founders (in their 20s to early 30s) take a long term approach to building businesses, whereas more senior managers (late 30s to 50s) look around and see the tremendous wealth that has been created in the past 20 years, and feeling left behind, they suddenly look for hail marry opportunities where they will strike it rich.
Experience is priceless, I cannot underestimate that, but the drive and hunger of young teams is probably even more priceless (call it infinite + one!)
#5 - Bulls make money, Bulls make money, Hogs get slaughtered
I’ve covered this aplenty, but the biggest mistake VCs and entrepreneurs make is by not considering (I’m not saying this should be a given/slam dunk, at all, just saying it should not be viewed as blasphemous) letting the entrepreneur take some money off the table so he can reinvigorate his risk threshold and align his time horizon with the VCs.
Read more in depth here.
# 6 - Speed & Agility are Everything In Business, so apparently, the VC World is not Business?
Man, when I met my wife, it took me a whole 30 seconds to know I wanted to marry her.
When I stepped into my current dwelling, I made an offer on the spot.
When I met my old colleagues, I knew I wanted to be a part of that story and acted on it…
Frankly, those were more risky decisions to make than the decision a VC needs to make to back a person/people, company, business plan and market.
I understand that an investment from VCs is akin to marriage, or buying a home etc., but when you see something you want, act on it, damn it! Oddly enough, the precise thing that kills companies - excessive meetings - is what is killing the VC community. I understand it’s a partnership and we’re talking sizable amounts of money, but unless the pace of investing improves, I just don’t see how VCs will compete with angels, private equity investors and companies increasingly acquiring young companies.
Somewhat related to this is how many VCs will keep moving the first down marker (got to love sports analogies) and make the team jump through more and more hoops during due diligence. All you do, my dear VCs, is get the entrepreneurs to come up with bigger and bigger tales. In fact, provided you intend on backing a company, the longer time you take to invest in a company, the more you hurt your investment because you force the company to accept worst terms on business deals than they would otherwise if they had backing… but we shall digress.
But, by getting accustomed to taking numerous weeks if not months, VCs in fact run the risk of finding themselves standing when the music stops. Once entrepreneurs get an insight into the world of financing and realize just how scarce good people and great companies are, VCs suddenly find themselves in the position of weakness, as such, if I ever run a VC fund or am a VC, trust me, speed and agility will be one of the central tenets of my practice, as it has been in every company or department I’ve run.
# 7 - Repeat After Me: “I don’t understand…”
Some of the biggest opportunities I’ve come across as an executive, entrepreneur, manager, investor, etc. have borne out of me admitting (either to myself or someone else) that I don’t understand or grasp what they are talking about. Oftentimes a business development executive will call me with a pitch, and I’m not interested. Some times, it’s because the pitch is ineffective, the product is useless and service too costly… but guess what, oftentimes, it’s not him, it’s me! When I admit that and inquire further, once in a while I’ll come up with something really interesting that helps my company. The best example, frankly, has led to one of our most interesting and accretive partnerships at WatchMojo.com.
# 8 - How are You Hitting Those Projections?
VCs don’t want to leave their vantage point and exchange it for the manager’s role, but if an executive consistently fails to meet his numbers, then they might not have a choice. That’s fair game. But perhaps, just perhaps, VCs need to do some soul searching then and come to the realization that their own track record, as a group, stinks! My good friend Don Dodge - who has worked at too many startups to name (but let’s anyway: Forte Software, AltaVista, Napster, Bowstreet, and Groove Networks, and is currently at MSFT) had this great overview that suggests that any way you dice it, VCs - as a group - have track records that would land them on the unemployment line.
My point is really not to pick a fight with a very powerful caste of society, it’s simply to suggest that, well, next time you Mr. VC gets on a phone and talks to an entrepeneur, at least consider that maybe investing in this company might be one small step for mankind but one huge improvement in the right direction for VCs.
# 9 - Herd Mentality
Many of the more honest VCs will admit that they will invest based on what other VCs are investing in. This is one reason why VCs have not fared particularly well, because if one VC invests in a dumb company, it’s one thing, but when 100 VCs follow him off the cliff, then it’s quite another. Some VCs will go against the grain, I’ve just yet to meet them.
Another problem is that this herd mentality makes VCs become simply Guys with Capital, and not Venture Capitalists because no one wants to stick their neck out and get killed. As a result a lot of the best ideas and entrepreneurs don’t raise money, and they tend to die by running out of dough or simply sell too early to a large company that does not know what to do with the startup.
# 10 - Deal Flow
Most VCs also admit that they prefer to invest in companies that have been started by entrepreneurs they know. I hate to say it, but that’s just how the world is. But we’ve seen how this increases the risk of a project, for example in the Parakey sale to Facebook, where the investors “only” got 2x return and were left on the outside with regards to the most sought after currency in that deal: stock in Facebook.
Of course, there are always to sides to a coin, so look out for Ten Ways VCs Help You Build a Better Company over the next few days…
Some useful tips for you all:
- 12 step funding process
- What should be included in pitch
And some of the best resources out there, include:
- Venture Hacks
- The Funded
- Raise Capital
- Ask the VC
If you have any suggestions for mistakes, email them or leave in comments… As well, if you can think of any posts or services, add them and I’ll update this post.
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