Why You Shouldn't Put VCs on a Pedestal

Influencers.  Kingmakers.  Sharks.  Power brokers.  Visionaries.

There are a lot of ways the startup world describes venture capitalists that portrays a certain power dynamic, real or perceived, that I believe is at the heart of so many of the industry's problems.  The industry treats VCs as if they hold all the cards, and the worst behaviors of investors reflect that.

Frankly, it makes me uncomfortable, because it's undeserved.

Here's why...

Who's really chasing who?

Do you think there is more money out there looking for good opportunities, or more fantastic opportunities?

Right.  Clearly, truly great ideas and great teams are at a premium--and there's a ton of money in the world.  It's rare that you really only have one option as a seed investor (follow on rounds are different, because it is expected that insiders are your first option, and their actions can influence others).  The idea that there's only one human on the face of the earth that will back you, and if that person is an asshat that you have to accept them is false.  If you can get one investor, you can get others.  Remember that we're lucky to be investing in your company, because ideas as good as yours don't come around too often, and that will change your approach as you try to gather your first check.

A lot of our success is on paper, or just dumb luck.

There was a time not too long ago when VC bios read "Fab investor", "Quirky investor", and "Gilt investor".  None of those companies produced great returns to their backers, so as the old saying goes, "Don't count the money until it's in the bank."  Today's Postmates might be tomorrow's Fab.

On top of that, you've got companies like Bebo that were huge exits that were eventually folded or written off by their acquirers.  Be careful giving too much credit to an investor who lucked out because a stupid acquirer mistook a flaming pile of dog poo for the greatest thing since sliced bread.

Founders do most of the hard work.

VCs can provide a useful piece of advice at a key moment--or help make a key hire, but the day in and day out grind is done by the work of the founder and the team, and they deserve 99.999999% of the credit.  Most of the time, if that VC didn't back them, someone else would have and they would have been just as successful.  

Good investor doesn't mean good person.

I wish that only high character people were allowed to make boatloads of money, but that's not the way it works.  Some people are complete scumbags, make a fortune, and karma just never catches up with them.  It's not how I would want to reach success, but for some people, it doesn't bother them.  We can debate whether they're sociopaths, but we definitely shouldn't assume that every "great investor" is "great" at being human.  

No one is perfect.

Kind of the same as the prior one, but backed off a bit.  Even if you're not one of the worst, and you strive to do your best everyday, a VC isn't perfect.  They're just a regular person and they don't always get it right.  Founders are in that boat, too.

Few of them made sacrifices to get where they are.

There are a lot of things you don't get to choose--like the gender you were born with, your race, and whether you were born into money or not.  All of these increase the chances that someone winds up being an investor.  I hope that, in the future, a more diverse population of investors will come from more humble and less privileged beginnings, but the majority of VCs out there were born with advantages.  To put us up on a pedestal as if we built up our career from scratch is giving many of us too much credit.

There...  If you go into your next pitch meeting and the VC seems cut down a notch, you can thank me after.  ;)

I Can Be Difficult

Last week, I heard the word "difficult" describing investors twice.  Once was about me and once wasn't.  

The founder and investor relationship is, in fact, a difficult one to get right.  Both sides walk in with a lot of cognitive biases and style differences unique to every pair.  Meanwhile, the work of trust building is hard and takes a long time.

In one instance, there was an investor holding up a round after agreeing to sign off on something verbally.  They weren't wrong about the term in question, but the dollar impact to their investment was so small that it wasn't meaningful to a fund of their size.  That's the kind of thing where you have to choose between being right and seeing the bigger picture in order to facilitate a transaction that was good for the company. 

No one wants that kind of difficulty in an investor and it frustrates me on behalf of my founders to see that.

That being said, I can be difficult in other ways.

On my side, I was told by a founder that they found some of our interactions difficult--a little too blunt without enough understanding of where the entrepreneur was coming from, doing all of this for the first time. 

The most successful founders have often told that they're crazy or stupid or both on many many occasions on their way up--and none of that helped them get there, at least, not on a productive way.  It's important as an investor in the company to make sure that when you have constructive feedback, it comes with support and respect.  Founders are going to hear a lot of naysayers from the outside, and so when you're on board with the company, you want a founder to feel like you believe in them personally, even if you disagree with them.

This isn't always easy.

VCs get the benefit of having worked with dozens and dozens of companies--and so it's easy to have a dismissive reaction to what you might see as a bad course of action, without realizing that the founder doesn't have the benefit of your experience.  Not only that, but a founder is basing their decisions on a lot more information than you--so while you're concerned about the what, perhaps you should be diving deeper into the why before you react.

Being a founder can feel like driving a car for the first time.  You're nervous enough--the last thing you need is a parent yelling at you for clipping the curb with the back tire on a turn.

Doesn't mean it isn't hard to freak out when you're a passenger in that car when you hit something!  

Still, it's something I need to work on more.

At the same time, there's also a "good difficult"--being willing to deliver tough feedback or pushing the founder to do difficult things they'd rather not do that are better for the company in the long term. 

This is something I'm unapologetic about.

I can think of a few instances where I've been "difficult" and I think ultimately it was better for the founder and the company.

For example, I've been putting in a spending clause in my term sheets lately, where above a certain one-time spend triggers a conversation.  The founder can spend whatever they want whenever they want, but we just have to talk about it.  It's a seed round, and so it winds up happening around hires, rent, and contracts with agencies or lawyers most often.

Some might see that as a pain because other investors won't ask for that--but it's already facilitated a lot of great conversations.  

For example, it helps to hear why you're hiring who you're hiring early on.  I want to understand your thought process and make sure that you have a method to salary and equity compensation.  That's not only good discipline, but it helps me figure out who to send you to help with recruiting in the future, because I have a sense of how you evaluate candidates. 

Still, it's always your call.

Communication is important to me.  The more I know about what's going on, the more helpful I can be--and everyone's got blind spots.  (Especially your investors!!)  Sharing more with your investors is critical for founders because the number of things a founder has to keep an eye on is overwhelming.  It's just good practice to have a few people around asking the right questions at the right time. 

It doesn't mean they don't trust you.  

They're being difficult because being a great founder and building a great company doesn't come easy.

The Cold E-mail and the Crazy Big Idea: Industrial Organic Announces Seed Round

"Hi Charlie,

I've requested a meeting with you during the first week of March. Here are ten reasons why you should take the meeting..."

This is an e-mail I got from Amanda Weeks in February 2014, and the beginning of a two and a half year journey that culminated with Brooklyn Bridge Ventures leading a pre-seed round for Industrial Organic that kicked off about a year ago.  The round, which was raised in two tranches, was recently announced by Inc Magazine.

Amanda and her co-founder Brett Van Aalsburg researched for two years and developed an anaerobic fermentatio process that quickly breaks down food waste in a matter of days.  Byproducts of the process can be turned into other goods like organic fertilizer and natural surface cleaners.  When I funded the company, it was little more than a science project in a garage in Brooklyn and soon, they'll open up a waste processing facility in Newark--one that didn't require tens of millions of dollars to setup and also won't pollute the local neighborhood with odor.  It won't throw off dangerous gases, and yes, the process will make a profit.  

I was once asked by a potential investor what I thought the exit of this company will be.  The conversation went like this...

"Well, acquisition or IPO."

"You think this company will IPO??"

"Can you prove to me that a company serving a market where every last human being on the face of the earth creates organic waste, which they get paid to process and then paid again for what they turn it into, *won't* IPO?"

That's how I think of this company--a huge problem, bet on early, with a solution exponentially cheaper, faster, safer and more urban friendly than the competition, built by scrappy founders knowledgeable enough to be dangerous but not so experienced as to get held up by old paradigms.

You give me 30 opportunities to make that bet at pre-seed valuations and I'll give you a winning portfolio, and a very very interesting set of companies to work with and be proud of.

BBQing with biomass pellets created by @industrialorganic.

A post shared by Charlie O'Donnell (@ceonyc) on

Also, very excited to once again be investing with Nisha and Susan at BBG Ventures in our fourth investment together (goTenna, The Wing, Ringly being the others), as well as Newark Venture Partners, 3G Investments, and several angel investors who are LPs in Brooklyn Bridge Ventures.  

 

My Least Favorite Part of Venture Capital

I'm a lead investor.

That means I'm usually the first person to put down a price on what your company is worth--a dollar value on months, if not years, worth of your work, blood, sweat, tears, stress, etc.  

"Here's a piece of paper that says how much I think your dreams are worth."

The reality is, any price that I put down at the stage that I invest isn't going to feel like enough--and if it doesn't feel like enough, I'm probably grossly overpaying.  But, you don't feel like that as the founder.  

Your company is special, which, I 100% agree with.

That's why, out of the 2,000 opportunities I saw this year, you and your company are one of the 8-10 I gave a term sheet to.  So, congrats!  All the reasons why you think you should get a much higher price for this round are the very reasons you made it past the 1,992 other companies.  

But, at this stage, starting from a Powerpoint, prototype, or even a demo product, you probably have just as much chance of going under as any other company.  It's sooo early in the life of the company that it's nearly impossible to determine if, in 7 or 8 years, whether or not you have a better chance at success than anyone.  

If picking out the winners were so easy at this stage, VCs would be a lot better at it.  

Really, the biggest determinant of price is supply and demand--and so, more so than a qualitative judgement on your worth as a human being, consider this bid a data point.  This is where I think the market is for this company right now.

That other company, I can't speak to what happened there and why they got a $10mm pre-money.  I passed on that deal.  Maybe those investors were smarter than me.  

What they aren't, however, is harder working--and I have to say, it really bugs me when I invest in someone super early and then the next round comes in and the price isn't that much higher than what I paid for it.  It's like, "Why did I take all this risk at this stage if the next round is going to be a $3mm round on a price of $12mm?"  

Makes my $7mm pre seem not really worth the risk in the grand scheme of things.

But back to us.

Look, we're just not aligned here.  I'm just trying to get the best price possible for my investors, and you're just trying to take the least dilution.  

I hope we can meet somewhere in the middle, but yeah, this part is kind of going to suck.  The only thing I can really do is tell you how I came to this price, what other deals I closed with similar pricing, and show a willingness to be flexible if it turns out we underpriced it and the round is oversubscribed.  

Besides, the only thing that matters is how big it gets in the end, and how self-sufficient we can make this company over time.  A million dollars on the pre-money now pales in comparison to the dilution of having to take a few more rounds down the line.

Not Just Any Given Sunday #takeaknee

Posted this in what used to be my tech newsletter, and what has lately been about more...

Yesterday wasn't just any given Sunday, was it?

I would imagine most of the NYC-based readers of this newsletter don't take the position that "these athletes should just stick to sports" nor do they feel that way about Jimmy Kimmel and his recent conversations around healthcare.  So, telling you that I support their willingness to share their views and why seems a bit like preaching to the choir.

What I will say is that there's no way either side of this conversation is going to "win" unless both sides start asking each other why they feel that way, and actually listening.  No, I don't mean listening to Trump and asking him why he feels the need to call private citizens SOBs.  Honestly, he's got the least important opinion in this whole equation--it's just the wasted noise of an old racist without any character or class.  

No, I mean that athletes need to understand and listen to people about what the flag and the anthem means to them--and why they feel offended by the protest, as is their right.

And anyone who says anything about these athletes needs to open their ears and listen to their stories.  They need to listen to firsthand accounts of what it means to be black in America.  Go read a book like The New Jim Crow.  Then, feel free to say you disagree with the protest.  

But never tell someone they don't have a right to *peacefully* protest--because then you simply don't understand the basis on which this country was even founded.  

The Lovett or Leave It podcast recently had Normal Lear on--the creator of All in the Family.  He was saying how "in love" his generation (he's 95 now) was with America.  We had not only won a World War on two fronts, but we were successful in helping to rebuild wartorn Europe and Japan.  We had a lot to be proud of.

What strikes me about these protests is what kids and young people likely think about this country today and whose side they're likely to be more sympathetic to.  They see the widening gap between the rich and the poor.  They see our inability to deal with drug addiction and gun violence or our problematic education system--all things other countries seem to have a better handle on.  They see us mired in a war in Afghanistan that, in two years, will start recruiting kids who weren't even born on 9/11.  I have a feeling that the idea that the flag and the anthem is unquestionable in any way isn't something that's going to hit home.

One thing Trump got right in the election is that there are a lot of people who feel like America isn't so great anymore--but what I hope he's wrong about is that the people fixing that aren't turning back the clock for answers.  We're not going to regain greatness by waging war or nation building.  We've got to do it by coming together to solve tough problems like inequality of all kinds.  We've got to get healthier and smarter--and that's going to take creativity and courage to change systems full of friction.  

People wanted change last November.  They didn't get it.  When a politician doesn't listen, that's not change.  That's more of the same.  

When every single NFL game has players protesting in solidarity--that's different.  That's change.  That's going to make an impression that people will notice.  

If they ask why and actually listen, Trumpism is done.