My internal compass has always steered me strongly toward the belief that founders who can scale with their startup companies are better to back that founders who eventually need to hire a CEO.

I have talked about this publicly a great deal – how I prefer “missionaries” over “mercenaries.”

But lately I’m more swayed by the wise words of Reid Hoffman.

“Founder is a state of mind, not a job description”

We all love the mythical stories of our great founder heroes who drove startups from scratch and led their businesses many years later: Bill Gates, Larry Ellison, Jeff Bezos and so on.

Very few founder CEOs go into the job ever expecting to give up their seat. It’s your baby. Your idea. You took the biggest leap of faith. It becomes an extension of self rather than a job.

So give up the CEO role?

Fuck no.

But it’s actually not that simple.

Jonathan Strauss took this issue head on in a blog post that I believe every startup founder should read on “Replacing Oneself as CEO.”

“After 3 and a half years of fusing my self-worth with the success of the company in the crucible of startup survival, it was impossible to tear them apart without pain.

But while my first reaction was disappointment and failure, it was almost immediately washed away by a wave of relief.

I knew change was inevitable, but I had no idea how stressful and exhausting maintaining my internal reality distortion field had been until they gave me permission to turn it off.”

I can’t imagine many founding CEO’s who don’t read Jonathan’s words and know exactly what he means.

I saw this first hand. The confidence, energy, passion and humor that are hallmarks of Jonathan became muted in the pressures of needing to show financial successes to match one’s enormous product vision and ambitions.

I told Jonathan (and believe) that this would be the best year of his professional life. He gets to return his focus and energy back to what got him so passionate in the first place – product – while now having a seasoned leader and enough capital to fulfill his vision.

I spoke with TechCrunch TV recently about the decision to give up the CEO seat, the stresses of the job and my perspective of the situation as an investor. You can watch it here.

I have never felt prouder of the team & product at awe.sm (please visit to check out our latest & be ready for our next big product announcement due out in next month or so) and yet we just brought in a new CEO to the company, Fred McIntyre.

How could these statements live in the same sentence?

*******

An Awe.Sm story

I first met Jonathan nearly 4 years ago. I know because I marked the occasion with a blog post on how to have a great VC meeting. I wrote about Jonathan’s visit (but never named him by name until now) because it was so memorable. His vision for social analytics and tracking the conversion funnel was better than any I had heard at the time (or since).

He talked about how we were going through a period of time in which people were measuring “likes” and “followers” but not the real value of social media conversion by tracking what actually converts into business and that few people understood the catalyst of what drove a successful campaign in the first place. It is what he set out to build and he had huge initial success in landing big clients like Disney, Zynga, Gilt and TopSpin.

I funded Jonathan’s first $500,000. For the entire first year after I funded the company he refused to take a salary and I had to admonish him to make sure he paid his expenses. He worked his ass off and delivered an amazing technical infrastructure to support a “big data meets social analytics” platform that could be used by any developer.

Yet our initial customer success didn’t translate into big revenue growth and we faced issues such as:

• Do we support developers, end-users or both?
• Do we price for volume of consumption or for enterprise integration with other platforms?
• Do we have a heavy-touch implementation and support or a lightweight one by integrating with products that white-label us?
• Do we optimize for “social sharing tools” or merely for back-end analytics?

The decisions were endless, the choices not obvious and the VC involved a pain in the ass. The financial pressures of running a startup started to hit Jonathan. I saw it first hand.

I have a very public seed stage investment policy  and awe.sm was definitely in the bucket of amazingly talented founders with a great product that hadn’t yet proved product/market fit.

So I wrote another check to extend our runway another year. The second check was $400,000 out of a $500,000 round. And I forced Jonathan to start paying himself.

Our product really started to show its strengths in attribution as we were able to prove publicly that Twitter was driving more traffic than people had acknowledged but it wasn’t showing up in referral logs due to what is known as the “last mile problem.”

We had inbound M&A requests from some of the biggest names in tech. We did a gut check and I asked Jonathan what he wanted to do. He knew that I didn’t want to give up on his journey but I would if that’s what he wanted.

He told me he couldn’t give up when there was so much more to prove. He remained as committed to the company vision as when we first met.

We had VCs show interest in funding awe.sm and settled on Foundry Group and raised $4 million ($1 million more from me).  It was great to get some new ideas around the table and to have some money to execute on our plans with more resources than before.

Yet with major advances in our product infrastructure we still hadn’t proven we could scale sales. It was really hard to look at the situation and know that the answer was that Jonathan needed help and that what he really needed was a boss. The board was unanimous in our opinion of this including outside director Ian Rogers who has served as Jonathan’s mentor and friend.

We knew what was right for the company and wanted to see the company succeed more than protect Jonathan’s short-term ego hit. Jonathan shared that experience in his blog post so I won’t repeat it.

But we did offer Jonathan his second gut check. We knew we had a valuable product that an acquiring company would gain greatly from and a world-class engineering and product team that would be valued by a buyer. If he wanted to sell we would enable it, but if given the choice I preferred to see the team fulfill their dream and I never lost confidence that our market was there. Nobody has stepped in with as complete of a vision as awe.sm has.

Jonathan went through a reflection period and chose to continue the journey. We have spend the last 6 months working on our next generation product and as one of the main beta testers I can tell you it’s the best stuff we’ve put out to date so I was very pleased with his decision to fight on.

We set out to find Jonathan’s “co-founder.” Somebody who had lived with the marketing consequences of trying to track online conversion from websites, google, mobile and social.

We found Fred McIntyre who had worked with Ian Rogers in the past and therefore we had a strong connection with his past skills, drive and determination. He has joined the team as CEO and shown an immediate desire to “live the company” in the way that founders did. To be a founder in state of mind.

*********

My Own Journey – And Replacing a CEO

I actually don’t talk about it publicly much but I am one of those people who gave up the CEO role in my first company so I know the emotional roller coaster it can be.

I had never even considered it, it wasn’t an option. But I was part of a networking group called YPO, which has a subsection called “forum” in which a small group of your peers meets monthly to discuss life. Topics range from aging parents, marital strife, infidelity, disease, stress, life’s true mission, giving back – you name it. I was staggered to hear people talking so openly.

I wish the tech community would found its own version of YPO Forum. It might help us better prepare for the enormous pressure & stress of being a founder, it might help us realize when there are people with serious depression in our midst (and try to spot people considering suicide), and frankly it might just be a great outlet for all of those insecurities you can’t tell your team, your co-founders and your VCs.

In my case it was the encouragement to hand off the role of CEO of BuildOnline before the company was eventually sold.

I had stayed for 6 years. I loved the entire journey – good and bad – and the employees and customers. But I was also in a rut where I felt I had lost the ability to be innovative and I had lost a bit of the passion & fun that came with the early days that were more existential and involved more intellectual challenges and less managerial ones.

The truth is I have never enjoyed running team meetings, managing processes & procedures and deciding HR policies, promotions and org structures.

There is no better article on the topic than Reid Hoffman’s post about giving up the role of CEO at LinkedIn.

“CEOs need to derive satisfaction from the nuts and bolts of building a company, not just building product and articulating the vision.  They need to be passionate about leadership, management, and organizational processes as the company scales.”

In this day and age many people will tell you that you can have your cake and eat it, too. You can simply hire a COO to do these things while retaining the CEO title but focusing mostly on product.

I have previously written why I don’t believe in the COO role at early-stage startups.

Reid weighed in eloquently on this topic.

“[to be CEO you need to] devote substantial time to time consuming things like running meetings and other business process. You can’t just do the exciting stuff like making the final call on product and speaking at conferences, while shuffling off everything else to the mythical COO who loves doing all the dirty work and doesn’t want any of the credit

… I had thought about the COO option, but I knew that the company needed someone who felt like they “owned the ball.””

Mythical COO who loves doing the dirty work with no credit. Kind of like a mythical Vice President of the United States who wants to be behind the scenes but doesn’t want the top job.

Therein lies the dilemma.

The best people almost always want the top job if they’re going to put in the real work effort. Of course there are exceptions – the most obvious one being Sheryl Sandberg.

Reid’s admission of his interests sounds like something I would have written myself verbatim

“I’d rather be solving intellectual challenges and figuring out key strategies, not debating which employees should get a promotion, or configuring project timelines.”

So Reid set out to hire a CEO. His first attempt was Dan Nye who had some success but apparently one key missing ingredient. Reid believes that you need a CEO who is also passionate about product and he later found that person in Jeff Weiner.

Jeff joined early enough to feel like a “founder” even though he wasn’t there at the “founding.” He was as passionate about the product as Reid and became the biggest eater of the LinkedIn dog food. He had founder mentality.

This seems to be the exact situation at Twitter. While Dick Costolo wasn’t there at the founding it seems clear that he has become the reasoned voice of the growth of Twitter. And while it was another team entirely that sparked the product adoption that is now Twitter, there is no doubt in my mind Twitter would not be its current success without Dick at the helm driving product, user engagement, capital raising and revenue growth.

Again, captured eloquently in the words of Reid Hoffman

“Being there at the start isn’t the only path to being a founder.  “Founder” is a state of mind, not a job description.”

So true.

So I look forward to watching the next awe.sm chapter unfold. To watching Fred lead our sales, marketing and implementation efforts and driving the recruiting & financing of the company. And watching Jonathan to continue to build on the product vision that started 4 years ago from his desire to fix a large part of the Internet’s inefficiencies.

No.

The one word the best entrepreneurs never accept.

I said it.

Now let me walk you through a broader story because avoidance of the word in and of itself will seem cliche. Stay with me.

When I was little I had a role model for entrepreneurship – my mom. She was a natural leader. She was president of the UJA in Sacramento. From this I saw civic involvement and leadership first hand.

She was a nurse but was never graduated from a 4-year college. Still – she can do the NY Times crossword puzzle better and faster than I. Even today.

She was a hustler. And a ball buster. And a natural sales person. She was never afraid of the word “no” even to the point of embarrassing me.

My youth was filled with her arguing with vendors if they tried to pull a fast one. As my wife will tell you – arguing is cultural – you grow up with it or you don’t. I did. It’s very Jewish. For better or worse. She’s learned to embrace it in me. If a maitre d’ tries to seat me at a table in huge traffic flow or a corner she knows not to bother sitting down.

My mom bought our family’s first computer and encouraged me to learn it at 13.

She opened 2 businesses – a bakery and then a restaurant. I worked in both before leaving to work in a software company at 17. I never knew a world in which you weren’t supposed to work and make money. Even though my dad was a doctor and in retrospect I probably didn’t need to earn my own money. My mom always taught me it was my responsibility to do so.

When I was younger my mom taught me something I never forgot

“You don’t ask, you don’t get.”

It’s simple. I know. But it amazes me how many people don’t really get it.

2 stories.

One.

When I lived and worked in London my wonderful assistant was Deborah Halliday, who was raised a very “proper” British young lady. Her brother played rugby for the English rugby team and went to Oxford. That’s kind of like having a brother in the NFL in the US.

If there was any society in which being a hustler was out of step with the norm is was England. Yet I was a foreigner so I got away with being different.

I used to ask Deborah to book my travel plans in France and Germany were I went 1-2 times / month. There were online tools to book this stuff but the Internet booking sites were early.

I would tell Deborah, “I found this hotel near the Champs Elysees for 170 Euros. But I don’t want to pay that much. Tell them I’ll stay if they’ll give it to me for 120 Euros.

“What? You want … what?”

“Mark. You can’t do that! You can’t just name your own price.”

Me. “Of course I can. Tell them you found a hotel down the street for 100 Euros but I prefer to stay at their hotel. Haggle. See what you can do.

Deborah. She was mortified. Bless her cotton socks. I put her outside of her comfort zone.

Me. “Deborah. You don’t ask, you don’t get! What’s the worst they can tell you? “No?” If so, we’ll call back an hour later and pay 170 Euros. It’s not like they’re going to tell you ‘no’ in an hour. You might as well try!”

Classic Mexican Road strategy.

Here’s the thing. They NEVER said ‘no.’ Such were the times. They weren’t fully occupied.

She began to love it. It was liberating. I taught her to make it a game. I would challenge her to see how cheap she could get rooms. I can still hear her giggle at how ridiculous it was in her mind’s eye. And yet how eye opening it was that you could have almost anything you wanted. If you just asked.

Story two.

Fast forward. My son Jacob. He’s now 10. When he was 7-8 my wife used to sit down with him to do homework and train him the importance of getting it done early and well. Luckily I have such a terrific and organized wife. Or Jacob would be screwed.

They sometimes did homework at Le Pain Quotidien. And if Jacob was good he could get a treat.

Tania once took him up to the counter to pick out a treat. He pointed at a chocolate cake and told Tania he wanted a piece.

“No, honey. That’s a whole cake. You can’t have a piece. It’s not cut. Why don’t you find something else?”

Jacob, “Of course I can have a piece. Just ask them!”

Jacob has IJ. He knows to ask for what he wants. He is respectful. But he has an inner compass that in stead of saying “ok” to adversity he says “why not?”

She had him ask the lady behind the counter directly. She said, “no problem.”

My wife smiled and couldn’t wait to tell me the story.

My wife thinks Jacob’s an over negotiator but she secretly loves it. I always take it as a compliment.

Both stories have something in common. Not being ashamed to ASK. As I tell people almost weekly, “What’s the worst that could happen? That they would say, ‘no’?”

And I mean it. I promise you that 95% of the people I meet are afraid of people telling them no. They are personally embarrassed by it. Or insulted. Or view it as failure.

I’m told “no” all the time because I often ask for more than others do and therefore you need to be willing to hear “no.”

I was on a flight last year from DC to LAX. I had a business class seat due to status of flying a lot and my family was in economy. I felt bad and was planning on rotating.

But when I sat down I asked if my family could upgrade since there were 3 open seats. I assumed the answer would be “no” but I figured I had nothing to lose.

The flight attendant said “ok. but you’ll have to pay a small upgrade fee and I can’t move them until after take-off.” But move them she did. And she decided it wasn’t really important to make me pay since the seats were unoccupied.

Score!

We had also just been upgraded from London to Baltimore.

2 times in a row – unreal. My wife was a bit incredulous (but grateful). I simply pointed out that our kids learned a more important lesson than the downside consequence of their expecting to always sit in business class (which isn’t going to happen!).

They learned to ask, “why not?”

You don’t ask. You don’t get.

And here’s the thing about “no.”

I know first hand just how chicken people are about hearing it. I’ve sat through so many meetings where sales reps didn’t ask for the order. I’ve been pitched by hundreds of entrepreneurs who never actually asked me whether I would invest. Very few people do.

Here’s an experiment for you.

Hold interviews with tech people, marking people, ops people, finance people – whatever. They always finish the interview with a “thank you” and barely ask next steps.

Any great sales person will ask you at the end of the meeting, “So, how’d I do? Who else have you spoken with? How do I stack up? What do I need to convince you of to get an offer? What is the next step in the process?”

Great sales people are trained to “ask for the order.” If you interview a sales person and they don’t ask for the order, be worried.

I like to flip things on their heads. I like to ask in reverse in interviews, “If we did get aligned to offer you this role, do you plan on accepting? What other offers do you have? What do we need to do to win? What steps do you still need before you decide to go with us?”

I want to know. And I have nothing to fear in the answer.

My favorite (not!) is dealing with lawyers (or VCs) who say, “as a firm, we never do a, b, c.” Let me tell you now that often this line is BS. But my standard response is, “I don’t care what you normally do. I think it’s right for our situation. So unless you explain to me logically why it doesn’t make sense at our company, my assumption is that it’s a good idea.”

In summary, I recommend some honesty with yourself. “Asking” is a skill that can be practiced and learned but you need to be self aware.

How comfortable do you feel with asking for the order? How confortable do you feel with asking awkward questions or asking for things that are out of the norm, “Could we have your room for 120 Euros so we don’t have to stay down the road?”

If you don’t find it within your confort zone – practice in small ways for asking for slightly unreasonable things just to get used to it. It’s a skill you’re going to need as an entrepreneur.

After all – you don’t ask, you don’t get.

For the past 5 years or so Google, Facebook and a handful of tech industry giants have been quietly buying scores of early-stage startups for their talent. And to keep up with the Jones’s it seems that Yahoo! has now employed the same strategy.

And who cares, right?

A couple of tech giants throw millions around in either cash (for which they have hoards) or part with some publicly traded stock. And a few teams of super talented, educated and bright entrepreneurs make a few mill. in their 20′s. What could be more capitalist than that?

It has even gone so far that we now have evocative headlines in the tech press such as “Buy or Die,” which is what got me thinking about this post.

We’ve been here before – trust me. Every era has its own amnesia for M&A gone wild.

In the end, it doesn’t really matter. It’s not some big tragedy on a grand scale. But the press (and I suspect many of the senior execs of these companies) don’t really explore the corrosive downside of these acquisition.

So I thought I would.

Buy. Or Die.

Really?

If I don’t commit to millions of dollars of acquisitions I will … die? I’m supposed to believe that my best innovation can only come from scores of startup founders who just made millions and have now become CVOs at my company? (Chief Vesting Officers)?

Meh.

The Aqui-hire Business

Many buying companies price these deals on the basis of $1 million per engineer on the team for an early-stage deal. And they might give a premium if the team has been around a longer period of time, has built some hard-to-build proprietary technology or has some customer traction.

Usually the location of the engineers matters great so having offshore engineering makes acquihires unlikely.

Let’s assume an early-stage company around for 2 years with limited traction. It is probably purchased in the $5 – 15 million range even if you see higher numbers in the press.

Almost certainly the startup would have raised some capital. Let’s assume $2 million in seed money.

If the money comes from professional investors it usually has a “liquidation preference” meaning that their money comes out before the founders or common stock. (If you don’t know venture economics – there is an overview here.)

While at initial glance this sounds unfair, when you think about it – it doesn’t. If you give $2 million for 20% of a company ($8 million pre + $2 million investment = $10 million post-money valuation) that has no product and no customers and it turns around 3 months later and sells for $5 million it would hardly be fair for investor to get $1 million back (20% of the proceeds). That’s why liquidation preferences exist – downside protection.

After the liquidation preference the founders (probably 1-3 people) are likely to get 90% of the remaining proceeds and the staff – those engineers that the acquiring company so desperately wants – would ordinarily receive a very small proportion.

I talked about the math of this in this post, “Is it Time to Learn or to Earn.”

Mark – doesn’t the acquiring company mostly care about the super innovative founders? Those 1-3 you’re talking about?

If they do then they’re naive. And most buyers aren’t. Most founders stick around for their lock-up period (1-2 years) before going on to found their next company.

Think about it – they were the ones most willing and most able to take risk in the first place. They founded their last company with no money in their pocket. Now they get to go out and try again with $2 million in their pockets plus the credibility of having just gotten a big W.

Most founders stay the least amount of time they can.

I know the buyers try the best to believe that [insert well known founder name here ... David Sacks, Max Levchin, Dennis Crowley, Keith Rabois] will stay and help lead their company in a totally new direction. But evidence suggests otherwise.

So the buying company usually wants to pay $0 for the company. And wants to structure a huge payout for the employees that will remain. That way investors (dead money for the buyer) and founders (flight risk) don’t get all the spoils while the faithful staff who will stick around get nothing.

And precisely because buyers usually prefer to have limited money go to investors – investors almost always have the ability to say “no” to transactions in the terms of their funding documents (aka “blocking rights”).

And that is the tension in the acquihire – what is the purchase price for the company, what is the “earn out” if the acquired company hits some performance targets and what is the amount of money set aside for staff retention? And will investors allow a deal to happen in the first place.

The numbers you see announced in the press for deals are hardly ever right.

OK, Mark. We get the mechanics. But what is so corrosive about this?

Why Acquihires Hurt the Acquiring Company

How about if we look at it from the “rest of company” perspective.

You have been at Google, Salesforce.com, Yahoo! for years. You have worked faithfully. Evenings. Weekends. Year in, year out. You have shipped to hard deadlines. You’ve done the death-march projects. In the trenches. You got the t-shirt. And maybe got called out for valor at a big company gathering. They gave you an extra 2 days of vacation for your hard work.

And that prick sitting in the desk next to you who joined only last week now has $1 million because he built some fancy newsreader that got a lot of press but is going to be shut down anyways.

What kind of message does that send to the party faithful who slave away loyally to hit targets for BigCo?

I’ll tell you what is says.

It says if you want to make “real” money  - quit.

Go do a startup. Get some famous angel or seed money. Get yourself in a big demo day competition. Woo the press. Hire legions of young, impressionable graduates from the top engineering universities. And then come back and sell me your company.

I know many rank-and-file employees. I’ve had the chats with them. You rarely meet people who don’t resent the scores of entitled acquihirees of their company.

Does Yahoo! et al really have to keep up with the Jones’s to build its future?

For the 200 new employees they’ll get through acquihires do they unleash 2,000 unhappy existing employees? Sure, most won’t quit. Because they know that it’s not a slam dunk to start a business and get acquired. But the most talented of those 2,000 will.

What if the $100 million you’re going to spend trying to win this alleged “war for talent” in stead went into big retention plans to keep your most talented employees.

You can’t “Roll Out the Red Carpet When Your Best Employees are on the Way Out the Door” as I wrote in this post. So why not announce big, hairy audacious goals on recruiting the best mobile talent with sign-on bonuses and retention plans? And reward your existing top 10% of employees handsomely.

I’ll bet the ROI would be higher than acquihires.

Acquihires and Venture Capital

I’m a VC. I know I’m supposed believe in acquihires to bury my investments that aren’t working.

I would never discourage any teams of people I’m working with against early acquisition if they felt it was in the company’s best interests.

But that’s not how you make money in the venture capital business. You make money by backing winners that build real businesses.

I look for entrepreneurs who set out on their journeys to do exactly that – build big businesses. Change industries. Not looking for quick flips.

And on many occasions I have passed on deals where it was clear that the founding team was over-optimizing the deal structure to focus on a quick exit.

When I have great teams with products that are taking longer to show traction than they or I would like I usually spend time trying to figure out how we can build a better business versus selling early.

I don’t blame entrepreneurs who go for an early exit when it comes up. To the contrary. On many occasions where I’ve met with teams of people in whom I’ve never invested I’ve encouraged exactly that – an early exit at a “small” price. Because if you’re business isn’t working or isn’t likely to work it’s obviously better than running into a brick wall or over-capitalizing yourself.

And of course many small acquisitions work for the buyers when there is a clear strategy for owning the asset or a clear alignment with the team you’re acquiring.

But as a repeatable strategy for large companies to try and compete with each other it still strikes me as a wasteful strategy. And few in the press are willing to call this out.

Sarah Lacy did. It’s why I love reading her writings – she’s one of the few remaining journalists in the tech sector (along with Kara Swisher and a few others) who have been around long enough to have earned their critical eyes or cynicism.

She wrote this excellent piece last year called, “The Acqui-hire Scourge: Whatever Happened to Failure in Silicon Valley”

And I thought I’d finish on a quote from Sarah,

“Allowing entrepreneurs — and their investors — to save face by saying they were “acquired” instead of failing is nice, but it’s a bit like the pre-schools where everyone wins a trophy for showing up.”

Note: image from PandoDaily, clicking it will take you to the article in which I found it.

Yesterday I wrote a post about “proprietary dealflow for VCs.”

In the article I discussed the downside of raising capital at a too high of a price and referred people to a previous article I had written encouraging founders to raise “At the Top end of Normal” as opposed to stratospheric prices.

In the comments section Siqi Chen wrote a great question

“Whenever I hear advice about pricing a round too high for the next round, I can’t help but think: well, if the choice (ceteris paribus) is between

a) doing what is effectively a down round preemptively when I don’t have to, by underpricing my current round in this market vs

b) accepting the market price along with some risk of taking a down round in the future, if I don’t hit my milestones, why would I ever choose b)?”

Since it is a great question with a subjective answer I wanted to broaden the reach of my answer beyond the comments section. I would love it if other people would weigh in on the comments section below if you’ve had experiences with down rounds.

The Damaging Psychology of Down Rounds

There is an important psychology that exists in investments. I don’t make the rules so don’t shoot the messenger. But psychology DOES play a big role in investment decisions. Even when investors themselves might not realize it is at play.

The rule is, “Always be over-subscribed.”

What does that mean?

It’s far better to be raising $1.5 million and get $2 million in interest (or perceived interest) than to be raising $1.5 million and only manage to get $750,000.

“What’s wrong with them that they couldn’t raise their money?”

Damaging psychology. People want what they can’t have. They want what they must work to get. So if you’re not a sought-after commodity investors may avoid you.

I know it shouldn’t be like this. They should either believe in you and your business or not, but I promise you I’ve seen this type of behavior repeatedly over the past 15 years.

And what’s worse than being under-subscribed?

A down round. That’s why.

But why?

Well, a down round is even more complicated than having no demand for your investment round.

First, a down round sends a signal that something is wrong with your company. Something didn’t go to plan. And no amount of explanations, “we raised in a frothy market. We know that. You’re getting a great deal when we’ve made huge progress.” or whatever simply won’t erase the “something is wrong” psychology.

But here’s the kicker.

As has been pointed out by Dan Primack based on FLAG Capital data, there are fewer than 100 “real and active” tech VCs in the country. If we count seed funds and large angels maybe that number goes up by 2x?

Point is – it’s a small industry. Everybody knows everybody. And we think of it like a Prisoner’s Dilemma played in multiple games. Whatever I do now it going to affect my future deals.

Often that is a good incentive because it keeps VCs from screwing people over since a bad reputation or bad working relationships could cost you deals in the future.

But in this case it works against the founders. Many VCs would prefer to avoid having to cram down other VCs by investing at a lower price or even if it’s not a cram down they prefer not to invest in a down round that forces the VC to take a “write down” on their valuation sheets they should their LPs.

And most VCs are over-whelmed with deals. So given the choice of pissing off your VCs (and you) they simply give you a polite response and move on to the next deal (with less hair on it).

What can you do if you’re already in this situation?

I’ve written about this before. I always tell entrepreneurs, “Clean Your Own Shit Up First.” (before fund raising). It’s the one post where my wife actually complained I went too far in trying to come up with an authentic image to represent the post.

So what do others think? Have you been involved in companies with a down round? Has it been easier / harder than I describe?

Do you think there’s a case for not raising at too high of a crazy price either for psychology reasons or for restructuring reasons?

Love to debate in the comments.

Image courtesy of Daniel Moyle on Flickr.