Choose Your VC Investor Carefully

Posted on Oct 25, 2009 | 53 comments


Beware of VC Seagulls, who shit on you and then fly away (or worse yet leave you with Red Herrings)

seagullThis is part of my ongoing series Startup Advice.  I write this post as a warning to pick your VC’s carefully.  I like to say to first-time entrepreneurs, picking a VC is more permanent than marriage.  If you pick the wrong spouse at least you can get divorced.

Keeping a blog has been great because so many entrepreneurs have written me with questions about their companies and I’ve gotten to know many of you personally through the process.  In these many exchanges similar questions crop up.

One theme that I always get is, “I’ve gotten an offer from a VC, but they want me to do X, what do you think?”  X is always something non-standard that the entrepreneur knows in his gut isn’t right.  Trust your instincts – they will serve you well as an entrepreneur.

For example, a recent phone call I had with a young entrepreneur straight out of one of the most prestigious engineering schools in America he asked, “I have an offer for $400,000 in seed money but the VC wants me to agree now to bring in a new CEO.”  This company is doing its SEED round and they already want to bring someone new in.

[UPDATE: Chris Dixon rightly points out in the comments that there are cases where somebody would encourage you to bring in a co-founder.  I have made this comment to teams myself.  In the case I was referring to above  it was a talented team but they were told they needed a “seasoned” CEO.  If you’re a founder and talented at what you do but aren’t well rounded enough to be a CEO in your startup you should listen to the message you’re being given – it’s possible you need another co-founder.]

I told the CEO, “I have the luxury of not knowing the name of the VC you’re talking to so I won’t sound biased.  I guarantee this is a bad VC.  Either you’re not a good leader and he shouldn’t be investing at all, or he has no clue what it takes to build a startup.”

There are many great VCs.  There are people like Gus Tai who any entrepreneur who’s worked with him well tell you is that he has helped coach them into building a great business.  I pitched Gus twice and he told me no both times.  Yet I walked away from the process feeling OK about myself and feeling like he actually engaged in our process.  Below is a quote about Gus from The Funded.

Gus has been amazing. When we were thinking of raising, he was the first I called, and after talking to Benchmark, Accel, August, and a few other tier 1 firms, it came down for me the person who was going to join the board. I have dozens of other entrepreneurs that do nothing but gush about Gus and these are in full confidence since we bash others :)

You’d be lucky if you got him. He has the most wisdom I’ve seen from a VC and I know I’m going to learn something with every interaction.

Yet Gus is in the minority in my opinion.  Too much money flowed into VC in the past 10 years and it brought in too many people who became VCs for the wrong reason.  And many of these people are money managers rather than people like Gus who inspire entrepreneurs.

I have a term for these kinds of investors who have no real experience with how to build companies – VC Seagulls.  Let me explain.

Many years ago I worked at Andersen Consulting, originally developing software for large corporations and then as a strategy consultant.  Much bad came out of this period including my cynicism for consultants. But much good also came.  At just 24 years old I was given the responsibility of managing teams.  I learned a lot about how to set goals, manage projects, deal with competing personalities and, importantly, manage “up.” [never mind who’s nickel I learned all of this on, but that’s a story for another day.]

One of the terms we coined there was a “seagull.”  We used it to describe certain of our partners (e.g. the owners of Andersen Consulting).  Seagulls were the partners who didn’t spend much actual time on your project.  They were smart and accomplished.  They knew enough about your project to have an opinion but not enough to help.  They would swoop in for one day to “check in on things,” shit on you and then fly away.  Seagulls.

The analogy holds pretty well for some VCs and this can be destructive.  I think the best VCs act as a sounding board for management.  We provide a point-of-view that isn’t clouded by living in the details on a daily basis.  We provide advice that is pertinent because we are able to see patterns across multiple companies.  And hopefully we provide input because we’ve been in your shoes before.  We’re there to serve you as the people who do the real work not there to have you serve our egos.

It is occasionally our job to spar with management – to point out where we don’t agree with the direction that is being proposed.  In many scenarios I view this role as my job to inject a different point-of-view but to ultimately let management decide what is right based on my input and that of other board members.  My normal viewpoint is that the management teams are living the day-to-day of the business and are in a better position to make the difficult daily choices that need to be made.

VC Seagulls don’t think this way.  They think that they know better than management.  They are condescending.  They can tell you what the “conventional wisdom” would be for your decisions.  They learned it at b-school.  They encourage you to hire senior people on your team who have gold-plated resumes.  They’re easily impressed when you’re selected for TechCrunch50 but not easily engaged in a detailed discussion about your conversion metrics.

You know in your gut who they are.  If you haven’t read Blink by Malcolm Gladwell then read it.  In our core we easily spot people’s inner character.  We know VC Seagulls when we see them but we’re attracted to work with them because they have a brand name.  They work for a prestigious firm, have sat on big boards, went to HBS and speak at lots of conferences.  But if your gut check is telling you that they would be a VC Seagull and IF you have other options … run!

Seagull VC’s (like some of my old Seagull Andersen Consulting Partners) are smart people, don’t get me wrong.  But they’re know-it-alls.  They always have to offer their opinion just to be heard.  They speak up on every topic.  They’re self-righteous about how to approach your business problem and often they’ve never actually had to do what you’re now trying to do.  They think everything is easy (if you would just listen to them).

redherringAnd the thing that concerns me is that they often introduce red herring’s into the discussion.  In the need to seem smart they divert the board conversation into something that isn’t on the company’s critical path or isn’t of strategic substance.  They slow down important decisions and inadvertently give management teams homework to analyse their suggestions following the board meeting.

You know the type.  They read something last week on TechCrunch and want to know what “you’re doing about it.”

One quick example.  At my first company, which was based in London, we decided to set up a development facility in India.  I hired a guy, Azhar Khan, who was raised in the Indian subcontinent (Pakistan, actually) but educated and worked his whole life in the US.  He also had experience in setting up tech development centers in India.

Azhar researched all possible locations for our Indian office based on: ease of travel, cost of employees, technical abundance, annual staff attrition rates, local infrastructure and safety for our UK employees who would spend a lot of time down there setting things up.

He gave me options like Bangalore, Bombay, Pune, Hydrabad, Chennai and  Noida.  He also gave me the option of Pakistan.  We narrowed down the decision to Bangalore, Pune and Bombay (Mumbai).  I personally ruled out Pakistan due to the perception that our staff would feel less safe there.  It was cheaper, sure, but post Sept 11th our employees didn’t want to spend weeks at a time there (rightly or wrongly).  I’m not anti Pakistan by any means (they guy I hired was Pakistani!), but when your people don’t want to go somewhere – you listen to them.

India_mapAzhar and I went out to India for 3 weeks and surveyed all three locations.  In the end I chose Pune because as much as I loved Bangalore I felt the annual salary increases and staff attrition would have been too high.

[Note, Azhar’s next company, iLike, chose Bangalore and then had to close down the office because staff salaries escalated too much.  This is a must read and cautionary tale of choosing a city that is growing too rapidly, plus it made me feel self righteous because Azhar left my company due to my choice of Pune ;-) – We’re still friends – he  just didn’t want to live there]

I came back and presented a very detailed analysis to the board.  None of my board members had ever set up development facilities in India.  I felt that we had gone WAY beyond the call of duty in our analysis.

For most board members it was a complete and exhaustive survey.  But I had one board member who felt the need to drag out the discussion.  He had been on the board of a company that had done development in Pakistan and argued that it was considerably cheaper (it was).

I tried to make the case that cost was only one factor and India was already an order of magnitude cheaper than the UK.  The conversation dragged on and in the end I had to go back after the board meeting and do more analysis and have the board decide at a later date.  To say I felt annoyed was an understatement.  In the end the board voted my way but I wasted valuable time on an expedition to serve his ego.  “Hey, we just had to be sure you’d done your work before we made this important decision.”  F-U.

I know this sounds like an extreme example but I see many board members add overhead to businesses all the time through similar red herring input.  In the VC’s mind it is innocent enough and starts off with a “have you guys ever considered …?” type comment.  They don’t mean to be malicious.

But it’s the job of the CEO to control the board tempo.  It’s your job to let everybody have input but to park red herrings that would take the conversation in the wrong direction.  More importantly, you need to be careful not to get “homework” out of the board meeting to feed the ego of the Seagull VC.

If you can avoid working with Seagulls in the first place it will save you hours of frustration.  If you already have seagulls, do as you would do in real life – take cover to avoid being shit on.

[UPDATE] In reading David Smuts’ excellent comments to my post it is clear that I didn’t give enough advice on what to do (the danger of publishing at 12.30am).

1. Make sure to reference, reference, reference.  Obvious start is to talk with other entrepreneurs.  I always tell people to seek out references of companies not listed on the immediate call sheet that the VC gives you.

2. The point I tried to make in my post was that I believe most humans innately know when they’re dealing with a seagull.  But we subjugate this feeling because we’re dealing with somebody we perceive to have a certain status.  Don’t go against your instinct.  Entrepreneurs tell me their current funding horror story and then usually back down by saying, “but maybe it’s me.”  Stick with your instincts.

3. David points out excellently that many VCs leave enough of a trail for how they think in their digital fingerprints.

4. Not all VCs are seagulls.  There are many great ones.  I hope nobody infers that I think all or even a majority are seagulls.  BUT … just like in real life there are MANY seagulls and they fly in packs.

 

  • http://www.resuwe.com/ Dan Boersma

    Great Post. We are going down the VC route for our company, ResuWe.com and appreciate the solid advice.

  • Ray_Chan

    Thanks Mark, good article, and had been shit on myself in the past, and that is why I put together SeedTrack.org at Tech Coast Angels. We are the kingmakers and we help the entrepreneur to run the show by providing services, connections, knowledge and help with execution, to turn dreams into businesses. BTW, we have another term for those VC Seagulls, they are the 'Shit and Run' VC.

  • Ray_Chan

    Thanks Mark, good article, and had been shit on myself in the past, and that is why I put together SeedTrack.org at Tech Coast Angels. We are the kingmakers and we help the entrepreneur to run the show by providing services, connections, knowledge and help with execution, to turn dreams into businesses. BTW, we have another term for those VC Seagulls, they are the 'Shit and Run' VC.

  • http://www.resuwe.com/ Dan Boersma

    Great Post. We are going down the VC route for our company, ResuWe.com and appreciate the solid advice.

  • http://www.resuwe.com/ Dan Boersma

    Great Post. We are going down the VC route for our company, ResuWe.com and appreciate the solid advice.