Deal with Your Elephant in the Room

Posted on Nov 9, 2009 | 35 comments


This is part of my series on Raising Venture Capital.

elephantThere’s an old saying that if I’m talking with you and I start the conversation by saying, “whatever you do, DO NOT think about Elephants” then you can’t help but thinking about elephants while we’re speaking.  There’s a lot of truth in this adage. It’s sometimes called “The Elephant in the Room” because even when you don’t mention not to think about an Elephant there are certain issues that you just can’t stop thinking about whether they are brought up or not.

Many businesses that pitch to me have Elephant issues and I’d like to tell you how to deal with these when you’re raising venture capital.  Elephant issues are those things that the VC would automatically be thinking about when you’re speaking but he/she may not immediately ask you about either for legal reasons or out of courtesy.

But the VC is thinking about the issue whether you address it or not.  I’d like to separate these from “skeletons in your closet” which are issues that the VC would have no idea about when you’re meeting but might discover later during due diligence.  I  talk about how to deal with skeletons in my next post, which is linked to above.   Today’s post only covers issues that the VC will for sure be thinking in your first meeting.

Let me give you some (real) examples:

- You were an EIR at a VC firm who isn’t funding your current company

- You have a “strategic investor” who wants to invest in your B round as long as a financial investor will lead. Your A round investors are not stepping up

- You raised $1.5 million for a social networking site 18 months ago.  Today you have 2,000 users.

- You haven’t been able to resolve who’s going to run the company so you’re raising money as “co-CEO’s”

- The person who founded the company is no longer working for the company

- Google has announced that they are planning to compete with you

- You’re raising money but the CEO is not in the room (e.g. you’re the ex CEO, VP Biz Dev or some other title)

Each of these scenarios are real-life situations I’ve seen where no matter what the person across the table from me is saying that thought – that Elephant – is hard to completely get out of my mind.  I’m not saying that they can’t be overcome – but avoid them at your peril.

There is only one way to deal with your Elephants – head on.  Don’t pretend it isn’t in the room.  Know in advance what you’re going to say and don’t wait for the VC to bring it up.  When VC’s bring up Elephants they feel like they’re “catching you out” and you’ve lost the high ground.  When you bring them up you take the issue off the table.  I can’t say that they’ll get over the issue, but they won’t hold it against you for not bringing it up.

Small story.  I used to work in the UK.  It was 2003 and I was training for a marathon so I was in great shape (yes, I know this was YEARS ago but I did complete it in 3:57).  I was looking for a person to head up my UK sales team.  I hired an executive recruiter and had 7 finalist candidates that I interviewed.

One of the people who came to see me was named Nick.  I don’t know exactly how much he weighed but it had to be at least 350+ pounds – maybe more (I’m a bad judge).  Anyone who knows me well knows that not only am I not “weight-ist” (or whatever the right term would be) but also that I will quickly reprimand people who talk in a derogatory way about people who are overweight.

In this scenario, there was NO WAY I could sit across from this individual without noticing that he was larger than even a normally overweight person.

Within the first 5 minutes of the meeting we had discussed that I was training for a marathon.  He made several jokes about how he wasn’t running a marathon any time soon.  But he also used to opportunity to emphasize that he is full of stamina, works late and hard and had always performed well in his previous sales leadership roles for which he’s be happy to provide pay slips as proof.

He took the issue off the table.  He disarmed me.  He got his talking points in.  And in the end I hired him.  I would like to think that this would have been the outcome regardless.  I’ll never know.  But as a sales person you have to be able to build rapport.

I recently met with a firm that raised $4 million in an angel round (some friends & family this guy had!).  But they didn’t have any revenue or enough traction to show for it.  Instead of BS’ing me he said, “we spent 18 months building out our product and a set of graphic editing tools when we realized we had developed in the wrong platform.  We rebuilt everything in Flash and now have a better product.  So we know that our valuation will be lower than others who would have already raised $4 million.”  He then went on to describe a phenomenal set of biz dev partnerships that they had signed and showed me a very cool product.  Issue off the table.  Elephant out of the room.

Elephants also exist in normal everyday business.  If you’re in front of a customer and you had some very public bad press that week don’t pretend it didn’t exist.  Many people Google you before meetings.  If you’re going to see a client and somebody else in their organization is having big customer service issues, don’t sweep in under the rug.  Deal with your Elephants.

From the VC perspective, before you go out to raise money think about whether you have Elephants.  If you do, make sure you write them out and think about what you’re answers will be.  Make sure everyone on your team who will attend the meeting knows the script.  When you’re dealing with Elephants you can’t waiver.

Also remember, Elephants are things that would (or could) easily be known about your company.  Issues that couldn’t possibly be known without “discovery” I call “skeletons in your clost” and I’ll deal with those in the next post.  The rules above don’t apply.

  • http://twitter.com/justyn Justyn Howard

    Thanks so much for your continuous insight Mark. We're all busy, and taking the time to help us all out, write these posts, do interviews etc. is much appreciated! Looking forward to the follow-up article!

    Q: Taking Google out of the equation, do you think it's always best to address competitive threats head-on, even when it's not clear that the threat will materialize? How wide a net should you cast when talking about competition?

  • http://twitter.com/Justyn Justyn Howard

    Thanks so much for your continuous insight Mark. We're all busy, and taking the time to help us all out, write these posts, do interviews etc. is much appreciated! Looking forward to the follow-up article!

    Q: Taking Google out of the equation, do you think it's always best to address competitive threats head-on, even when it's not clear that the threat will materialize? How wide a net should you cast when talking about competition?

  • http://arnoldwaldstein.com awaldstein

    Mark, another good post.

    To me you are saying: “Be completely transparent”. “Be honest and upfront on business issues” and 'Don't hide from problems, embrace them”. Good messages and in keeping with the honest and transparent nature of our times that information freedom has pushed.

    In my experience this is critical. Even if your team is great, your vision right, your development platform next gen, sometimes stuff happens. With transparency you can sit down with the team and the equity holders and figure out collaboratively what to do with the pieces. These are great meetings when they happen even if the market conditions are uncomfortable.

  • davidgehring

    Great reminder! I've been in a few of the situations you list as examples. I guess there's comfort in feeling they are not totally unique to my experience!

  • http://reecepacheco.com reecepacheco

    Great advice Mark, particularly about “losing the high ground” with the VC.

    We did a similar thing as your example – starting out on the wrong dev platform, but made the switch and are crushing it since then – so we're honest about this with biz partners. It's a mistake that we made, realized and fixed and we're better for it.

    Embracing it shows that we're aware of our situation and in control of our information.

  • http://lmframework.com/blog/about David Semeria

    Mark, fwiw, I believe the breadth, depth and quality of your advice for entrepreneurs is now at a level with Brad Feld's excellent series.

    It represents an invaluable resource for people far and wide. You should certainly consider collating it all into a book.

    I would certainly buy it, even if I've already read each post.

    Thank you.

  • http://arnoldwaldstein.com awaldstein

    I second the thought!

  • http://twitter.com/stephen_henault Stephen Henault

    Great depth in this post. Good illustrative examples laid out as well. Would check the “white” elephant reference, it's a bit out of line with definition, but I'm pretty sure everyone who read this got your message.

  • http://arnoldwaldstein.com awaldstein

    Mark, another good post.

    To me you are saying: “Be completely transparent”. “Be honest and upfront on business issues” and 'Don't hide from problems, embrace them”. Good messages and in keeping with the honest and transparent nature of our times that information freedom has pushed.

    In my experience this is critical. Even if your team is great, your vision right, your development platform next gen, sometimes stuff happens. With transparency you can sit down with the team and the equity holders and figure out collaboratively what to do with the pieces. These are great meetings when they happen even if the market conditions are uncomfortable.

  • http://www.findingthegear.com David Gehring

    Great reminder! I've been in a few of the situations you list as examples. I guess there's comfort in feeling they are not totally unique to my experience!

  • http://reecepacheco.com reecepacheco

    Great advice Mark, particularly about “losing the high ground” with the VC.

    We did a similar thing as your example – starting out on the wrong dev platform, but made the switch and are crushing it since then – so we're honest about this with biz partners. It's a mistake that we made, realized and fixed and we're better for it.

    Embracing it shows that we're aware of our situation and in control of our information.

  • http://bothsidesofthetable.com msuster

    Yes, you should always deal with the competition. If you don't, they'll be thinking about it. Competition is like PR … either you take control of the message or somebody else will define the message for you.

    Two types of competition to address:
    1. Real competitors
    2. Threat from Google (I know it's dumb … but just find a way to say what you'd do if Google competed … assuming you're in a market that they could conceivably compete in).

  • http://bothsidesofthetable.com msuster

    Thank you. But a warning, in my next post I'm going to talk about a situation where I don't think transparency pays off. I know it's counter intuitive but stay tuned.

  • http://bothsidesofthetable.com msuster

    Most every company has elephants. If you read press releases only you'd never guess it!

  • http://bothsidesofthetable.com msuster

    Agree 100%. Good move.

  • http://bothsidesofthetable.com msuster

    Thanks. I really appreciate the feedback. FWIW, Brad is the one who inspired me to keep a blog.

  • http://bothsidesofthetable.com msuster

    Fixed the “white” – thank you for pointing it out. You learn something new every day!

  • http://arnoldwaldstein.com awaldstein

    Standing ready to respond.

  • http://lmframework.com/blog/about David Semeria

    Mark, fwiw, I believe the breadth, depth and quality of your advice for entrepreneurs is now at a level with Brad Feld's excellent series.

    It represents an invaluable resource for people far and wide. You should certainly consider collating it all into a book.

    I would certainly buy it, even if I've already read each post.

    Thank you.

  • http://arnoldwaldstein.com awaldstein

    I second the thought!

  • stephen_henault

    Great depth in this post. Good illustrative examples laid out as well. Would check the “white” elephant reference, it's a bit out of line with definition, but I'm pretty sure everyone who read this got your message.

  • http://bothsidesofthetable.com msuster

    Yes, you should always deal with the competition. If you don't, they'll be thinking about it. Competition is like PR … either you take control of the message or somebody else will define the message for you.

    Two types of competition to address:
    1. Real competitors
    2. Threat from Google (I know it's dumb … but just find a way to say what you'd do if Google competed … assuming you're in a market that they could conceivably compete in).

  • http://bothsidesofthetable.com msuster

    Thank you. But a warning, in my next post I'm going to talk about a situation where I don't think transparency pays off. I know it's counter intuitive but stay tuned.

  • http://bothsidesofthetable.com msuster

    Most every company has elephants. If you read press releases only you'd never guess it!

  • http://bothsidesofthetable.com msuster

    Agree 100%. Good move.

  • http://bothsidesofthetable.com msuster

    Thanks. I really appreciate the feedback. FWIW, Brad is the one who inspired me to keep a blog.

  • http://bothsidesofthetable.com msuster

    Fixed the “white” – thank you for pointing it out. You learn something new every day!

  • http://arnoldwaldstein.com awaldstein

    Standing ready to respond. As someone who did his first IPO just pre email and in a completely different world, I'm a good test case for 'old school'.

  • http://twitter.com/stephen_henault Stephen Henault

    dude, that's why this blog is badass – cause you give a damn. I totally wasn't calling you out, for the record.

    cheers -

  • stephen_henault

    dude, that's why this blog is badass – cause you give a damn. I totally wasn't calling you out, for the record.

    cheers -

  • http://www.bigdaybillboard.com Trindaz

    This was great reading Mark! Now I'm thinking about elephants I'll have to address next time I talk about http://www.bigdaybillboard.com.

    Also, LOVED your interview on Mixergy.com

  • http://www.bigdaybillboard.com Trindaz

    This was great reading Mark! Now I'm thinking about elephants I'll have to address next time I talk about http://www.bigdaybillboard.com.

    Also, LOVED your interview on Mixergy.com

  • http://www.bigdaybillboard.com Trindaz

    This was great reading Mark! Now I'm thinking about elephants I'll have to address next time I talk about http://www.bigdaybillboard.com.

    Also, LOVED your interview on Mixergy.com

  • Pingback: How to Deal with Skeletons in your Closet

  • Pingback: What should you tell a VC? Fred Destin vs. Eileen Burbidge « Curley Contemplations

  • Pingback: Deal with Your Elephant in the Room | CloudAve

  • Pingback: Need Investors? Get Publicity That Will Make Investors Beg You to Invest | Your Information House

  • Pingback: Small Talk: Elephants and entrepreneurs | Read NEWS

  • patrick allen

    Hey Mark, just an FYI that the link to “skeletons in the closet” in paragraph 3 above is broken. The page is alive elsewhere, so just needs a relink.

  • http://twitter.com/Ifiwasrory Rory

    Mark, I must say as a Jamaican trying to break into the start-up world this is indeed much needed information. Our region has been overlooked but this makes for a great start. Thanks a million !