The Problem with Collecting Logos at Startups

Posted on Sep 1, 2011 | 79 comments


Collecting logos. It seems to be all the fad in the startup and VC world these days. VCs are paying up at enormous prices to say that they have GroupOn, Facebook and Twitter on their roster irrespective of whether they really venture funded them or bought in late stage.

And entrepreneurs are working hard to make sure they have as many VC names and famous angels on their cap table for signaling value. As a result they end up taking money from many firms all at once.

I call this collecting logos because it seems that having fancy brands to brag about trumps the logic of maximizing the value of your investor. Here are the problems that I see increasingly crop up for entrepreneurs in collecting VC logos.

1. Leaderless rounds
Let’s say you’re raising $1.5m and have 5 different VCs kicking in $200k each and 10 angels taking the balance. There is really no “lead.” This is a problem. Every corporate transaction you’ll do will require somebody to help you to: Think through the options, negotiation terms, get other investors on board, talk with new investors/partners/companies you’re acquiring, etc. With no lead it’s hard to get somebody to play the role. Everybody assumes that somebody else is playing parent.

Even if you’re super successful there will at times be dissent on issues like: Firing founding employees, increasing the size of the option pool, putting in place provisions about selling on secondary markets, agreeing controversial “bet the company” strategic biz dev deals and the like.

2. Not enough skin in the game
When investors don’t have enough capital at work – enough “skin in the game” – then you’re simply going to get less of their individual time and attention. I know they’ll all tell you otherwise. But think about it logically. Even if they emotionally want to spend time with all their children it’s hard not to prioritize your huge financial winners. Or at least companies where you have enough money in the deal and enough ownership that it warrants rolling up your sleeves and doing the hard work when things aren’t going well.

3. Nobody’s head on the chopping block
The biggest problem with leaderless rounds is that no one individual has their head on the chopping block if things aren’t going well.  “Yeah, that wasn’t a ‘real’ deal for us. We just kicked in $200k. It was seed.” That’s what they’ll be saying to other VCs or their partners as your company is flaming out. If the deal has just one investor, for example, there’s absolutely no hiding for the investor if the company fails. You’re more likely to get their attention.

If you had taken $1.3m from one investor or $650k from two then they would be a lot more accountable. Their partners would see it as “their deal” rather than a company that just “passed the hat.”

I have had this debate publicly with some other VCs. They say “ownership percentage doesn’t matter.” That’s true. If you invested in Facebook or Zynga. Here’s how a VC thinks.

“I’ve got 7 investments and 7 boards. I own 20% of these three companies that are killing it. I’m going to put more wood and more time behind them. I have these 3 ‘problem children’ that are having some difficulties (founder quit, product has no uptake, Facebook just copied them) but at least I have meaningful stakes. 20+%.  And I have this other company that I put in $500k and own 5% of. It’s struggling. Ugh. What a time suck it has been. It doesn’t look likely that they’re going to succeed. Oh, well. It least is was a small check.”

It’s not going to be so destructive as that investor being unhelpful. The “lack of support” will be more subtle. They’ll send some intro emails to other VCs but they won’t sell hard that someone else “really has to look at this deal. I love what they’re doing.” They don’t do this because a VC has to protect its reputation with other VCs so sending others your problems isn’t going to win them over for more important deals. Read: Deals in which that VC has a meaningful stake.

4. Fights over follow ons
Ironically you also have problems if the company is going reasonably well. See most VCs (let’s say funds $200m or greater) will be putting in their $200k into your round with the hopes that if you succeed they’ll get the chance to write a larger check later and therefore own more of the company. They’re not going to build a successful fund on a 5% ownership for $200k. So as you go out to raise more money you can often find these VCs fighting amongst themselves about who gets to pick up the next round of investment.

I know it sounds like that would benefit you by creating internal competition and higher prices. Trust me, it will become a shit show and you don’t want it.

5. Information leaks
Some people give advice that you should always be open with your information. I don’t feel that way. The more people around the table the more knowledge about your company and your actions are going to leak into the market. Often it’s inadvertent. The investor doesn’t intentionally share all of your good ideas with other companies. But once it’s in their head they can’t “un-think” what a brilliant idea you had. It leaks out in unintentional but very real ways.

Is there any good case for taking a large number of VCs into your deal?
No

Top 5 excuses for taking many investors in a round
1. “I want as many people helping me in the market as possible.” Wrong. You want a few, highly placed people who are incentivized to work their asses off for you, to shout from mountain tops how much they love you and to think about you constantly.

2. “I want more people around the table to help with the next round.” Wrong. As I’ve said before, too many investors can create problems in downside or upside scenarios. You want motivated investors who have their heads on the chopping blocks.

3. “I didn’t want to have to turn down A,B, C investors. I don’t want them to be pissed off at me or fund my competitors.” Man up. VCs turn down entrepreneurs every day. And VCs are turned down all the time, too. It’s part of the job. If a VC would truly be pissed off at you for not selecting them then you dodged a bullet. If they’re that big of a prick for just not getting selected imagine how much fun they’d be to work with in your darkest hours.

4. “We want some financial investors and some strategic investors so we have to split it up.” Strategic investors are oxymorons. Ask them to be in the trenches with you when the economy totally tanks over night. If you’re company is successful there will be plenty of chances to bring in strategic investors at a later stage when your company is more mature.

5. “We want some investors in New York, some in Silicon Valley and some in Los Angeles to help us with Hollywood.” No. You don’t. You want 1 really strong investor locally to meet you for beers after work when you have strategic issues to go through. You want an investor that will help you interview senior executives for your company. You want an investor who can meet a much broader set of your team than just that CEO. And if you take a second investor it’s OK to either have them be local or cover another important market like NY. But you don’t have to dice up your round like onions.

You don’t need logos. Logos are for insecure people. Just like they were in high school when the cool kids had to wear the right logos on their shirts, shorts and handbags. Show strength & conviction. Make the tough decisions and choose the investors with whom you feel the closest fit. Make sure they own enough to be motivated to work with you in good times & bad.

  • http://www.ContactComplete.com Tony Mariotti

    As always, Mark, you tell it like it is!  Thank you.

  • http://twitter.com/rkillgo Russell Killgo

    Mark,

    Doesn’t  it look better in later rounds that you have multiple companies that believe in you?  What’s the cutoff?  Should you only take on one VC in the beginning even if you don’t think in the long run it will be enough to get you to the next round and just hope that VC can pony up more along the way?

    And just a quick update… We finally went live in iTunes last Friday with the new app for my company, Siffter.  I think I’m finally ready to invite you for coffee.

  • http://www.twosides.co Jono Lee

    Let’s say you’re raising a seed round, but no one is willing to be a lead investor but everyone is willing to put in just $200K (like you say), what do you do then? Is it better to wait until you can find a lead investor or just go for it?

    Venture Hacks has a good 3 part series on finding a lead investor: http://venturehacks.com/articles/lead but I just wanted to know if there’s something you’d do differently.

  • http://www.webjoe.com webjoe

    Great post! The only logos you should collect are the ones from your customers! http://www.sometrics.com

  • http://twitter.com/ryanmatthewb Ryan M.J. Burke

    Mark – so true! Logo collecting is a fallacy prevalent in enterprise sales as well, which I’m sure you are familiar with from your Andersen days. I agree with all of your points, including one that you failed to hammer on… IT DOESN’T WORK! Why?

    1. Logos are not differentiating because everyone has them and the details get lost in the noise

    2. If the client (enterprise or entrepreneur) hasn’t researched or built a relationship with you enough to know what you are about without logo collecting then you have a bigger problem.

    3. If clients are focused on logos then they are focused on the wrong things… CYA vs. finding the right business partner. It’s probably a bad deal.

    4. REFERENCES… nothing is shadier then flashing major logos in the presentation but when it comes to reference time you supply lesser known company references because you don’t _really_ have strategic relationships with some of the sexier logos or trust them enough to give a good reference.

    I hate the logo slide so much that I took it out of a presentation to a client (large multinational CPG). When at the end they asked about our clients during Q&A time they said “It was kind of refreshing that you didn’t flash a logo slide. Can you talk specifically about some clients of yours that have had a similar problem as us?”. It was a moment of pride.

  • http://www.darrenherman.com dherman76

    Fantastic post Mark.

  • http://bsiscovick.tumblr.com/ bsiscovick

    this is EXACTLY our experience at IA Ventures. spot on analysis!

  • http://reecepacheco.com reecepacheco

    thank you for finally calling this out!!!

    i’ve heard of so many “party rounds” lately and i just don’t see the logic in it

    in giving advice to other entrepreneurs, i’ve actively rallied against this type of behavior – so glad my round is shaped this way

    way to tell it like it is, Mark

  • http://joeyevoli.com Joe Yevoli

    Dead on.

    I’m lucky enough to have someone from our first round step up and take the “parent” roll.  He’s been absolutely invaluable.  

  • Anonymous

    Collecting logos also happens on the hiring/employee side. Would love to see you write about that also inna separate post.

  • http://earnedmedia.wordpress.com/ Christian Brucculeri

    Wow.  This post is awesome.

  • http://twitter.com/mikeejt Mikee.J.T.

    It seems to be following the same as resume building – the more prestigious universities you’ve graduated from and the more prestigious companies you’ve worked for, the higher the price you drive for yourself.  Startup companies w/ big name VC backing look to be more trustworthy, and VC companies w/ big name companies in their portfolio look to be more valuable.  Does it have any indication of the true value one brings to the table? No, which is exactly what your blog post is all about.

  • Anonymous

    Well played!

  • http://twitter.com/berolz Michael Berolzheimer

    It seems that having only angels in a seed round ($500k – $1.25m) may make the most sense.  That way, you don’t have logo problems with multiple institutions, and you don’t get ‘feathered’ in the market when your single institutional fund backs away from re-upping in the next round.

    Yes, you’ll need a great ‘lead’ angel, but what’s been your experience with companies raising the next round without their original institutional lead supporting that effort?

  • http://twitter.com/bwertz Boris Wertz

    Awesome post – you describe the problem I have with most Angellist deals.

  • Rajath Kedilaya

    Well said Mark. 
    But what would your suggestion be if one does not find an angel or a VC willing to take the lead and put in a bigger share? What should the plan B be?

    Rajath K
    http://www.yourcabs.com

  • Matthew Prince

    This is great advice.

  • http://twitter.com/vitalyg Vitaly M. Golomb

    Word.

  • http://twitter.com/TMattCameron Matt Cameron

    Mark, VCs collecting start-up logos reminds me of enterprise sales guys – I am sure I have interviewed 50 guys who all ‘OWNED’ [Insert Fortune 50 company here] – Turns out they supply the toner cartridges for the Freeport, Kansas branch… 

  • http://www.alearningaday.com Rohan Rajiv

    Haha. That’s exactly what crossed my mind, Tony! :)  Thanks Mark.. Lots of parallels to careers whose sole objective is to add more brands to their name!

  • Tgowland

    Amazing article Mark – invaluable!

  • http://francispedraza.com Francis Pedraza

    rock on man

  • http://www.grooveshark.com sbmiller5

    I feel like I created your article photo for a stupid banking pitchbook…

  • http://popupchinese.com trevelyan

    > Make sure they own enough to be motivated to work with you in good times & bad.

    Not meant to sound critical, but it would be useful to have a very concrete post about what exactly founders should expect from investors in terms of this sort of work. Is it mostly restricted to follow-on fundraising? Genuinely curious.

  • http://thinkinginteractive.com Andrew Lockhart

    One argument I would make for “collecting logos” in the seed round is to mitigate the risk of being put in the position of trying to raise a Series A when your seed investor didn’t follow on. Perhaps that it is “insecure”, but I could see a number of circumstances (personality conflicts, portfolio conflict, fund stage, change in portfolio thesis) where a VC might decide not to follow-on on what might still be a decent investment. Unfortunately, once that happens good luck convincing another VC that you are still worth a look, particularly if your seed investor is well-respected.

    Thoughts?

  • http://blog.ideatransplant.com Jan Schultink

    VC financing is in the twilight: not completely closed as it used to be, obviously not as open as public markets. What herd to follow?

  • http://twitter.com/c_sheehan Chris Sheehan

    Mark, good comments and observations.  It dovetails nicely with a post I wrote last week on putting together your perfect seed round  http://bit.ly/phQqXU.  Founders need to think carefully through all the options.

    Chris

  • http://www.victusspiritus.com/ Mark Essel

    Good stuff Mark. Your post triggered a memory of this scene from Office Space.

  • http://www.feld.com bfeld

    Bingo!

  • http://about.me/humphrey HumphreyPL

    Great article and well written Mark. I have heard you talk about this topic before on ThisWeekIn and its always great to get a refresher just when I am looking to raise in the next couple weeks. Bad timing I know but its never a good time to raise in Australia :)

    I was wondering about Angels Groups. In Australia you tend to have lower rounds maybe $150k – $500k and generally there are Angels in a group all putting in $50k. Since there are limited funds should I rather stick to my guns and say look thanks guys but I really need an outright lead? Especially if this is how their funding normally works. Interested to hear your thoughts. Thanks!

  • Dave W Baldwin

    Very good!

  • http://www.startupboyo.com/ RichardF

    Mark,  your blog is a real VC handbook for entrepreneurs.  Well done, yet another cracking post.

  • James Smith

    Great post Mark thanks.  Do you feel that many people spend their life collecting badges/logos?  

    Young people can place much emphasis chasing the right schools, the right designations and the right companies to put on their resumes; rather than just getting out there and making their mark.

  • Anonymous

    Mark,
    One point overlooked is the founder believes they know how to run a business and just want the money.  The do not want the advice or support of investors, because the entrepreneur thinks he knows it all or at least more than anyone else about his business and market.

    Hope you enjoyed the summer.  Let’s grab a beer soon.

    Mark J. Landay
    Dynamic Synergy – Executive Recruitment
    mark@dynamicsynergy.com

  • Anonymous

    Same goes for business development deals.  Doing 15 deals and collecting logos is generally inferior to picking one or two key partners and working with them closely…

  • Anonymous

    Spot on, Mark.

  • Anonymous

    Spot on, Mark. I’ve been thinking about this phenomenon even more recently, and the effect that the accelerators (TechStars, YC, DreamIT, etc.) have on it. Those programs create so much focus on startups, and attract so many investors, that the best companies inevitably have serious interest from way too many investors for any logically constructed cap table or board room. I hope the folks running those programs will heed your advice and think hard about encouraging their entrepreneurs to make these tough choices. It’s understandably advantageous for the accelerators to be able to tout all the fancy names that have invested in their companies, and more logo collecting makes those lists that much more impressive, but it doesn’t serve those companies well and in the end, that doesn’t serve the accelerator programs well.  And if you’re interested, here’s a related post I wrote back in January http://bit.ly/qjzGyO.  

  • Jason Spievak

    Good post, Mark.  It’s all about accountability.

    As said elsewhere here in the comment stream, the only logos you should collect are your customers.

  • Pete Griffiths

    Excellent post.  Again.  Many thanks.

    There is one important point that does not seem to have been addressed yet in the comments so…

    “You want 1 really strong investor locally to meet you for beers after work when you have strategic issues to go through.”

    This is indeed ideal.  And in N. Cal you may well be so spoiled for choice that this is realistic.  But let’s consider other geographies.  Some of them aren’t stuffed with VCs.  And the thinner on the ground VCs are the slimmer are the chances of finding someone who ‘works’ for your company.

    IMHO you are probably better off finding a VC you believe in and that believes in you and your company, with whom the chemistry is right, who is not necessarily in your geography than someone you can meet after work even though both would be ideal.  

    Focus is best in most management situations and I strongly agree that it applies with investors as you argue.  But you set a high, perhaps unattainable, standard with the local guy you can meet for drinks and interview people with.

  • Josh Rutstein

    In another context we call this the NASCAR strategy. A great analogy is that no matter how many logos are on the car, there is only one who gets the hood.

  • http://bothsidesofthetable.com msuster

    That’s a big misnomer. No, is the short answer. VCs are sophisticated. If they see 5 guys at $200k each they’ll think, “Oh, it was an option.” That or they’ll think, “Wow, what a rookie move by the CEO.  Trust me: I hear what they say in the corridors.

    Right number of $200m+ fund size of VCs is 1 or 2 at A round, 1-2 a B round. It’s less of a problem to have one strong lead (50+% of the round) plus a few smaller funds that also participated.

    Congrats are launching. I’ll check it out when I can.

  • http://bothsidesofthetable.com msuster

    When you don’t have great options you resort to “as best as you can get options” and it’s not the end of the world. But I wouldn’t proactively reach out to do it.

  • http://bothsidesofthetable.com msuster

    Well said!

  • http://bothsidesofthetable.com msuster

    thanks!

  • http://bothsidesofthetable.com msuster

    thank you, good sir!

  • http://bothsidesofthetable.com msuster

    great to hear, Joe. Congrats.

  • http://bothsidesofthetable.com msuster

    can you be more specific?

  • http://bothsidesofthetable.com msuster

    I think “big name” VCs are fine. Just not 5 of them in one round.

  • http://bothsidesofthetable.com msuster

    Disagree. There are advantages and disadvantages to having only angels. The biggest advantage to having VC money if you want to build a big business is that you already have a player who can write a big check in tough times. The biggest advantage of angels only is that you can sell at a cheaper price if you want to.

  • http://bothsidesofthetable.com msuster

    Plan B – get yo’ money any way you can!