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Conflicted Capital

blog.aaronkharris.com

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Re: Conflicted Capital

#11

Post by stanrivers »

Everyone has their own incentives and when things get tough, they will work to maximize what their incentives say should be maximized - keep that in mind before signing up with investors if you are a founder. The term sheets and final docs - and the specific rights in them - matter a lot.

Examples from Charlie Munger [1]:

"One of my favorite cases about the power of incentives is the Federal Express case. The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can’t be done fast. And Federal Express had one hell of a time getting the thing to work. And they tried moral suasion, they tried everything in the world, and finally, somebody got the happy thought that they were paying the night shift by the hour and that maybe if they paid them by the shift, the system would work better. And lo and behold, that solution worked."

"Early in the history of Xerox, Joe Wilson, who was then in the government, had to go back to Xerox because he couldn’t understand how their better, new machine was selling so poorly in relation to their older and inferior machine. Of course, when he got there he found out that the commission arrangement with the salesmen gave a tremendous incentive to the inferior machine."

[1] https://www.butwhatfor.com/charlie-munger-the-psychology-of-...

Re: Conflicted Capital

#13

Post by akharris »

mbesto wrote: post #10

> In fact, the vast majority of the investors I’ve met, even those that have fired founders, are good people. It’s deeper than that, even. Investors mostly want to do the right thing for founders. There are emotional and business reasons for this impulse, but ultimately the fiduciary responsibility has to win. Founders need to understand that venture investing is a business where friendship is an input or an outcome,…

I don't think it makes sense to lump a whole group of people into a single categorization this way. You're right that being seen as good helps drive deal flow, but, again, most of the people I've worked with are actually pretty "good" in the moral/ethical sense.

Where and how personal ethics, business ethics, business needs, financial incentives come together and produce results is immensely complicated.

Re: Conflicted Capital

#14

Post by akharris »

pm90 wrote: post #3
zuhayeer wrote: post #2

My issue with the whole fundraising circuit (esp for low cap-ex startups) is how much you have to strain yourself to convince a non-customer to believe in you

Only slightly related to your point, but I find almost the entire VC community not one that I would want to be working with very closely with. It’s just not the kind of people I find interesting. Not that they’re not skilled or provide value, but the whole fundraising dance seems to be tiring and honestly pointless. Harkens back to an equally pointless endeavor I’ve been through before: the struggle to get good grade…

There are quite a few VC firms that model what you're talking about - for instance I think this describes what Garry's doing at Initialized.

But raising money is a choice that some founders will make because their businesses require it. If you don't need it, don't raise it. If you do need it, go into the process and decision with as much information as you can get.

Re: Conflicted Capital

#15

Post by rsweeney21 »

stanrivers wrote: post #8
rsweeney21 wrote: post #5

Raised money from VCs for my last startup. Series A investor made all sorts of overtures about how founder friendly they were and how supportive they would be. The week after we closed our series A they told me I had to hire a COO. I asked, "You trying to get me to hire my replacement?" "No, we'd never do that. How could you even think that?" Less than two months after we hired the COO they fired me. The COO was made…

This is not cool - I am sorry. Investor here - they should never do that. Make sure you tell others about how this went down. If they were planning on getting rid of you, that needs to be part of the upfront discussion etc.

They are a large and very lawsuit happy VC. It's not worth the risk to warn other people about this VC.

Re: Conflicted Capital

#16

Post by choppaface »

throwaway98797 wrote: post #12
rsweeney21 wrote: post #7

Earlier quoted context omitted.

None.

That really sucks. I think in the bubble of YC seems like this doesn’t happen but then there are counter examples like yours. Thank you for sharing.

I know of at least three successful YC companies that fired founders and then took a hit... YC isn't that special of a bubble, especially these days.

Re: Conflicted Capital

#17

Post by vcvc »

rsweeney21 wrote: post #5

Raised money from VCs for my last startup. Series A investor made all sorts of overtures about how founder friendly they were and how supportive they would be. The week after we closed our series A they told me I had to hire a COO. I asked, "You trying to get me to hire my replacement?" "No, we'd never do that. How could you even think that?" Less than two months after we hired the COO they fired me. The COO was made…

What VC?

Re: Conflicted Capital

#18

Post by [deleted] »

rsweeney21 wrote: post #15
stanrivers wrote: post #8

Earlier quoted context omitted.

This is not cool - I am sorry. Investor here - they should never do that. Make sure you tell others about how this went down. If they were planning on getting rid of you, that needs to be part of the upfront discussion etc.

They are a large and very lawsuit happy VC. It's not worth the risk to warn other people about this VC.

[deleted]

Re: Conflicted Capital

#19

Post by 908B64B197 »

stanrivers wrote: post #11

Everyone has their own incentives and when things get tough, they will work to maximize what their incentives say should be maximized - keep that in mind before signing up with investors if you are a founder. The term sheets and final docs - and the specific rights in them - matter a lot. Examples from Charlie Munger [1]: "One of my favorite cases about the power of incentives is the Federal Express case. The heart a…

In Xerox case, it was the same company that wouldn't enter the personal computing market because it might impact their copy-machine market.

Re: Conflicted Capital

#20

Post by k__ »

rsweeney21 wrote: post #5

Raised money from VCs for my last startup. Series A investor made all sorts of overtures about how founder friendly they were and how supportive they would be. The week after we closed our series A they told me I had to hire a COO. I asked, "You trying to get me to hire my replacement?" "No, we'd never do that. How could you even think that?" Less than two months after we hired the COO they fired me. The COO was made…

Why would you even give up more than 49% of your company?
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