When I've seen founders try to keep investors at arms length it seems to result in mistrust, leaving investors feeling like they can't get the real story, and thus decreasing the likelihood they invest further. So rather than keeping insiders at arms length, I'd suggest being direct about wanting to meet other investors. I suggest uncomfortable candor over comfortable misdirection.
Conflicted Capital
61–70 of 76 posts
Re: Conflicted Capital
#62Earlier quoted context omitted.
This is kind of what I'm working on. Basically a product studio with LPs
It's been done, I know of a couple of these. They start out well intentioned and end up being backseat drivers in every company they launch, usually with bad side effects.
I think the big distinction is avoiding launching companies and instead launching products.
I'm increasingly convinced that very few products need to be companies, and the insistence that they do is why a lot of them end up so shitty.
Re: Conflicted Capital
#63So...how do founders get unconflicted capital?
Re: Conflicted Capital
#64Another note about 'internal' investors getting preferential treatment as opposed to outsiders: this is usually a result of SHA conditions and elements in the articles of incorporation that stipulate that in case of a sale or issue of new shares existing shareholders have first right of refusal. That this makes for a less competitive environment is something that everybody seems to take as normal, but after reading t…
You should avoid giving a right of first refusal even at great cost (20% valuation discount).
If there is a right of first refusal many investors will decline to engage in future rounds since if they end up negotiating a good deal it might fall apart at the last moment.
Re: Conflicted Capital
#65Earlier quoted context omitted.
It's been done, I know of a couple of these. They start out well intentioned and end up being backseat drivers in every company they launch, usually with bad side effects.
I think the big distinction is avoiding launching companies and instead launching products. I'm increasingly convinced that very few products need to be companies, and the insistence that they do is why a lot of them end up so shitty.
Having seen this model before, I think the challenge there is incentives, motivation and focus. If you have a winner, it's likely that through power law effects it makes sense to double down on it unless you have too much capital to deploy through that company.
With that said, I think running a product studio before you find product market fit or the killer company is not a bad idea, especially if you can work directly with LPs to source the funds. Then the challenge is just making sure people don't step on each other's toes when you staff the winner.
Re: Conflicted Capital
#66> 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,…
These are humans, after all. It seems unlikely that all of them should be unscrupulous, fundamentally dishonest, profit-maximizing robots who only exhibit benevolent traits as a charade to lure in entrepreneurs. Surely some are simply good people.
It sounds a little hyperbolic and black and white to consider those two things as being mutually exclusive. It's possible (and maybe even common) for someone to be a good person to others in matters that don't pertain to money -- but, when the rubber hits the road with respect to money, they end up being making decisions that make sense given how much leverage they have. At the end of the day, VCs are subject to their LP stakeholders. They are also subject to their founder stakeholders, but the degree to which the various entities in that three legged interaction hold sway varies based on environment.
In a frothy environment like the present, founders really do have a lot of leverage because the demand for investable companies in many ways greatly outstrips supply; you see this in the SPAC craze. But in other environments, LPs and VCs have a lot more leverage over founders. When that is the case, it is only reasonable to expect them to behave according to their incentives. Now one could make the argument that it's still a poor long-term decision for VCs to sour community goodwill if they want to be in the game long-term. That may be the case, but it doesn't mean that a cunning VC cannot profit from exploitation in the medium term, enough to enrich themselves to the level where a poor reputation doesn't prevent them from continuing to operate.
It's important to not over-anthropomorphize the way that financial professionals operate as agents in a system with incentives. When they do something unsavory, it's generally not meant to be personal even if the result is incredibly unsavory.
Re: Conflicted Capital
#67Raised 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…
>The lesson for founders is to never, ever, ever give up control of your board/company. Always maintain control of a majority of the board seats. Maybe you're too close to the situation so what you say above feels to you like a universal truth but it actually doesn't help me as a reader. To raise the quality of discussion, we'd need to know what your realistic options were at the time you raised Series A . E.g... Did…
"To raise the quality of discussion..."
To raise the quality of discussion, we need for all the email and Signal messages from the investors / VCs for a variety of deals to be made public. That would be a major step towards reducing the amount of information arbitrage in start-up funding (not to mention blog posts like the OP).
Re: Conflicted Capital
#68Earlier quoted context omitted.
What VC?
Insight Partners. They evidently led the Series A for OP's last startup, which according to their LinkedIn is Numetric. Crunchbase tells you what you need to know: https://www.crunchbase.com/funding_round/numetric-series-a--...
I'm aware of Max Levchin doing something similar to a YC founder, but with the involvement of another VC at the time.
Re: Conflicted Capital
#69>Investors mostly want to do the right thing for founders.
See, that's an important difference between investors and VCs.
A VC firm or division gets (say) $1B, and a deadline: invest it all by end of quarter. All they can invest in are what come through the door. They know most of those have no future. A few do, but not enough to absorb the whole allotment. They can't not invest. What to do? No choice, really; invest it all, with 9 of 10 expected to flop.
Having identified, at the outset, which should flop, start milking them. There's no reason to waste that money, even though it's lost to the actual investors. Make them spend their nut where it will do somebody some good. Maybe make them hire a crony, who will hire more. Make them use a pet staffing agency. HR pros are (to first order) all grifters, so provide them one of yours. Make them buy software from one of the not-flops from this round or last quarter's, or somebody you own part of, personally. Be creative. You can draw it out, deposit more cash from next quarter's infusion, and extract that. Maybe they can build, code, patent something of value that can be bought for pennies at the bankruptcy.
There are a million variations on this, all used.
Re: Conflicted Capital
#70> Founders need to understand that venture investing is a business where friendship is an input or an outcome, and not the other way around. Does anybody know how to parse this?
My guess is he means that VCs don't make decisions out of friendship.
That is what I meant. Totally agree it wasn't my best turn of phrase. Worked in my head!