I promised I would write a post from the VC side to balance my recent “darndest things” startup/entrepreneur focused post, see here. So here it is.
– “What would you do if you raised more money?” Usually asked to the CEO of a promising startup. I don’t know about you, but heck, I would spend it wisely… Still, this line of questioning is interesting and non trivial. There is such thing as too much money and the burden of success when raising more goes up exponentially more often than not.
– “You are not growing fast enough, you should spend more.” immediately followed by the equally important “But remember to pay attention to cash burn.” Yes, we investors can be completely schizophrenic with the capital we invested in your startup. I can actually claim to have said something similar, in the same board meeting! I should be ashamed of myself.
– “The pre money valuation you are asking is too high.” Show me a potential investor who upon negotiating a first time investment in a startup will tell the CEO his pre money valuation aspirations are not high enough. For full disclosure, I too complain about high valuations all the time. Egads.
– “You are too early for us.”, “You are too late for us.”, “The check size is too small for us.”, “The check size is too big for us.”, “You do not have enough experience as a team.”, “These guys are way too experienced as a team.”, “The management is too young.”, “The management is too old.” We are masters at coming up with reasons why we should not invest while avoiding the real reasons, which I strongly believe, we should always share with a startup and its team. Better be honest, point to one’s analysis and understanding of a business model and space, it will strengthen the startup team.
– In the same vein, but equally hilarious are “The target market is too small.”, “The target market is too big.” Make up your mind! There is never a “right size”. What is more important is how easy it is to capture enough market share at pace, assuming it is not too small
– I heard from a peer investor this nugget “This market is quite fragmented, there are 3 competitors owning 85% of the market.” Said with a straight face. I promise.
– When the founding team does not have a technical co-founder “We are passing because you do not have a technologist.”
– When the founding team has only technical co-founders “We are passing because you do not have a business-minded person.”
- “This is an untested business model.” without backing up the assertion with grounded reasoning as to where the weaknesses are. Frankly, most truly new and disruptive ideas are untested, by definition.
– “We are hands off investors.” followed by “We will want two board seats for our firm.” If I were an entrepreneur I would be fuming.
- “We only invest in capital efficient business models.” followed by “We would like you to raise more money so we can invest more now.” I actually overheard these very words during a startup challenge event I participated in in Asia. To be fair both statements could be perfectly valid and not contradictory. At the time these words made me laugh though.
– “You need to grow fast/faster.” Has anyone heard an investor asking for slow growth? Has that ever happened in the history of investing? Seriously, I prefer smart growth with the right timing.
– “Your product sales price is too high.”, “Your product sales price is too low.” If you start high, you are wrong. If you start low, you are wrong. Basically you can never be right – the investor will take the opposite view.
– When the startup is doing well: “xyz is my portfolio company.”, “I made the investment in xyz.”
– When the going gets tough: “yes, xyz is one of our portfolio companies.”, “we invested in xyz.” Who knew! We revert to sports fans’ language, “We won” vs “The Yankees lost tonight.” A couple of years ago one VC explaining me how they had invested in this great company early on but since they had left the board the business had gone into a tailspin – no trace of humility, all ego.
– One of my pet peeves: “xyz is my/our company.” Let’s remember that VCs usually own less than 25% of a company at any time, invest alongside other VCs AND the founders/management teams own the company in ways an investor will never achieve.
– From one VC to another VC ,“We love to co-invest.”, “Let’s find a deal to invest in together.” and you never hear from them again.
– From one VC to another VC, “Can you share your due diligence notes with us.” and they never reciprocate. I will stress that most investors I co-invest with are very generous with their time, thoughts and analysis.
– From one VC to another VC, “you should look at this company. we passed but they are interesting” without giving you a grounded reason for why they passed.
– From one VC to another VC, during due diligence “yes they are a great team, great company” while eluding the real problems one will encounter post investment. A classic. I have witnessed this behavior, indirectly. Not sure how I would behave if it happened to me.
– From one VC to another VC, “valuation is not the issue here, this is a great growth story.” The VC usually making this statement has usually already invested in the business in the prior round. The serious question to ask here is what is the right valuation not only join relation to what the company has achieved but also what it will need to prior to the next round.
Now to some fun categories:
1) The “control freak” syndrome: When a VC takes over management of the company from his board position. Bad stuff ensues.
2) The “fear/greed gyration” syndrome: When a VC alternates between fear of loosing out and greed of making out.
3) The “slow treatment” syndrome: When a VC strings you along when you are raising capital, without being upfront with you as to their real interest. I do hope we do not do this at R66 – I do not like the slow treatment from startups either.
4) The “never enough traction” syndrome: When a VC wants beta users when you only have a beta product. When he wants paid users when you have beta users. When he wants 10 paid users when you have 2. We are never satisfied as investors, we always want more.
5) The “ghost” syndrome: When you cannot get hold of a VC prior to an investment or earnest due diligence – ok, I admit to being a ghost sometimes. When the VC is conspicuous by his absence at board meetings – even if he is physically present – and rarely challenges you as a founder, checks the progress of the company or help in any way.
6) The “no risk/all return” syndrome: When a VC does not want any risk associated with early stage investments but still wants to invest in a potential unicorn.