August 3, 2007
I’m slow finding it, but Bill Burnham’s Why Your VC is Acting Crazy is a must-read for entrepreneurs with or wanting to have VCs in their lives. I’ve unfortunately experienced crazy vcs twice, once with one of my own investors and once with a potential acquiree’s investor. Bill outlines some of the things to watch for, but in practice much of his advice is hard to implement. For example, only one of the many funds I’ve dealt with has been open about the fund’s own performance issues – it just isn’t that easy to know what’s going on. I think that the sad part of this dynamic is that investors typically position themselves as “partners” in your business. But true partnerships are two-way, and vcs don’t welcome entrepreneurs as partners in their businesses. There is a fundamental imbalance of power in the dynamic between most VCs and most entrepreneurs that the entrepreneur has to accept because of the golden rule: he who has the gold rules. Deal terms formalize the hierarchical structure and interpersonal dynamics – vcs tend to be older, richer, and more arrogant than entrepreneurs – cement it. The only glimmer of hope is that things do even out a bit with performance. When a company is kicking butt, it has options, which means that a crazy vc may drive you crazy, but he (they are almost always hes) can’t really force you to do anything. And over time, as entrepreneurs are successful deal-to-deal, vcs start to view us as long-term investments and treat us more like peers. At the end of the day, though, it is critical that we are aware of where our vcs are sitting. Sometimes they’re on our side of the table and sometimes they’re on the other side. And it’s never in their best interest to point out when they switched sides.