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. 

Today Fred Wilson posted about VC-backed women entrepreneurs. Being one, I thought I’d weigh in.

First, let’s be clear about the numbers. Forbes says (emphasis mine):

“According to the Center for Women’s Business Research, the number of firms run by women grew at nearly twice the rate of all U.S. firms from 1997 to 2004. But a new study released this month by VentureOne, a unit of Dow Jones, shows that the number of women-owned or women-run businesses backed by venture capitalists has been on a slippery decline since 2002.

“To be clear, the number of venture-capital-backed,female-owned firms wasn’t very big to begin with. In 2002, only 7.55% of all venture-backed companies had women as chief executives. But in the first half of 2006, that number fell to 3.7% (the lowest percentage since 1997). The number of venture-backed companies with women in top management bottomed out at 29.7%–versus 34.8% in 2002.”

We received only 3.7% of the deals, and – even worse – only 2.7% of the dollars. My experiences anecdotally support those tremendously sad statistics. Just this week I was at one of our VC’s portfolio company conference. Other than the fund’s non-investment staff, there were two women. The second was a VP of Marketing. At another investor’s conference earlier this year the statistics were the same. In the many rounds I’ve raised I’ve pitched to a woman exactly twice.

Why? I don’t know. But here are two thoughts.

First, the VC-entrepreneur relationship is based on trust. (At least one way – the VCs have to trust that the entrepreneur is going to do well with the investment.) Most of the entrepreneurs I talk with view trusting a VC as 1) a nice-to-have and 2) naive. I’ll save that for a later post. The main point here is that VCs do have to trust the people managing their companies. I believe that people tend to trust those who they understand. It’s a lot easier to understand people who are like oneself. VCs are (white) men, so they’re more likely to trust (white) male entrepreneurs.

Second, expanding to a cultural divide, I think that most women are ill-suited to raise venture capital. Most VC pitch meetings are a jousting match. The first time I raised capital, I had a potential angel investor who wanted his VC friend to look at us and opine. I called the VC every day for about three weeks, and he kept ducking me. Finally, his secretary slipped and said “I’m sorry, he’s on the phone.”

“I’ll wait,” I replied.

That VC kept me on hold for almost an hour. Finally, he picked up the phone, and proceeded to drill in and belittle me. After too much of this, it became clear to even me that I wasn’t go to get anywhere, and i purposely, by mistake, referred to him as a vulture capitalist. “Ah,” he said, with a smile in his voice, “like I didn’t know I kept you on hold for 45 minutes. I come by my arrogance honestly, I was a cardiac surgeon before a venture capitalist.” And then, since I had established my machismo, we made nice. Many months later, I pitched that VC’s firm. Although he was health care and our deal was tech, he joined the meeting, recounted the story with gusto and recommended to his partners that they should back anyone with my persistence and “ability to go toe to toe.” It’s an extreme example, but it does illustrate the competitiveness in the environment. Women just aren’t brought up to be so in-your-face.

For me, the fact that there are so few women entrepreneurs is a huge positive. I’m memorable – I suspect that VCs I pitched for TurnTide in 2003 are 50 times more likely to remember me today than a male with as good a company. Being 6’ tall puts me on equal footing. Growing up surrounded by boys and spending my first 25 years consumed by highly competitive athletics taught me to be comfortable in the boys’ world without being a boy. But, although the status quo might be good for me, I can’t be selfish on this issue and wish that things stay the same.

Women and men are – at the peak of the bell curve – wired differently. We give birth, and we typically bear more family responsibility than men. We tend to be better with people and worse with machines than our husbands. But the sum of all of these differences, and more, cannot explain even half of the 26x difference between the number of men and women in whom venture capital invests.

Whatever is going on isn’t fair and it hurts everyone. Great women with great companies that fit the investment profile for venture capital are being passed over because they don’t fit the cultural profile. So the companies can’t take full advantage of their opportunities. And investment returns are suffering because good deals are being missed.