I just finished reading Founders at Work (by Jessica Livingston of Y Combinator). I would definitely recommend it to any aspiring entrepreneur. And there is plenty of interest to those with more experience. (I know it came out a while ago. Well, my brother read it first and then it took a while to work it’s way up through my reading list.) Basically, it’s a series of interviews with founders of technology companies. Like good any interviewer, she gets the interviewee to talk a lot so you hear their perspective in their own words. It may not be “the truth” but it certainly has a lot of value to hear all these oral histories. One thing that I liked, is that it includes some founders with a variety of outcomes for investors (going out of business, selling, IPO, etc.).
A couple of the stories include cases where entrepreneurs had bad experiences with VCs. It reminded me of a theory I’ve kicked around before:
Investors can smell your fear.
Sure, it is well understood that investors are much more likely to get involved if things are going badly. Beyond that, I think it becomes a self-fulfilling prophecy for founders to run into trouble with VCs. If they start out with a distrust or a lack of understanding of the mechanics, they’re more likely to make mistakes or put off a sense of fear.
And I think that VCs judge the founder’s business skills in large part by if the way the fund raising process is conducted. Many VCs won’t always have experience evaluating technology or other skills. But they do know termsheets, valuation, and the mechanics of getting a deal done. If the entrepreneur is fearful or does not embrace the process, I think VCs assume that the entrepreneur does not have good business skills. And therefore is much more likely to put in place other management or generally attempt to play a more active role. Which can lead to more mistrust and misunderstanding on the part of the founder. A vicious cycle.
So, as a founder, what should you do? I’m all for raising money from investors if that’s what is needed in your business. Look at your goals and figure out if having the money will raise the likelihood of reaching them. But before you do sign a deal:
- Learn about the VCs business model and their termsheets (lots of good blogs out thereon this plus you could read the book Term Sheets & Valuations)
- Learn how to negotiate (say by reading Getting to Yes)
- If you can, find a mentor who has been through it before and is willing to share thoughts free of charge.
- And before, during and after, work on your business so that you are as successful as you can be. The better your alternatives are to taking VC money, the better negotiating position you’ll be in and the less desperate you’ll feel. Also, as mentioned when things are going well, you’re more likely to get along with your investors.
If you don’t want to work on this “investment” stuff, have a co-founder you really trust to who will. And don’t expect that you can hire someone to handle this for you who is not a co-founder. It’s rare that the person you hire will be as aligned with you or care as much about the business.
