An entrepreneur traced and plotted out every “reputable investor,” he pitched to. More than 217 investors passed the “hot potato” startup on to another, without doing anything or explaining why; a clear symptom of dumb herd mentality. For why would you refer a deal you do not want to invest in?
Retail store decorations reminded me that Easter is approaching and that set off the memory of an easter egg chart (on the right) I received from an early-stage entrepreneur who had been trying to raise money over the past 12 months. In many ways, the chart indicates how the Venture Capital (VC) world is filled with the wrong operators (not a lack of money), incapable of assessing risk; I will clarify later.
The enclosed chart includes the names of every investor (VC and Angels) the entrepreneur has spoken to face-to-face (in dark green), conversed through email (in light green) and is scheduled to connect with (in orange).
The 217 investors (whom I will not disclose, upon request from the entrepreneur) that bothered to meet face-to-face include pretty much anyone who means anything in the VC business.
Helped by a tiny amount of seed money and introductions from a well-known and respected investor, most investors responded enthusiastically (according to the entrepreneur), yet virtually none have bothered to provide the valuable feedback (or met with a decent no) that could lead to a line-of-sight of a term-sheet.
So, we conclude from this painstaking process the entrepreneur went through the following:
– Fundraising takes time, a lot of time
Even with the introduction of a well-known VC, carve out one year of your life to raise virtually nothing (a million or so). Most entrepreneurs chase a dream that is chiseled from years of experience dealing with inefficiencies, only to discover that at fundraising time they don’t understand (and don’t want to understand) the VC microcosm that holds “innovations” hostage. We recommend entrepreneurs to start socializing the idea with VCs the minute they begin writing code, to establish a clear target list of investors that can and should do the deal nine months to a year later. One year ago, I would have recommended the entrepreneur to sell his house and raise money that way, more comfortable and better retention of control in the company.
– Investors don’t treat entrepreneurs with the respect they deserve
Not responding to the entrepreneur (even when they share valuable connections) as the majority of the investors on the enclosed chart did is the lowest form of disrespect imaginable. I have written about obnoxious VCs on this blog many times before (reinventing VC, subprime VC, LPs fooled, the curse of subprime VC, investors to avoid) and would tell you that those over-inflated personalities contribute that I have no interest to belong to the current VC club (I have been asked). Not everyone was raised by a grandfather (and co-founder of the Mentos candy) who taught us early on that you can be hard-nosed, respectful, and triumphant all at the same time.
– The current crop of early-stage investors are numb
As you notice from the linkages in the chart (hard to see at 6% of the original size), many investors have provided referrals to others. But referrals only happen when investors believe “there is something there” (one of their favorite phrases) and pass it along to another investor who may better understand the proposition. In a productive investor ecosystem and regardless of their belief in the scheme, the chart would never grow to be as large as it is. When investors don’t like the proposition, they will not pass it on, and when they do, they will keep it to themselves and work out a deal. So, the sheer size of this chart communicates well how clueless our current VC microcosm is.
– The current crop of early-stage investors don’t understand the technology business
The fact that this entrepreneur is thrown around like a rag-doll by some of the most prominent “experts” in the VC business says it all. The investor’s indecisiveness is an indication of their lack of knowledge and vision that has earned them such a prominent role in the innovation of our industry. But, the best investors weigh risk; they do not need to deliver the vision. Experienced entrepreneurs do not require investors to hold their hands in understanding the technology business and need their investors to get out-of-the-way.
– The current crop of early-stage investors are cowards
There is nothing, I repeat, nothing wrong with a VC saying no, whatever the investor’s rationale. But this chart shows how none of them can decide on their own – either way. These investors cannot stand to lose a deal they may miss out on (and not saying no will keep that door open), and don’t have the guts to take the risk if they thought otherwise. It takes a strong character to be a VC, not an insecure and arrogant one.
– The current crop of early-stage investors are lemmings in rudeness
We knew that they were lemmings already, but now we know they will not only decide to jump off the cliff together but also share incredible brutality. A sad state of being. No entrepreneur should sign any of these people on to their boards, because if they were not rude to them yet, that behavior will undoubtedly pop up when they least expect it.
– Entrepreneurs need a professional agent
Talking to this many investors and not yielding any takers is creating the smell of a dead fish in the venture community. While great successes like Skype required talks with reportedly about 40 investors and I did 20 on one of mine, the entrepreneur should have forced an early feedback loop with some investors before proceeding to talk to anymore. The entrepreneur should pick an advisor or agent that does not allow this to go on for so long. Sadly, we are beginning to look an awful lot like Hollywood to become effective.
Now, notice that I have not discussed the specific proposition of the entrepreneur here and we may side with the VCs unable to extract razor-sharp focus from this entrepreneur’s full tale (but we will have the courtesy to tell him that directly). But the validity of the proposition is beside the point made here. Entrepreneurs, while they eat away their family’s life savings, and make considerable personal sacrifices, deserve the straight talk to help them plan their resources.
It is even more appalling that without any severe feedback the only response from a few VCs is to come back later, build the base technology first (which the entrepreneur has done) and get a critical number of customers. As if at that time, the entrepreneur needs any fair-weather friends. The exact nature of the subprime VC is shining through again, but I am surprised it includes so many investors I thought better of. No wonder people like Umair Haque become even more enraged, describing VCs asleep at the wheel of creative destruction.
I would suggest the LPs (Limited Partners) to pull back from 80% of their current VC commitment (that are not producing returns anyway) and re-allocate the majority of that money to the creation of new VC firms that target more fundamental diversification in the technology asset class. I offer my services to the LPs that want to take a hard look at that. And I would love to see the remainder of the current “prime VCs” be forced to re-invent themselves by this new influx in the same way entrepreneurs are all the time.
The only way to grow technology innovation is to force the VC business out of its current sub-prime mode and challenge the behavior of the crypt-keepers by making them highly accountable for their performance.
In the words of Ron Conway (a prominent angel investor) who recently stated “it is time for a new crop of entrepreneurs,” we surmise “it is time for a new crop of investors” that attracts better innovation, for in the words of Albert Einstein
The thesis determines what can be discovered. — Albert Einstein