Robert Scoble and VC Think

I got some link love from the Scoble blogging machine (thank you, Robert) with respect to my VC Handbook posting.  At the risk of getting yelled at (again) over excessive Scoble linking, I’d like to review/respond to a couple of points Robert made in his note.

Robert has this snip:

“I’ll be honest. If I were starting a company I would try to do it without much VC, if any. Why? Cause I know some folks who’ve worked for VC-run startups. Ones where the investors made billions. Where the founders got maybe a hundred million. And where everyone else got literally bubkiss.”

and this snippet:

“How the investors just don’t care about the developer. The folks who actually make the product work and make it pretty. Er useful.”

A couple of reminders: I know Robert personally and I used to work for Microsoft so filter everything through those disclaimers.

I’m not surprised that smart people are taking a hard look at this whole notion of VCs as we head into this thing everybody but moi is calling Web 2.0 and other such new and improved stuff.  For the record, if I left my firm and were to do a start up, I would do it with as little outside money as possible as well. That’s just the nature of slicing up the pie and creating value. And, as I’ve said, today you can go really far on that credit card so my outside money would come from my trusted partners but only after I had started the process of creating value.

The VC community clearly is getting a wake up call about the changing nature of the business we are collectively in. We need smart people with smart ideas or we are simply finished.

Robert is off base, however, on what we (the VCs) care about and who drives much of the wealth sharing in a start up.

A start up, by the way, is different from late stage, 200 employee, expansion capital type situation.

Let’s first hit the ‘don’t care’ part. This just wrong on a number of fronts. We care a ton about the people building the product or service.

In almost all start up cases, it is the founders who were/are the core people who think up/code up the very thing I want to invest in.  So, ‘the developer’ is the founder and those first few folks that the founder hires. In a start up situation, it is usually less then 10 people so, in general, we care about everybody, talk to everybody, and take care of everybody when we first go into the company.

All good VCs speak the “its about the people” thing so it’s unfair to make that type of  ‘don’t care’ sweeping statement.

The “VC-run” start up comment concerns me from a different perspective.

A “VC-run start up” is a company in trouble because that is not what VCs do. VCs invest in smart people with good ideas, providing capital and (I hope) other value add to improve the odds of success. 

In most first round cases, VCs are not the majority or don’t have board control, etc, so it isn’t the VC who ‘runs’ the company.  When a company goes through multiple rounds of financing, you will always have cases where the majority shareholders are the investors but they don’t run the company.  Yes, when a company gets  into trouble or there is a case where the management team doesn’t perform, the investors will bring in a team, change the board, etc. But that is not the normal process, rather the result of some kind of trouble.

Finally, there is the issue of who got/gets what. In Robert’s note he mentions founder getting a pile and everyone else getting zip. That, Robert, is the fault of the founder(s), not the VC. 

As part of almost every term sheet, we have a requirement for employees to be taken care of.  In most cases, it’s the obvious, stock options, but there are other ways, like restricted stock grants, etc.  I have companies where the employees, all of them, got a chance to invest along side us, in effect, getting the same price/value we did and making all of us owners. In one case, all the employees took a reduced first year salary in exchange for some clear, vested, stock. In a couple of cases, I have companies with a plan in place where a piece of the gross sale of the company is reserved for the team. And that piece is on top of option/restricted shares that are given out.

Good VC firms know the value of motivated people. Good VCs will layout the basics and then work with the founders in making sure the team is taken care of.

Founders who don’t want to have option plans, scare me.  Founders who don’t want to share the wealth with the team, scare me and they should scare you.

Flickr and Skype? I’d ask the founders how many other people in the company got a good reward. Say what you will about Microsoft, Google, Netscape, Ebay, Amazon, Yahoo, Real Audio and many others. Those big time companies made a lot of people a lot of money, including many of the people on who’s back (or keyboards) the products were made. In fact, Robert’s current employer (my former employer) made a ton of developers rich.

Robert is right, tho, on making sure win-win drives businesses of all sizes because, in the end, that’s the only way anybody or any company can be successful.

Comments

[Robert Scoble]

Yeah, my comments came from a discussion with an employee of Skype. I was suprised to hear how little the team got and how bad morale is now on that team because the employees feel they were sold a bill of goods. You're probably right that the founders were complicit at minimum, but he blames the VCs so that's where I laid the blame. I'm glad you pushed back.

[Charlie Crystle]

No venture-financed startup would dream of not having an employee option plan. But not everybody's going to do as well as founders, of course. Skype really should compensate those employees, perhaps with decent vesting, but definitely spread the love around, because their game isn't over yet and leaving employees out in the cold in the first place was wrong.

But founders take most of the risk, invest more time, create more value than the average employee, and thus receive more. That said, I'd love everyone in my company to reach financial independence through their work here. That won't happen for everyone, but you never know--it might...

Robert, have you run a startup before? I don't get the since that you have...

[Dennis Forbes]

The linking between you and Scoble is a tad on the excessive side. It seems every other day Scoble is talking about something you're saying, and then the next day you're saying something about what he's saying. There is a much bigger web out there than just Scoble and you, and the disproportionate linking seems...odd.

[Robert W. Anderson]

One thing to note about some of those big companies (e.g., Microsoft), the lion's share of the money came post-liquidation event. For example, people talk about how the secretaries got rich at Microsoft, but that wasn't at the IPO, it was over time with the growth in stock price.

The Skype deal (or any acquisition, for that matter) can limit growth, and certainly one's relative value in the organization. I assume the average developer at Skype went from being fairly senior in a small company to being just another body in a huge organization (I don't mean to devalue their roles, just that they are a smaller fish in a bigger pond). When my last company was acquired by ABB, I went from being #2 or #3 in the organization to aspiring to middle management as I approached middle age. That wasn't the role for me.

I think people blame VCs because they are an easy target, but VCs are a necessary part of the ecosystem -- especially now that they are starting to behave a little less like insitutional investors!

[Robert Scoble]

Charlie, I was the seventh employee at Fawcette Technical Publications, which grew to more than 200 employees at one point.

I was director of marketing at UserLand Software, which was small.

I was a marketer at Winnov when it was a startup.

I started up a Web site that I sold to DevX and had options there when it was a startup.

As to founders getting more, totally agreed.

But Skype had 150 employees. They were purchased for almost $4 billion. From what I hear the average employee, even fairly high level ones, got less than a million.

That's not just more.

[Matt]

What you say about "good VC firms" is probably true. Knowing what I know about you from reading this blog, I'm sure you know a lot more about how a good VC acts than almost anybody.

But there are a LOT of folks in this business who've been burned pretty badly. Many of them tend toward the view that "good VC" is an oxymoron. A credible case can be made that there are structural issues in the VC business that push all but the very best people in it to behave badly.

And while I don't feel, as some of my friends do, that "good VC" is oxymoronic, I would assert that making logical inferences about the whole field based on the behavior of only the very best is not a valid maneuver.

From what I know of the Skype complaints, it does sound like, as you say, the founders bear more of the blame in that case than the investors. But the fact remains that the overall reputation of venture capital in many sectors of the tech community is not good.

Having seen the things I've seen, and having read about even worse, I absolutely would not start a business today that I wasn't _sure_ I could finance without outside help. Fortunately for me and others like me, that's incomparably easier nowadays than it's ever been before.

[Shanti Braford]

While this thread is probably dead by now...

... I'd just like to say to Robert --

I've always been under the impression that stock options are doled out by the management team (so long as they have majority control of the company).

With perhaps, an oversight board setup by the VCs.

If some top developer at Skype only had .02% of the company in options, wouldn't that be Skype's management's fault, not the VCs?

Also, if Skype was approaching 50-100 employees (just making up these numbers), it becomes increasingly difficult/impossible to continue cutting new hires even .05 - .025% of the company in options. You'd pretty soon be giving 50% of the company away to new hires!