VC DNA - Make Sure You Get a Swab

In between pounding on my product and getting ready for our beta (if you have a BlackBerry Device and are interested, email me), I've been trying to hold true to the giving back/pay it forward philosophies by meeting with the occasional start up to help review this or that. It's free advice and worth every penny.

Over the last couple of weeks, I've met up with two start ups which stand out in my mind because of the interactions they've had with my former work life; the VC community. Both were at the early stages of business

SU1 opened the conversation with "If we just told our VC we quit, left, and started something new, could they get our houses?" Yowsa...

SU2 opened the conversation with "These creepy douche bags don't have a clue what start ups actually do." Another satisfied customer.

Without boring you with all the details of each story, here are some observations I'd like to pass on as you wade into the funding adventure. Or not.

VC DNA

With unbelievably rare exceptions, there is no such thing as "Stage Agnostic" Venture Capitalists in the true sense. By Stage Agnostic I mean a firm/person who can be equally comfortable doing a seed/jumpstart deal or a $5 million series B. I say this not to get bombastic or incite screaming among investors. Most investment specialists follow whatever is in their comfort zone and whatever matches the skill set they bring to the table. Some people are analytics and heavy duty thinkers. They throw massive amounts of due diligence work against a potential investment, chasing down every possible market metric, forecast, historical trends, etc, etc. Lots of brilliant people making very smart investment decisions, bravo, above my pay grade.

This type of person, however, is a walking disaster when you combine them with a founder and his napkin. The the idea is on the napkin here, I need X dollars to figure it out and if I'm right, presto the next Google. That's a Ron Conway thing, if I can use him as one end of spectrum. He spends the short amount of time sanity checking the person, not necessarily the idea, lays down some coin, and takes a shot. Wildly successful guy, bravo.

All of these Y-Combinator shops cropping up all over the place have investors that think like Ron (or try to) and take shots with little more than the napkin. A 150 million fund with piles of process, weekly meetings to endlessly (and maybe rightfully) debate the potential of a $3 million investment with the whole we need 20% argument thrown in simply doesn't have the DNA to take small little risks based on little more than the napkin and founder. That fund spends just as much time on a $200,000 investment as they do on a $15 million investment which is a dumb use of the talent around the table and it has serious implications when they flip some pocket change into a seed deal.

The impact is they don't relax and let it play out, they are on the board creating process & committees, weekly status meetings, fretting about immediate revenue before the idea even gets shaken out, etc, etc. They stress out the entrepreneurs, come off as jerks when they are otherwise nice people, and in general cause the fund to get a bad name in a space they shouldn't have been near in the first place.

The second bad thing which happens to these seed deals in big funds is they can get cut loose, often times, unfairly. A $150 million fund which spends it's time looking at 3-5 million investment clumps who tosses a little coin ($250k) into some idea doesn't have the mindset as I said above. Absent the play it out mentality, it's the seed idea the founders are smart and will figure it out filtering process, what often happens is: cut em loose, it's a rounding error.

The VC community will respond that it is good discipline to cull the herd, not throw good money after bad, etc, etc. It's all true and I agree with it. My observation is that I'm worried about the environment in which that call is made. One partner is a gut check, let's just see and 6 others are 'banking investment types' makes for a stressful table if you sitting there wanting to get some additional capital for an idea that is evolving. I mean no disrespect to banking types, I'm using that term as a label to make my point. And, yes, having others to prevent Dr. Gut Check from drinking all the Kool-Aid and spending insane amounts of money are good checks to have in place.

My point, again to be clear, is the culture/DNA of the firm and people making that call. Angel/Seed guys who do only those types of deals, totally have a better sense of how to cull that type of herd versus (in my opinion) some big fund who allocates some play money. The play money investments can often time get killed because the big fund partner spends too much time on little deal. He spends that time because that's what they do on all investments so it is only natural to say this 200,000 deal isn't worth my time, etc.

What you can do.

First, read the web site of the fund. Really. I know you've heard this advice before but really do it. Spend the time learning about the people in the firm. What have they done, come from, invest in, etc. Read the blogs of the firm/partners. In summary, get to know the DNA. Call the CEO/CTOs of companies they have invested in.

Second, have endless meetings. Yeah, I know makes no sense. Of course what I mean is don't think of those meetings a waste of your time rather use them as an investment in your time. Most of the CEOs who had to slog through Rick's rants and me sitting on the board would tell you they 'knew me' and knew what to expect when the deal closed. I didn't go all Frankenstein on them when the check cleared the bank. I was nuts prior, during and after. Consistency. My point is getting to know that person who will be on your board, in your face, etc, is a seriously important investment in your time, don't blow it off. Interview them, push them on what they've done, get references on them, etc. Just the exercise of you doing it and watching investors reaction will give you volumes of data.

Third. Good ideas get funded. If you have a good idea that others think is a good idea, you can find a way to get the idea into the game. It probably sounds polly-anna but I believe it. So do the homework.

What we (Canada) needs to do.

- Build some $20 million seed funds with people who eat, drink, and live it. It's a DNA thing. Grow the right type of fund for the right type of investments.

- Embrace failure. I've harped on this forever.

- Team up the big funds with the little funds so we start to create a farm team of founders and companies which can grow into big things or get sold as little to medium things which then give the big funds a pool of talent to draw from on big bets. Rinse and repeat.

We live in interesting times.

Comments

[Danial Jameel]

Very interesting insights on how VCs view their investments and make their decisions/mistakes. Finding the right DNA fit is crucial for any start-up. I also agree with your suggestions of having smaller seed funds and embracing failure!

In you opinion, what would be the ideal combination of the type of VCs (banking types, entrepreneurs, gut-type etc.) in a startup fund?

[Pat]

@Rick --

So what was advise to SU1 & SU2? Did you tell them to walk away?

If I ever go for funding ( ha-ha ), as part of the negotiation I will point out that I as an entrepreneur have a walk-away option. Might as well explicitly state it and see the reaction it brings out.

P.S. interesting error when a poster types in half of the captcha:

"Your comment could not be posted. Error type: VHosts __ANON__('Apache=SCALAR(0xecb5f70)') called at /dev/null line 0 eval {...} called"

[Rick Segal]

Danial,
I think you need guys who have built companies, numbers guys to keep the gut guys out of trouble but mostly you need a serious mandate/support from an LP group who gets the whole start up thing. Without them, fuggettaboutit.

Thanks for stopping by.

[Rick Segal]

Hey Pat!

There is always the walk away option, you are totally correct. There are a ton of scenarios where this is the right thing to do. Nice error, I've passed it on to the typepad gang.

Rick

[Saul Lieberman]

This was right up there with any Marc Andreesen post.

[Rick Segal]

Saul,
Thanks very much, I appreciate the kind words. Thank you for stopping by.

Rick

[Produce the Note]

Awesome post. Your writing style is very smooth, and I enjoy reading it.

[twitter.com/davidfeldt]

Rick - great post - I'd love the opportunity of chatting with you and getting your POV on what we're building. Hopefully we can connect.

Best,
David