Inspired by Ben Horowitz’ excellent
“Good product managers, bad product managers” post and Stefan Smalla’s
“Good leader, bad leader” masterpiece I’ve tried to put together my thoughts on what I think makes a great venture capital investor. Thanks go to
my colleagues at Point Nine Capital
for their invaluable feedback, in particular Michael, Mathias and
Rodrigo, who reviewed an early draft of this post and provided lots of
great comments.
This post represents our current thinking, which
may evolve our time, and some parts are still work in progress.
Feedback and discussion with other VCs and entrepreneurs is very
welcome.
We’re fully aware that we don’t always live up to the
ideal of the “good VC” described below, but as Stefan Smalla said in
response to a comment on his leadership manifesto: “Nobody is exactly
like that, but it's good to move towards that ambition. Inch by inch.”
A good VC does everything she possibly can to support her portfolio companies
A good VC is truly value-add
A
good VC is available for her portfolio companies almost 24/7. If a
portfolio founder needs her, she will do everything she can – roll up
her sleeves, use her social capital, get on a plane – to help. A good VC
is sometimes a recruiter, sometimes a beta tester, sometimes a personal
mentor, and isn’t afraid of getting her hands dirty. Not scalable?
Screw scalability. If a portfolio founder needs your help in putting out
fires, the last thing he or she cares about is how this scales from a
VC business model perspective.
A
good VC doesn’t only react to
requests from the founders. A good VC knows the current challenges of
her portfolio companies and is proactively looking for solutions all the
time.
Good VCs create firms where portfolio founders have equal access to all partners and not just to “their” partner.
Knowing
that there are limits to the help she can provide to founders herself, a
good VC tries to leverage the knowledge and expertise of other people.
In particular, she facilitates knowledge exchange between the founders
of her portfolio through various forums, online and offline.
A
bad VC overpromises in the deal-making phase and under-delivers once the deal is done.
“We
view ourselves as a services firm. We try to earn our reputation and
brand every day. We practice the art of adding value and we want to be
the highest executing board member that founder has and we’re out there
everyday trying to earn that reputation.”
Bill Gurley
General Partner, Benchmark Capital
A good VC is humble and doesn’t try to run the show
A
good VC is aware that there is a huge information gap between founders
and VCs with respect to the founder’s business. He understands that the
founder has thousands of hours of experience in his industry and with
his customers and intimately knows the people on his team, whereas the
VC’s knowledge of the startup is often much more superficial. He
understands that many if not most of the ideas he will come up with are
things that the founder has already considered and knows that while he
can provide great input, advice and a different perspective, he should
neither try to micro-manage nor try to make decisions for the founders.
A
good VC knows that managing investors can be time-consuming for
founders and tries to find the right balance between being close and
providing value on the one hand and getting out of the way on the other
hand.
A
bad VC overestimates his insights, tries to
micro-manage, tries to exercise control and becomes a maintenance burden
for the founders.
A good VC goes all-in and avoids conflict within the portfolio
A
good VC doesn’t invest in two or more companies that are directly competing against each other.
A
bad VC, instead of going all-in into one company and giving his
undivided attention and support to her portfolio company, tries to hedge
her bets by investing in several companies in the same space.
A good VC tries to maximize the size of the cake vs. his slice of the cake
If
a company wants to bring on board other investors, whether in the same
round in which the VC invests in the company or at a later stage, a
good
VC helps the founders to attract great co-investors. A good VC also
does this pro-actively – suggesting to invite value-add co-investors to a
financing round whenever he sees a great potential fit for a company.
A
bad VC worries that if co-investors join a company, he will get a
smaller stake in the company. So he discourages founders from working
with other investors, maximizing his stake in the company rather than
trying to do what’s best for the company as a whole.
A good VC doesn’t take unfair advantage of the founders she invests in
A
good VC uses simple term sheets. A good VC may negotiate hard, but she
doesn’t try to screw founders by sneaking in hard to understand
provisions that can hurt founders. A
good VC tries to keep
contracts simple, knowing that in an industry where the bulk of returns
is produced by the best outcomes, there’s not much value in trying to
protect herself against everything which can go wrong anyway.
A
good VC
also doesn’t overly use leverage, which she might gain over portfolio
founders in different situations throughout the company’s life.
When a
bad VC negotiates a
term sheet, she spends way too much time (and legal fees) on
micro-optimizations of all kinds of unlikely scenarios. She may even try
to fleece the founders by imposing terms that are unfair, unusual and
hard to understand.
Whenever she gets leverage over a portfolio
company, e.g. when the company runs out of cash and asks its investors
for a bridge financing, a
bad VC exploits her leverage to improve her
position.
A good VC treats every entrepreneur with utmost respect
A good VC respects the value of the founder’s time at all times
A
good VC rarely re-schedules meetings with founders and is almost always
on time. In meetings with founders, his phone stays in his pocket.
A
bad VC re-schedules meetings with founders all the time, often at the
last minute. Once the meeting finally happens, he often arrives late. In
the meeting, he will start to check his email (or Facebook feed) on his
phone the minute he gets bored.
“If anybody is not on time I will fine them $10 a minute. That comes from my experience as an entrepreneur. When you are an entrepreneur you are living and dying with your company. You are working extremely hard and the last thing you need to do with your time is to sit in the lobby of a venture capital office.”
Ben Horowitz
General Partner, Andressen Horowitz
A good VC handles “passes” professionally
Knowing that she has to pass at least 99% of the time, a
good VC
has built a team and established a deal assessment process that ensures
that founders get timely responses. A good VC also tries to give an
explanation on why a company is not a match for her, although
unfortunately time constraints may make detailed feedback impossible in
every case.
A
bad VC takes forever to respond to inquiries, and
often she doesn’t reply at all. When she passes on a potential
investment, she doesn’t try to give the entrepreneur useful feedback. A
bad VC also often delays the decision forever, trying to keep her
options open.
Side note: This is the area where the distance between reality and ambition is the largest for us at Point Nine. We're trying to get better, but with ~ 200 potential investments to evaluate per month, it's tough.
A good VC only signs a term sheet when he’s going to make the deal
A
good VC only signs a term sheet when he’s going to make the investment.
After having signed a term sheet he only bails out if really bad things
come up in the due diligence, which happens extremely rarely. A
good VC also tries to be transparent in the deal evaluation phase
before, trying to give the founders a realistic assessment of his
interest level and timing requirements.
A
bad VC sometimes signs a term sheet to secure the
option
to invest – at a point in time at which he is not yet sure about his
intent to invest. A bad VC often also conveys a misleading impression as to
how close he is to making a positive decision and how fast he can move.
A good VC aligns her interests with the interests of her LPs
A good VC is incentivized by carry, not by management fee
A
good VC optimizes for higher carry and lower management fee. A good VC
also invests most of the management fee in a way where it leverages her
ability to make great investments and helps her portfolio companies
(e.g. by building a team of associates and advisors and by providing
resources to the portfolio) rather than drawing a large salary. A good
VC invests heavily into her fund and doesn’t view the GP commitment
(1) as a
burden.
A
bad VC wants to make a lot of money even when she
doesn’t make her LPs
(2) a lot of money. She tries to minimize her GP
commitment while trying to maximize her salary.
A good VC is focused, courageous, humble and desires diversity
A good VC is focused
A
good VC is focused on one or more investment theses built around expertise in a certain stage, geography and/or industry.
A
bad VC invests broadly across all stages, geographies and industries.
Rather than knowing a lot about a few things he knows nothing about
everything, which prevents him from providing effective portfolio
support and from seeing the best investments in the first place.
A good VC is courageous
A
good VC makes bold moves. She has strong opinions, and although she
values other investors’ opinions she often invests in companies which
many other investors have passed on. A good VC also isn’t afraid of
admitting mistakes and failures.
A
bad VC’s main driver is FOMO
(“fear of missing out”). She doesn’t have the expertise or courage to
think independently, but as soon as other investors want to invest in a
deal she gets excited. If an investment fails, she tries to produce a PR
story to make it look like a success.
A good VC is humble
A
good VC knows that luck and serendipity play a big role in investing.
He knows that he has to constantly prove his value and that he’s only as
good as his last investments. A good VC also doesn’t have a big ego, is
a great listener and says “I don’t know” very frequently.
A
bad
VC, after having made one or two lucky shots, thinks he’s a genius. A
bad VC has a big ego and is one of those people who make Board Meetings
inefficient because they love to hear themselves talk.
A good VC desires and appreciates diversity
A
good VC wants to work with people and invest in founders from a wide
variety of languages, cultures, color, origin, gender, religion, age,
personality and orientation. He knows that “these people can open up new
markets and new geographies, and create potential outsize investment
returns from opportunities that others may overlook or not want to risk
going after”, to quote Dave McClure.
A
bad VC prefers to invest in people who are like him.
“Our
Commitment to Diversity stems from an irresistible desire to explore,
from a burning curiosity to learn more about the world, from a moral
imperative & intellectual humility to help both others and ourselves
become part of a larger, more enlightened global community and global
family.”
Dave McClure
Founding Partner, 500Startups
A good VC invests for the long-term and gives back
A good VC invests in long-term relationships
A
good VC optimizes for the long run in everything she does. She knows
that you “always meet twice in life”, as the German saying goes, and
tries to create win-win situations.
A
bad VC tries to gain short-term advantages over other people, sacrificing relationships and long term gains.
A good VC shares knowledge (but keeps private information confidential)
A
good VC openly shares knowledge with startups and investors, knowing that the tech community is not a zero-sum game.
A
good VC never, ever shares confidential information like pitch decks
with people outside of his firm, unless the founder explicitly gave him
permission to do so.
A
bad VC is secretive when it comes to
sharing knowledge with the community – and leaky with respect to
confidential information.
A good VC wants to make the world a better place
A
good VC cares about others and knows that there’s more in life than
financial returns alone. Whether it’s investing in clean technologies,
giving to charity, doing community work or something else – she has a
strong urge to make the world a better place. When she’s made money she
doesn’t forget that as much as her wealth is the result of decades of
hard work, it’s also the result of being born and raised in the right
place and having had opportunities that billions of people on the planet
never have.
A
bad VC has an exaggerated sense of entitlement, a lack of compassion for the poor and forgets that there are other things in life.
And last but definitely not least…
A good VC delivers sustainable superior performance.
A bad VC doesn’t.
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1) GP commitment = the investment made into the VC fund by the fund’s managers, often called “GPs” (General Partner)
2) LPs = Limited Partners, the people and funds which invest into VC funds
