Sunday, November 02, 2014

Good VCs, bad VCs

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.


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


Pranay Srinivasan said...

A Good VC does not brag about his portfolio companies as if they are his own (heard this from VCs we went to pitch). A good VC always praises the founder and knows it is the founder's company to own and run - and if its done well, the VC will earn a substantial return.

A Bad VC, by virtue of owning 20-25% of the company and with Board Veto Rights, thinks all portfolio super star companies are an extension of their VC firm and discuss pivots, product ideas, and business strategy casually between themselves without either the founder present, and/or in the right forum (usually a board meeting or a 1-on-1) They force their direction on founders and act like company leaders rather than financial investors and advisors.

Uday said...

That's a pretty comprehensive list! I can relate to many of the points covered through my direct experience with several VCs in the last 12 years. Some of these seem to be lofty goals - we must remember that VCs are human beings and are extremely busy. The one thing I'd like to add is that a good VC has an open mind - can think outside of templates and patterns when necessary.

chrija said...

Thank you for your comments, Pranay!

Regarding the first one, I understand where you're coming from, but you will hear me brag about portfolio companies frequently. :) I also tend to call them "my" portfolio companies. It's not meant in a wrong sense of entitlement but it's just pride of and excitement about the great job done by the founders. Hope it comes across that way.

chrija said...

Thanks Uday, and great to hear from you. :) Yes, indeed – some of these are lofty goals which we definitely cannot always reach.

Pranay Srinivasan said...

absolutely!! and I didnt mean it in the bad way.

Josh Maher said...

Some of these are nice to have features of a VC and don't define a good or bad VC. For example, investing in geographic diversity is fine if the VC is good at doing that; however, if investing in other areas means that they will not make good investments, then they shouldn't do it. One of the other "good vc" attributes you list (focus) agrees with this sentiment.

chrija said...

Thank you for your comment, Josh. This was maybe a bit misleading. What I meant to say is this:

- With respect to the types of *businesses* VCs invest in, VCs have should have some kind of focus. This may or may not include a geo focus.
- But as far as the *people* are concerned, VCs should appreciate diversity.

Ahsan Sohail said...

Terrific post. As an aspiring investor, this is exactly the kind of advice I'll take to heart.

Rajen said...

Loved the post - particularly your comments on being humble. I think being humble and genuine are 'human qualities' that are unfortunately becoming a rarity in the startup world. Thanks for making that a priority in your 'Good VC' list. By the way- I also wrote a post using Ben Horowitz's originally essay as an outline called Good Sales Executive, Bad Sales Executive here: . It's specific to b2b startup sales and thought I'd share.

Drew Broadley said...

May I suggest a better word than "my", is "our", instead of "me", "we".

Shows balanced respect of ownership and responsibility to founders and the wider team (especially if Founders hire better than themselves!)