5 Things Most VCs Won’t Tell You with August Capital (Video + Transcript)

David Hornik, General Partner at August Capital, says all the taboo things that most VCs won’t talk about. With his background as an attorney with Jason Lemkin, to present day VC, he shares some of his stories and lessons he learned along the way.

Also, if you didn’t attend SaaStr Europa, we’re having it again in 2019. Don’t miss out on the chance to get your tickets. 🙂

Transcript

General Partner @ August Capital | David Hornik

So I guess I’ll start up by saying that Jason Lemkin and I. He started SaaStr have you guys seen Jason yet? Jason and I started both in the same incredible way that all people in the entrepreneurial ecosystem should start. We were attorneys. Turns out that’s not the best way to become anything other than an attorney. But luckily Jason and I escaped. Jason and I were both working at a firm called Venture Law Group back in the late 90s when the first Internet emerged and we were these young attorneys who were basically literally attached to our desks and pounding away. Jason won the award for the most hours suffered or something and and he basically looked angry every day of sad and angry. But now he and I have escaped and now I’m a VC. He’s a VC – Life is good. And so since we’ve lived in the past where we were representing you and we know what entrepreneurs go through we have been making it our mission to tell you the truth and it turns out that that just hasn’t been the history of venture capital hasn’t been the history that VCs get up there go “You want to know the truth…”

They’re usually telling you. That’s I think was built earlier said that venture capitalists are always selling. Right. And there’s something to that obviously. That’s why I wear this fantastic shirt because I think you’re out there thinking I would like to work with the man who wore that shirt. That’s how I’m a seller. I’m always selling. But Jason and I…I think are more inclined to say like oh actually it turns out that there’s some good things about venture capital and there’s some bad things about venture capital. There are some good venture capitalists and there’s some bad venture capitalists. And so when this topic was proposed I sort of sat there apologizing like on the side. How’s that. Then I’m here. I.

I said “All right there are a lot of things actually that don’t really tell you.” And in fact I started the very first venture capital blog over a decade ago was called Venture Blog and it’s called Venture Blog because it was the first so I could call it Venture Blog. The second had to call itself something else. I think the second called AVC said Sorry Fred Wilson Bradfield went with Feld Thoughts but we had Venture Blog and I started because I thought that the venture industry was one that was extraordinarily non-transparent for no good reason like these CEOs were hiding things from you that would actually help all of us. So here’s the overarching theme of what I’m going to say about the venture industry that nobody, no VCs, tell you about and that is that it turns out despite lots and lots of efforts to try and suggest it to the contrary that venture capitalists are not in charge of your business. Venture capitalists are not in charge of your process. They’re not in charge of your financing process. They’re not in charge of how you run your business and they’re not in charge of how you sell your business. Now there are lots of CEOs who would suggest the contrary they in fact work very hard to suggest the contrary. And it turns out that it’s not true. So for those of you entrepreneurs in the audience here’s the good news. You are in charge. The bad news is you are in charge right.

You can’t blame your V.C. because it’s on you on the good side. You see also can’t tell you what to do because it’s not our job.

And so I’ve thought you talked about three aspects. The process of company building and the end in this context. So the first one is fundraising right. There is this there is this mythology of fundraising that is like Oh I come to pay homage to the venture investor.

And I pitch my business the venture investor acts mighty and ask questions which I am and I am commanded to answer. And if all goes well then that person tells me what the financing is right.

Well it just turns out that’s not the process right. The process no. It’s much more like a dating process. I mean this I’m I’m cognizant in this time of me too and harassment and all that that this is an analogy that is that I need to be careful with but for what it’s worth I think this is dating in any sense of dating. It’s not. And as I think about it right. You come to a venture investor to try and get him or her excited about your business. And that first meeting is not about convincing the V.C. that this is a great company and therefore they will anoint you with capital. It is about building a relationship. It’s about getting them excited about what you are doing and more importantly getting them excited about working with you. Right. And the only goal of that first meeting should be a second meeting. Don’t be confused into thinking that the goal of that first venture meeting is to get a term sheet right for two reasons. One it never happens. So that’s a good reason to not do it. And secondly in the rare instance that I’m wrong and it actually happens those people are morons like you know did I like my wife after our first date.

I did very much. She was lovely but I did not propose to her that night because that would be stupid. I went on another date and another date and got to know her and determined that maybe she could put up with me for 26 years. So far and that’s the venture process right.

So. So the amazing thing is you go through this process you pitch a venture investor and then the V.C. says like oh I have decided you’re good enough here’s a term sheet where I tell you the answer give me an edge.

You know let me know by tomorrow.

That’s that’s just not how it works again. That’s not how it works it turns out yet the entrepreneur naturally has this feeling like oh my goodness I’ve gotten a term sheet now and this vest has all the cards right. Here’s an investor they have millions of dollars they’re ready to give to me. I better take it or I’m gonna lose it.

So here’s the secret of venture capital which is when someone gives you a term sheet that term sheets not going away.

My year is to spent take to cure about a thousand businesses and meet with one hundred and get excited about 10 and dive into five. And work really hard and give maybe two term sheets. So I’ve gone from a thousand opportunities to where I’ve determined that I want to fund you. So if I give you a term sheet after that one in five hundred and you say David I’d like an extra week.

Do I really go like oh no I guess I’ll try for another year. Damn that whole year was a waste. Because you want an extra four days. No that’s not what happens. That person says but don’t you love me. Why do you need more time. You should take my money. This is when the tables turn. This is when the seller the seller the buyer becomes seller.

This is when I used to be like I don’t know about your company suddenly I’m like please pick me. And don’t forget that.

It turns out that the second someone wants to fund your company then you’re in charge and you get to say I’m going to take as long as it takes and I’m gonna find the right partner for me. And don’t be confused into thinking like just because you want to give me money that therefore I have to take it. Right. And I like to think of that. This is called an exploding term sheet. Right. I’m gonna give you an exploding term sheet and all you need to give me a decision by Friday or it explodes and I like to think of that more like the exploding V.C.. We’re just like Please give me a decision by Friday or either I will actually let the term a term sheet expire in which case you’re an idiot and you have exploded or you go like. Never mind. How about next Friday. And that’s the right answer which has give you the entrepreneur the time to decide who is the right investor for you. All right here’s the second piece you’ve gone through this process. You’ve decided to take investment from some venture capitalists by your here by the way. Here’s another myth that you have to take venture capital to take venture capital like if you have a business that can generate enough capital that you can feed it back into the business and grow then you never have to take venture capital it’s not like venture capital is some honor.

Hey I raise venture capital what crap. It means you sold some shares in your company. That’s not a thing. It’s an enabler. And if in fact it makes sense for your business to take money in exchange for shares of your company so that it will accelerate the business then do it. There are plenty of amazing entrepreneurs who built huge businesses without taking money from me or anyone else in the venture business right. So just because VCs exist doesn’t mean you need to take venture money doesn’t mean that you shouldn’t. There are all sorts of reasons to take venture money but just remember V.C. is not in and of itself and as a prize it’s the means to an end and the end is to continue to build an amazing business. So you say Hey David I really like you and I think that would be great to work with you. An August Capital and I give you eight million dollars and I buy some part of your company and then we get to work and building the business. Now here’s the second one I’ve seen. I’ve been on lots of boards I’ve been in the venture business almost 20 years now so I’ve sat in on a lot of board meetings.

There are these CEOs who then think it is their job to tell you how to run your company. This is a bad idea.

Why. Because most VCs don’t know what the fuck they’re talking about. It’s like you know first vote. Some of us haven’t run businesses. Secondly those of us who have run businesses ran a different business not your business. If they ran your business why are they funding your business. It didn’t make any sense.

So it is not the venture capitalists job to tell you how to run your business and yet I sit in all these board meetings where I’ll hear a V.C. say hey you know at the next board meeting can you do me a favor and show me this metric and that metric in this metric and blah you know and the poor entrepreneurs sitting there. Okay. Like you’re on the board the answer to that is no I will not show you those because I don’t care about those stupid metrics because they don’t. They’re not relevant. You know why they’re not relevant because you don’t know what you’re talking about. That’s not how I run my business so when I’m in these board meetings and someone says like I want you to provide this information I always say the same thing which I say to the CEO. Oh is that how you measure your business. Are those the metrics that are relevant to how you measure your business. And if the entrepreneur says yes then I say great will be awesome to see that data since that’s how you’re measuring your business you should have data on it. And if the entrepreneur says no. Then I say no. Why don’t you read that. And they inevitably say because that’s stupid.

And we wouldn’t measure these stupid things that you asked us to measure. And then I’d say then yeah maybe you shouldn’t provide us with stupid info. And then the venture capitalist has requested it looks at me and says like you’re a jerk but on the good side the entrepreneur doesn’t have to provide information that is not a good use of his or her time. Venture investors aren’t in charge of your business it is not our job to tell you how to measure your business. It is not our job to tell you how to what direction to take your business. It is our job to advise you to give to share our opinions to try and help you. All of those things are true but V.S. should not confuse themselves for operators it is not what we do. We. We sit on the board. We have a fiduciary duty to the company and we have a fiduciary duty to our investors and we’re trying to do those two things simultaneously we’re trying to make our shares worth more money so we can give more money back to our investors and we’re trying to make your company more successful which conveniently is directly related to making my shares more worth more money right.

And that doesn’t mean oh I’m gonna tell you how to run your business. All right. The last thing that visas are not in charge of is selling your company. That’s not our job either now some these used to be investment bankers and they think that’s their job. But those visas were investment bankers also tend to be the ones to tell you how to run your business along the way which they don’t know anything about. So at least they know something about selling your business but you should be just as likely to say I mean I hear what you are saying thank you for your opinion. Right. It is neither the venture investors job to tell you to sell your business hey this is a time you must sell your business. Nor is it a venture investors in a venture investor’s interest to tell  you can’t sell your business and yet there’s this mythology that says like oh these CEOs tell you what you have to do like they tell you when the company must be sold or they tell you absolutely can’t sell the business. Well here’s the thing about it let’s say a visa tells  you have to sell your business and you’re running a company and you don’t think it’s the right time to sell your business. Who’s in charge of that process right. What  would how would that happen even. I would go to a company and say hey Salesforce you should buy my portfolio a company that’s great. I’d love to meet with the CEO and then the CEO says Yeah yeah I’m not really interested in selling and that’s the end of that process. The same is true for a visa. If you’re an entrepreneur which says I want to sell my company you say I don’t think it’s the right time to sell the company.

They say I hear what you’re saying but blah blah blah. I want to sell this company now is the opportunity now is the time if the V.C. says no this is the wrong time. Who’s running the company. I go back to my earlier point that these are not the right people to be running your company so if you aren’t running that company who is running it. So if you think the right thing for your company is to sell that business there is no rational venture investor on the planet who will say no you can’t do that. They might say as I have on occasion say Oh please don’t do that. They might say like I think it’s a kind of a great company wouldn’t it be awesome if you didn’t sell it you know and then that entrepreneur evolves I like well I don’t know I kind of get rich if I sell it and you’re gonna go. Yeah but you could be richer you know like you might be richer if you don’t sell it and you wait and sell it later. And on occasion that entrepreneur is that. Right. And on occasion the entrepreneur said no I want to be rich today or I want to sell the company today because tomorrow it is in big trouble. Whatever you say who sell it like sell. You should totally sell that company. My bad I thought you were doing great. No. Turns out this company’s second window sell it. By army and sell it so. I. As I said I could go on forever. I think I have like three minutes left. But let me just say the none of this is to say that venture capitalists can’t be helpful to your business.

None of this is to say that you shouldn’t take venture money that these CEOs don’t have lots of things they can do to help. Right. All venture money is not fungible it money may be fundable a dollar here is the same as a dollar here but there are lots of venture investors out there and there are good venture investors and there bad venture investors. But the good ones understand that it is their job first and foremost to win your trust to win you over to get you excited about working with them. And the reason is that that you’ll get excited about Wiggum is that when you then do work with them they won’t think it’s their job to tell you what to do. They will think it’s their opportunity to help you be successful to to celebrate the successes to help you through the challenging times to bring their perspective and their relationships and their and their capacity to fund your company more with more money et cetera all of which to help you build a bigger and more exciting business and those same venture investors who are good at their job and who are helpful to you will help you find that moment in time when either you can take the company public or you can sell that business and celebrate that win with you and not be a friction in that process be someone that helps and supports it.

Right. So know that there are alternatives. Know that as entrepreneurs you have choices and make sure that you’re that you’ve spent the time to know which thing you’re getting and make sure that you get the version that you’re excited about over the next 10 or 15 years I’ve been on boards now for 13 15 years. You know you know what you’re getting with me. And if that’s going to scare you after two years like don’t do that you know but if but if you are excited about building this partnership for the next two decades then you’re gonna you’re gonna have a great partnership and that investor is going to be gonna be sitting alongside you and helping you and cheering you on for the foreseeable future. So I think that’s all I have time for. Thank you so much for listening and good luck.

Published on November 29, 2018

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