I’ve been on every side of the table, and had challenging experiences with my investors.
I think what founders get wrong is not understanding incentives. VCs really do want you to be a big success. They can’t make money otherwise.
So really, the ‘worst’ things VCs do are simply around incentive dis-alignments. And VCs at different stages have different incentives:
- Tiny, non-Silicon Valley firms often won’t want you to raise very much. They may handicap your growth and ability to raise more capital because of this.
- Big Silicon Valley firms can only make money off Unicorns and Decacorns. If you want to do anything else, you get disaligned, at least partially. If you raise money from a Big Fund and don’t really want to build a Unicorn, you’ll always be looking over your shoulder. More on the math here: https://www.saastr.com/why-vcs-n…
- Seed funds may push you to raise more than you want. Because they get big personal ROI from “mark-ups” (i.e., higher prices in the next round). That’s OK just understand incentives.
- Smaller funds may also tell you not to raise more 😉 because they are dilution sensitive. Some small funds want mark-ups, but others are more ownership focused. They know they don’t have enough money to put a lot into subsequent rounds, so they’ll advise you to raise less. Don’t raise, Big Funds are bad, Try to Get Profitable With No More Money. They will give you this advice. Not necessarily wrong. Just biased 🙂
- Big funds may also push you to raise more than you want. Mark-ups matter here too, but also, they have a lot of capital to deploy in their winners. Once you take off, they’ll often want to invest $50m or even $100m per winner.
- Very big funds may be less sensitive to who the CEO is (founder or not). Every VC fund wants the CEO they invest in to go the distance, or at least, the vast majority. But the bigger the fund, the more they tend to have potential CEO and COO candidates “on deck”.
- B-tier funds worry more about small stuff. A B-tier fund won’t have as many winners, and will be more worried about every deal doing at least OK. The top funds are generally swinging for the fences every time, and care less if they lose a few nickels here and there. The B-tier folks may micromanage you (annoying), but the A-tier folks may push you to swing hard when you aren’t ready.
- Different individual partners at firms have different incentives. I am a “solo GP” so I have nothing to prove except to my own investors. But at other firms, it’s very different. The GP with the hot hand can make calls and decisions that up-and-comers can’t. On the other hand, if your portfolio is full of winners, you may not care so much about the ones that aren’t yet winners.
- Bridge rounds are tough to predict. Some of the most stressful interactions with VCs are all-internal bridge rounds. You’re running out of money, and no one will write another check. So the insiders are forced to. No VC wants to be in this position — period. Never, ever plan on it. Never assume a VC will ever write you another check, and your life as CEO will be much better. But the stronger the hand of the VC partner overall, the less she may stress a relatively small bridge check. If she/he doesn’t have a lot of winners, a bridge may create huge drama. And CEO replacement discussions.
- If you don’t sell for >3x what you raise, it never ends well. There are many ‘horror’ stories on the internet of how founders sold and made nothing. That the VCs threw the founders under the bus. This can happen at the margin, for sure. But there is almost always one common thread in these stories — the company sold for less than it raised, or not much more. VC money is not a gift. You have to make your investors money first to make money yourself. That is how it works. If you sell for 3x or more than you raise (no matter what the sale price is, actually), it will all work out well or at least OK financially for the founders. Do not raise venture capital if you can’t commit to selling for a price at least 3x the total amount of venture capital you raise (and ideally, at least 3x the valuation of the last round).
None of these behaviors are evil, but personally, they did frustrate me as CEO at times.
Understand incentives for all your stakeholders. This is part of your job as CEO. Getting this right for your VPs, your engineers. And if you can, your investors.