Q: What is the meanest thing that venture capitalists can do to founders?
Even today, a lot of founders worry about raising VC capital. They hear the stories about how things went sideways. And those stories often are true. But assuming the VCs as a group do not control the board or the majority of shares of the company (in which case, they can, generally speaking, taking over control of the company, bring in their own CEO, etc.), then really there’s only so much investors can really do.
So as long as you don’t sell too much of your company, really the meanest thing VCs can do is Not Support The Company.
This can be a big deal. Or not. Depending on the scenario.
First, If you need to raise more venture capital, and aren’t doing incredibly well, a VC not being supportive can be a gating item to getting further funding. If your prior investors aren’t 100% positive, or at least, 90% positive on the investment … usually … the Next Round guys simply won’t invest. They will almost instantly smell the lack of commitment, and see it as a sign not to invest. You can game this. You can try to get investors that won’t do reference checks with earlier investors, for a number of reasons (FOMO, nonstandard investors, etc.). But you’re in a tough spot for future fundraising if your prior round investors are actively or even passively, negatively un-supportive. It’s at least a huge negative.
You’re even in a tough spot for fundraising if they are quietly, passively-aggressively not supportive. This is more common.
And forget about most bank-style debt financing if your VCs aren’t 100% supportive. Next-generation vendors like Capchase, Pipe, etc. may not care too much what your VCs think. But classic venture debt from banks like SVB, etc. care a lot how supportive your VCs are if you raise venture debt. Because they are banking on the VCs to at least potentially backstop the company if things are tough-ish.
There’s also a super quiet way to not support a portfolio company without even saying a non-supportive word. Which is not to do your pro-rata in a round. A big fund saying they aren’t going to do pro-rata, best case, will raise material concerns in any pre-unicorn round. No one will care about small funds not doing pro-rata, however. But if your lead investor isn’t willing to “step up”, the majority of subsequent investors will see this as a flag. Sometimes, a very large one.
Second, it can be a real issue in M&A, when you sell the company. Usually, no matter what the legal documents say, each VC gets a veto. They may get a veto under Delaware or California law. Even if they don’t, the acquirer will generally require close to 100% shareholder support to close a deal no matter what the financing documents or law say.
You don’t always need the support of all investors to do an acqui-hire. But a real acquisition, to buy the company —you need almost everyone’s support. At least, almost always, most usually.
Third, if they don’t believe in you, and they have a strong brand — it can become almost an “anti-brand” for you. If you are funded by a Top VC, but … they don’t say positive things about you. VPs won’t want to join. Press won’t want to write about you. Lots of small, negative things.
“The partner doesn’t even go to board meetings anymore [but they own 20%].” There are exceptions. But usually — that’s a small, but clear signal, they think it’s a Total Dog. Or at least. Will never be big, ever.
But … These issues are usually >easy< to avoid. The key isn’t always crushing it. No one expects that.
- The first key is transparency, and early heads-ups. Get monthly updates out on time, every month. Have organized board meetings with real-time, updated projections. If you are behind, having a tough quarter. Don’t hide it. Don’t excuse it. Explain it. In fact, explain it before it happens. Investors have seen it all. What we really don’t want to see is something negative we aren’t braced for.
- The second key is not to ask for more money from your VCs, and not expect it. If you are struggling, and ask for more money, you may get it. If you are still struggling, and ask again — a second “forced” check after the initial investments — many VCs will want to find someone “better”. Struggle, but just ask for help and not money — and you’ll be much more aligned.
- Make sure no one ever thinks you’ve quit, and/or aren’t at least trying to build a unicorn. VCs want to believe. If they see you are doing everything possible to win, they’ll likely continue to back you. If not with money, then at least support you to the outside world. But when VCs think you’re no longer trying to go big, they lose all confidence. Fair or not.
(note: an updated SaaStr Classic answer)