Last night I was at an event where the old discussion of the ‘pressures’ of high valuations came up. With valuation creep, the thinking goes, the pressure on entrepreneurs can be way too high in some cases, some argued. My view was valuation is irrelevant to ‘pressure’. If you raise Series B money at a nine figure valuation, obviously you can’t sell for eight figures, but beyond that implicit pressure – so what?
Really what it raises is the real question: Yes, you will sign legal paperwork when you raise capital. But — What is The Social Contract with your VCs? And do they have one back to you?
I remember at a closing dinner after one of my start-ups was sold, a partner of the VC who invested in me (not the one who served on my board, but his partner) made a sort of haunting comment. His firm had made 6x on the investment, and his comment after some wine was “We [the partners] debated whether to let you sell or not. In the end [because you’re a good kid], we decided to let you.”
Hmmm. Ok, this guy makes 6x and didn’t even lift a finger (he wasn’t on the board) — and he gets to decide if the company should sell or not?
So perhaps the Social Contract is asymmetrical.
Here’s what every founder knows they owe their investors:
- To work as hard as they possibly can,
- And never quit,
- To deliver a profitable investment,
- Ideally with a return broadly commensurate with the risk.
But … VCs don’t really invest their own money. It’s their LPs. As soon as you have traction, they don’t perceive there to be any more risk — just a question of how big the upside is. Hence the tension around the zero-work 6x return.
I don’t know the answer. But I’ve decided the answer is — You Owe Your VCs 3x. That’s the Social Contract. VCs target 3x as absolute return on investment. They need some investments to do far, far better to balance out the losers, yes. So once you are a ‘winner’, the dialogue changes. And of course, more is always better when it comes to returns. But as far as moral obligations — I don’t think balancing out our VCs’ losers is our problem as founders.
[Another post on what VC’s social contract is back to founders — and if there even is one, and what it means if there’s a one-way Social Contract anyway … ]