This is yet another missive on my growing awareness of the complexities and challenges of the venture business. More specifically, how to be a good investor and steward of limited partner capital while being respected, and, in fact, sought after, by entrepreneurs, most of whom you will leave disappointed by not investing in the their company. Let me get this straight — to be a good VC you have to: make your limited partners money; be fair and honest in all your dealings; provide constructive input, regardless of your investment decision; deliver bad news well (which, by the way, is almost all the time); and avoid being hated by those whom you disappoint. Does anyone think this is easy? I can assure you it is not.
Let’s start with LPs. They invest in venture funds for one reason: to make attractive risk-adjusted returns. By definition, they are accepting a disgusting amount of illiquidity in exchange for what they hope – and expect – to be a lot of coin at the end of the rainbow. Do they care about “people” issues, the very foundation of how a VC builds and maintains their reputation and deal flow? Not unless they perceive those people issues to directly influence their economics. At the end of the day they have a “single bottom line” – how the sausage is made is not really their concern. The good news is that the GP knows what they are managing. The bad news is that being a VC with a long-term perspective is much more complex than maximizing short-run profits.
Notwithstanding the perception that most VCs see a bunch of companies, make a few investment decisions, sit on a handful of boards, pull meddlesome strings behind the scenes all while wearing Polo shirts and khakis and living off management fees, most venture investors I know are crazy busy and grossly bandwidth constrained. They see hundreds if not thousands of deals a year, have legacy portfolio companies with whom they are working closely to help build their businesses, are spending an unsatisfying amount of time working out problem investments, and might be raising their next fund. Further, they want to be helpful to companies where they can, particularly investing time in opportunities which might be underdeveloped at present but could be attractive investment opportunities after a few key milestones are reached. All of this requires the VCs’ most scarce and valuable resource (and it’s not money) – time.
Entrepreneurs often think there is a massive power imbalance between themselves and the VC, as captured by the phrase “Those who have the gold make the rules.” At least in my reality this is hardly the case. Do VCs have money that entrepreneurs want and need to execute their plans? Yes. But do the best entrepreneurs have companies which far more than one institutional investor (not to mention large and powerful angel investors) want to fund? Absolutely.
Being a successful VC involves a lot of selling, to LPs, companies and potential recruits, quite similar to the way a start-up seeks to raise capital, sell its products and services and hire new talent. At the end of the day the VC and the entrepreneur are really two sides of the same coin – they both need to attract and deploy capital in the most effective way possible, and their livelihoods depend upon it. Why there isn’t more empathy between VCs and entrepreneurs is beyond me, because the underlying opportunities and challenges are really quite similar. “A start-up investing in start-ups” is how I conceive of IA Ventures. I am the founder of a start-up and have the same passion, laser-focus and insecurities as the companies in which we’re investing.
Building and running a start-up is hard. Really hard. I get it. And there is nothing on this Earth I’d rather be doing.
Roger Ehrenberg is founder of IA Ventures. He blogs at InformationArbitrage.com
