We were in the trenches together. We fought for every customer together. Hell – we fought against the VC’s together!
-Mark Suster, Both Sides of the Table.
As a first-time founder, there's so much you don't know and don't understand when you step into the world of venture capital. Investor signaling. LP relationships. Fund size. Fund vintage. Angels vs. Seed funds vs VCs. It's a game we play with a lot less information than the guys on the other side of the table.
Yes, it is a game. And the VCs collude.
Assertion #1: The market is not rational. Stop pretending it is.
Hot Potato can spend a year looking for money then the FourSquare deal pops and they suddenly get showered with money and their A round is oversubscribed at $1.4mil. Nothing fundamental changed, just the market for money.
C'est la vie.
This is why entrepreneurs need to collude! Market information allows you to negotiate pricing and apply normative leverage. And the more information you share with other founders, the more information you get in return, and the more information you get, the better you can play the game.
And, umm, guys, it really is us against them. Not forever. Not after we've got their money in the bank. But up until the point that they write a check, our interests are at odds.
"But Matt, aren't investors instrumental in building great companies? VCs are here to help…"
All very true, all very correct––after they cut us a check. What I'm talking about is the before.
Assertion #2: It is in the Founders' interest to get the most money at the lowest price in the shortest time.
If you come to me today and say "Hi Matt, I'll give you $10mil at an $80mil pre-money valuation," I will either: a) say yes, or b) if the terms are bad (onerous liquidation preferences), use it to raise slightly less money at a slightly lower valuation with better terms (preferably no liquidation preference). What would SpeakerText do with $10mil? I have no fucking idea. Probably hire someone to figure out what we'll do with $10mil. Or have a money fight.
But we'd take the money because it gives us time to build, pivot, learn and grow––without the distraction of having to raise more money. It wouldn't be based on some well thought out use of proceeds or needs. Cuz really, our burn rate is just super, super low. We are scrappy motherfuckers who can and have gotten by on a tiny amount of money. But once we hit product-market fit, we want to be able to hit the accelerator without the distraction of having to pause and raise more $$$.
Raising money is a huge, unproductive distraction. You should seek to shorten the time it takes as much as possible.
Assertion #3: It is in the VCs' interest to acquire the most ownership of a company at the lowest price with the least risk.
(And yes, I am clumping individual angels, seed funds and VC firms together in one boat.)
This means that it is in their interest to acquire shares in your (successful) company at the lowest price possible. Buy low, sell high––that kind of thing. This should be obvious.
Just one caveat: they don't want the entrepreneur to own so little of the company that they stop working. And the game is iterated, so they have an incentive to not be known as pricks who screw entrepreneurs.
Assertion #4: Sharing market information improves market outcomes for all entrepreneurs.
The more entrepreneurs collude, the bigger the incentive that VCs have to play nice and offer good terms. Take The Funded. How many VCs have changed their behavior based on public reviews they'd gotten on the site? Or gone out of business? I don't know for sure, but I'd bet money that the number is >1.
When David Lifson of Postling told me the dirty details of their last investment round, it gave me data with which to think about my own situation. And more importantly, it inspired me to share more details of my own misadventures with other entrepreneurs––who in turn shared info with me. And we all learned. That's the point.
What's "market" ? No one really knows:
The only way to know what’s market is to research a broad enough base of deals both current deals and over some reasonable past period, in a relevant market (geographical, stage (series A or follow on) and a relevant industry (biotech, renewable, etc.) to be able to draw some meaningful conclusion.
Since most people don't have access to this kind of data, the real answer is an individual's perspective of "market" is really just the mean of any random number of data points. Wanna play the game better? Get more data. Use it as normative leverage. And to get, you gotta first give.
Enter Venture Hacks.
I love Venture Hacks because they peel back the facade and lovey-dovey bullshit and explain the messy internal workings of startups and the venture capital business in a way that few peeps do. Take this AWESOME interview with Mark Suster, Chris Dixon and Naval Ravikant as an example : VC signaling in seed rounds
Question: How do seed investors actually make decisions? Answer: The market is not rational. In most situations, investors tend to follow social cues more than they analyze market or business fundamentals. It ain't pretty, but it's life.
And for entrepreneurs raising money, understanding this fucked up psychology is absolutely crucial. It's a game. We play it as novices. They do not.
So Founders, please remember who the opposition is: It's not other startups. It's them. Against us. Until they give us money––at which point it becomes them AND us against the competition, or Google, or Microsoft, or DST. (I know this sounds a bit crazy and extreme, but you should REALLY listen to the Venture Hacks interview. If you've never heard about how on occasion bad VCs can screw companies, you'll come away from this interview feeling scared shitless. I know I did.)
Some day some of us will be on the other side of the table, but until then, for godsakes, share what you know. We need it. It benefits us all.
UPDATE: My man David Lifson sent me this tweet…
I think he makes a great point. The guys in this interview (Mark Suster, Chris Dixon and Naval Ravikant) are a case in point. The thing that scares me is how they were throwing around or alluding to some VERY REPUTABLE names in VC during the interview as folks doing bad shit that screws entrepreneurs/startups.
The question is: How do you tell the good ones from the bad? This is where information sharing amongst founders and thinking of ourselves as a class becomes so important.
Great post, Matt. And thanks for the shout out. You do a great job of summarizing a very complex topic. When I was an entrepreneur I formed a lunch club of entrepreneurs who shared information on valuation, terms, VC’s, etc. I was surprised how many entrepreneurs didn’t want to share this stuff. Wake up – it’s not competitive amongst trusted friends and ALL VCs share this stuff. It’s about creating information symmetry for you. Well done. Hope you’re doing well.
Great post, Matt. And thanks for the shout out. You do a great job of summarizing a very complex topic. When I was an entrepreneur I formed a lunch club of entrepreneurs who shared information on valuation, terms, VC’s, etc. I was surprised how many entrepreneurs didn’t want to share this stuff. Wake up – it’s not competitive amongst trusted friends and ALL VCs share this stuff. It’s about creating information symmetry for you. Well done. Hope you’re doing well.
Point taken on the “dirty” in dirty details re:Postling. Nice alliteration, but wrong implication. FIXED.
RE: Hot Potato: I say that because i got a “Don’t be a Hot Potato…” speech from an investor who seemed to know details about the deal. This person offered up the story as a cautionary tale. If my facts are wrong, which they very well could be, I am happy to correct them.
Point taken on the “dirty” in dirty details re:Postling. Nice alliteration, but wrong implication. FIXED.
RE: Hot Potato: I say that because i got a “Don’t be a Hot Potato…” speech from an investor who seemed to know details about the deal. This person offered up the story as a cautionary tale. If my facts are wrong, which they very well could be, I am happy to correct them.
One of these days, you’ll get your facts straight. What makes you think Hot Potato was in the market for a year? Justin spent a good part of ’09 bootstrapping his product build, and didn’t start fundraising in earnest until late summer. If you think otherwise, feel free to ask him.
I’m curious about the “dirty details” about David’s investment round. From what I can tell, since I was part of it, there as a lack of interest in Postling given his prior business model, and then as soon as he pivoted to something much more workable, everyone got excited. He had a great team and a bad biz model… but when he had great team + much better biz model, people jumped in. No big mystery/secret/collusion.
One of these days, you’ll get your facts straight. What makes you think Hot Potato was in the market for a year? Justin spent a good part of ’09 bootstrapping his product build, and didn’t start fundraising in earnest until late summer. If you think otherwise, feel free to ask him.
I’m curious about the “dirty details” about David’s investment round. From what I can tell, since I was part of it, there as a lack of interest in Postling given his prior business model, and then as soon as he pivoted to something much more workable, everyone got excited. He had a great team and a bad biz model… but when he had great team + much better biz model, people jumped in. No big mystery/secret/collusion.
Thanks dude.
Whoa dude, what’s up with the hostility? I’m trying to rally entrepreneurs and push them to help each other out. A lot of entrepreneurs are afraid to share info and actively distrust each other. My hope is that with this blog post I can help change some of that.
And while you can wonder why I do it, blogging has helped me and SpeakerText substantially, including with getting on people’s radar and finding technical talent. Besides, it’s fun and interesting.
Thanks dude.
Whoa dude, what’s up with the hostility? I’m trying to rally entrepreneurs and push them to help each other out. A lot of entrepreneurs are afraid to share info and actively distrust each other. My hope is that with this blog post I can help change some of that.
And while you can wonder why I do it, blogging has helped me and SpeakerText substantially, including with getting on people’s radar and finding technical talent. Besides, it’s fun and interesting.
Matt-
I’ve been reading your posts. This one is pretty exceptional. However, I stop and think to myself why you spend all this time blogging and complaining about New York being an awful place to start a company and how you can’t raise seed money when you could spend time building your product and Speakertext?
Matt-
I’ve been reading your posts. This one is pretty exceptional. However, I stop and think to myself why you spend all this time blogging and complaining about New York being an awful place to start a company and how you can’t raise seed money when you could spend time building your product and Speakertext?
Nice post. Couldn’t agree more that entrepreneurs should help each other. I’m also generally a believer in the “goes around comes around” thing too, so helping others could help you someday.
Nice post. Couldn’t agree more that entrepreneurs should help each other. I’m also generally a believer in the “goes around comes around” thing too, so helping others could help you someday.
Dude, you rock, Matt.
Dude, you rock, Matt.