I’ve been an entrepreneur in Silicon Valley since 1994. My first company completed an IPO in 1999 but before then it fell victim to the mismanagement of investors who never allowed the business to grow to its full potential. The company and the ideas that were its driving force remain unfulfilled in part because of the ‘one size fits all approach that many VCs employ. This is an approach that leaves no room for managing with heart, caring for those involved, and an awareness of the larger impacts on humanity as a whole. Rather, it is driven by one thing: the maximization of return as quickly as possible.
Too often, founders go aftermajor venture capital funding (myself included!) thinking that it will give their company clout.The truth is though that many large VCs are only looking for home runs. They often care only about their management fee (usually about 2-3%) and their carry fee (20-30%). They are not always looking to remain committed to a company that may have a questionable future based on current market conditions. They often don’t want to get bogged down by continuing operations. They would rather focus on building to flip their investment into a sale or IPO (SPACs included), without a care for the long-term success of the entity. They would rather expend the energy building towards their next fund, allowing them to earn even more, and the cycle continues. I’m generalizing, but it’s true more often than not.
Large branded VCs come with major baggage. They rarely care about the companies, they rarely care about the founders, and they certainly don’t care enough to prioritize the long-term success of the business or the employees to which their portfolio of companies provides jobs. They focus almost solely on the maximization of their personal net worth. This is Wall Street greed happening at the local level in all major entrepreneurial hubs.
This approach is of course supported by our flawed approach to capitalism. The only thing that matters is the maximization of the bottom line. Greed at any cost. The end always justifies the means. This point is characterized by belief systems such as: If I view myself as an independent member of society, I can focus solely on the accumulation of as much money, goods, and services as possible. I needn’t worry about the people (the employees, the founders, the communities) I will destroy in order to accomplish my goals. It only matters if it can improve my ability to get more of what I want. Inspiring, right?
This is capitalism without a heart. In this process, many entrepreneurs are sacrificed. A company that has raised $50M and has a future, although likely not a path to a big exit, may get sacrificed because it can be viewed as a distraction. VCs often forget that a distraction to them may be the source of hundreds of jobs, and still a life-changing opportunity for the entrepreneur. They often forget, or they do not care, that there are people (and often world-changing ideas) behind the logo in their portfolio.
This is exactly what happened toVolansi, a company I invested in five years ago, and again in subsequent rounds of financing. They had developed one of the most promising drone technologies available in the market. Recently, the VC-controlled board overruled the founder, ignored other shareholders, and voted to file for bankruptcy.
A little background here: Although the CEO was one of the original founders, after securing funding from the major VCs was driven out for another CEO – and was only allowed back at the helm once the company was badly damaged and was out of cash. This happens often in Silicon Valley. VCs make bad decisions but won’t correct them until it’s too late. Admitting a mistake is not a trait often observed.
When Volansi filed for bankruptcy, they did not alert the shareholders, myself included, in advance. We could have provided bridge financing and helped to find a way forward. In fact, when the bankruptcy filing was made, the founder/CEOwas in the middle of an M&A process, had prospects of financing from other potential investors, and Volansi had significant revenue and a major new contract in the works.
I found out about the board’s intention to shut down about 48 hours before the action was taken. I emailed an offer of funding to the chairman of the board, within hours. They did not respond until the next evening. The chairman sounded annoyed and communicated that they had decided to go bankrupt and didn’t want to commit to more work. He, however, asked me to forward the commitment using a simple convertible note format, which I submitted the next morning at 7 a.m.
They shut down that afternoon without responding to my offer. Without so much as a counter. Why?
Because they were in a rush to shut down and seemed ready to move on to the next deal. Because they didn’t indicate any concern about the shareholders that were not represented on the board. Because they did not show any care about the incredible technology the company had developed. Because they didn’t seem to care about the founders or the employees. Because Volansi no longer met their model for success – the success of their funds and their personal success.
Who were the VCs on the board of Volansi that pushed for this? It doesn’t matter. There is nothing unique about them. They did what many VCs do: cut distractions and moved on even after another investor was prepared to step in and save the company.
I really think this type of behavior must be stopped. It’s bad for Silicon Valley, (it’s bad practice anywhere), and it’s bad for the economy – for employees, for vendors, for everyone. And let’s be clear here: no offer is ever as bad as bankruptcy. That’s a fact.
I feel deeply for the entrepreneurs and the employees involved, but let this be a warning to other founders in search of investments. Let’s not forget that entrepreneurs enable this behavior by participating in the culture of greed in much the same way that home buyers participated during the last major financial crisis - banks weren’t the sole guilty party. There are always enablers often working against their own self-interests, dazzled by the illusion of riches. Remember that the house always wins. And guess what – VCs are the house.
Here are some steps to make sure this doesn’t happen to you.
- Get a mentor. The value of this cannot be overstated.
- Vet your VCs thoroughly. Ask your mentor to vet your term sheets before you raise any money. Remember that major VCs can be sharks and that they often care first, and only, about their return.
- Look at more than the money. Find companies and individuals that are aligned with your values. It’s truly the only way to do business. At least the only way that will leave you fulfilled.
- Beware of big-name VCs. While they may have only one vote on the board, if their view carries the rest, you’ve already lost control.
- There is no such thing as an independent board member. Money talks, and the ‘independents’ almost always back the VCs by whom they were recommended.
- Remember that board seats aren’t just about the votes. Don’t assume you’re protected by putting your co-founders on the board. They will be equally ignored. Fill the seats instead by bringing in capable and successful board members who will have your back. The most important conversations often happen behind closed doors when you’re not in the room. I believe that Volansi would not have been shut down if one of the founders had given up his seat to someone with more influence.
- Protect yourself. Know that VCs often do not care about you over their personal interest. Add clauses in your term sheets for protections, specifically with clauses to stay on as CEO.
- Remember, unethical is not illegal. Greed is at every level in our society and bad practices will continue, simply because they are not illegal.
- Protect your downside. It’s more than likely that your company will not be the next Google. Protect yourself in case your company is one of the “disappoints” to investors. It can still be a great business and remain a life-changing opportunity for you.
- Stay humble. Whenever we believe that we are the smartest person in the room, the universe reminds us otherwise. Also, choose VCs and partners who show humility in their approach.
This is a topic about which I care deeply. The VC world needs a major clean-up, and founders need to open their eyes. For every successful headline, there are hundreds of companies that went to the graveyard. How many could have been saved by remaining at a smaller and humbler size? Bigger is not always better. Small companies can still have great technology and ideas, preserve jobs, and change the course of the lives of their founders and others involved.
Want to talk about this more? Message me! I would love to help. I’d love to protect you against the toxic VC culture that currently rules the industry.