Thursday, December 11, 2014

Should Your Lead VC Veto Other Investors?

Fundraises tend to either have a lead investor, or be a party round.  If you have a lead investor, they will negotiate and set the overall financing terms with you (valuation, round structure, etc.), put in the bulk of the money, and sometimes take a board seat.

Some lead investors also ask to have veto rights on who else can invest in your round.  In general you should solicit their opinion, but not give them veto rights [1].

As an entrepreneur you only get to do a handful of fundraises, so VCs often have insights into which other investors to include (or exclude) and why.  However, the lead investor may also have a number of conflicts in terms of who else they want to invest in your company that have nothing to do with increasing the value and success of your company[2].

These conflicts include:
1. Blocking competitors.
Many funds view other funds as their competitors.  Sometimes they want to block one another out of a company so that they keep the upside (or branding of a hot company) for themselves.

2. Favors.
Some investors trade favors.  They will let someone invest in your round in exchange for a favor later.  E.g. "If I let you invest in this hot company now, I expect you to let me invest in the next hot company you work on".

This horse trading usually does nothing good for the entrepreneur.  It is simply currency for investors to gather and trade.

3. Voting blocks.
Sometimes a lead will bring in an investor who will always vote their way.  E.g. I know one VC that pulls a large University endowment in as an investor in companies it is funding.  This endowment always votes it shares the way the VC tells them too - increasing the %age of preferred the VC controls.

4. Ego.
Investors have different tiers.  Sometimes the investors are focused on the brand value of the other investors versus how helpful they are to the company.  E.g. "this other investor is beneath me, so they should not invest in the round I am leading".

As an entrepreneur, your primary selection criteria should be helpfulness & ethics of investor, not whether your lead investors views them as an equal.

5. Personal dislike.
Some investors just don't like each other.  They may have insulted each other on Twitter or at some industry event and now don't want to work together.

As you can tell, none of the reasons above should impact your company.  The focus in a fundraise should be on building the best possible investor team around your company.

Takeaway: Your lead investor should not have the right to block who else invests in your round.  You want to consult them and get their feedback on the round, but also need to make your own decisions.

Notes
[1] The nice way to do this is to tell the lead investor that you value their input and feedback on other investors and you will be soliciting it along the way.  However, it is ultimately up to the company to chose who the investors are.  All of you are aligned on trying to get the best possible people around the company to help it and that is the focus of how you will close the fundraise.

[2] There are also lots of genuinely helpful reasons a lead may want to help shape the round.  As investors in many other companies, they have grown to learn who is actually helpful versus not.  Similarly, they may have seen other investors act in an actively destructive manner.  So, your lead investor may have great input for you.

Related Posts

Wednesday, December 10, 2014

Defensibility And Lock In: Uber & Lyft

One of the most common critiques an entrepreneur will hear is that their business is not defensible.  This was frequently stated about Google ("The switching cost is low - there are a dozen other search engines so you can just change web pages!").  Later, when I was at Google, a senior Google manager said the same thing to me about Facebook ("The switching cost is low!  First there was Friendster, then Myspace, now Facebook.  In 3 years everyone will be on something else!").

Many companies that appear to lack defensibility have strong lock in effects.  Others start off without a lock in strategy, and have one emerge over time.  Finally some businesses, such as marketplaces, inherently have lock-in due to their network effects.  The key is to think through how you can create a moat for your business.

Approaches To Defensibility
1. Scale Effects.
Scale gives you leverage when negotiating costs or special product features with suppliers or partners.  For some companies (e.g. steel, oil and gas etc.) this scale allows the company to outcompete and outprice its peers in the market.

2. Network Effects.
Marketplaces (AirBnB, Uber/Lyft, Instacart), social networks (Facebook, Twitter, LinkedIn, Pinterest), and even YC all have different network effects that help to lock in customers/users.  More on Uber/Lyft below.

3. IP.
Differentiated technology or technology leadership can lock in customers or customer cycles over time.  Intel was always one step ahead of AMD processor-wise, while some healthcare companies use IP litigation to prevent other entrants in certain markets.

4. Distribution and Sales.
Locking in sales or distribution channels is a classic form of defensibility.  Google gained searched market share in part via exclusive deals with Mozilla (back before Chrome became a dominant browser) and toolbar distribution deals.  Traditional enterprise companies like Cisco and Oracle have strategically locked in reseller and services focused channels to push their product and lock out competitors.

5. Data.
Google's mapping dataset, and Yelps business listings + reviews provide defensive barriers for each company over time.  Unique data can often help a business prevent its own commoditization.

6. Other.
There are a number of other ways to create lock-in.  Branding is one way to differentiate a commoditized service and cause people to use you over and over, even if you offer a commodity product.

Uber and Lyft As Examples
Uber and Lyft are examples of companies that have baseline defensibility due to the network effects inherent in their driver/consumer liquidity.  I.e. the more drivers they have, the more consumers want to use them and vice versa.  Lock-in by these companies could actually go quite a bit farther with specific features and products:

Driver Side Lock In
There are numerous services Uber and Lyft could potentially provide drivers who drive from them frequently enough to try to differentiate against each other.  Uber has already started some of these programs for things like car buying.  However, one can image offering discounts or other services to drivers who spend more then 50% of their time driving for Uber or Lyft.  If done quickly and correctly, this may create further lock-in for these services.

1. Bulk discounts (tires, gas, bodywork, etc.).  Uber should now have enough heft to negotiate differentiated bulk deals for tires, gas, bodywork, and other car maintenance & operations costs for their drivers.  These discounts could add up dramatically for a driver due to normal wear and tear while packing on the miles.

2. Driver insurance.  Since Uber and Lyft have driver specific data, they should be able to help price insurance differentially for the best drivers, driving down costs for the driver.

3. Loans.  Pay day or other short term loans based on past driver behavior/working hours.  Pay day loans can be onerous to people who get them, and Uber/Lyft could help their drivers decrease borrowing costs due to transparency on future cash flows coming from working for these services.

Consumer Side Lock In
While consumers are ultimately going to make decisions based on driver availability and price, there are added services that may help get consumers to stick with the service more.
1. Business services such as wifi.  Adding something like Karma wifi to cars may be a way to generate additional revenue for both the driver, and Uber or Lyft, while enhancing the experience for business passengers.  I know of a number of people who use Uber for long work-related drives.

2. Parental controls.
An increasing number of parents are using Uber or Lyft to deliver their kids to school, pick them up for afternoon activities and the like.  The ability to pre-set locations (e.g. "my child can only go to school at 9am or I get an alarm", or schedules for kids ("pick up every afternoon at 3:00pm") could help lock in parents to the service.

For every business there will be a set of features that help create defensibility.  The key is to think through what elements work best for your product, market, and business.

Related Content
Uber And Disruption
Who Cares If Its Been Tried Before?
The Road To $5 Billion Is A Long One
How To Win As Second Mover
End Of Silicon Valley
Social Products

Wednesday, September 3, 2014

YC Is A Network Effect Business

The best investors often look for network effect businesses - where each incremental addition of a user to the network increases the value of the network for the other users.  These types of business are typically very defensible (hard to break the network) and quite valuable (if in a large market).

In Y-Combinator's case, the "user" in the network is a startup.  YC creates a pretty amazing network effect for the companies who pass through.  This includes:

1. Peer based help.
Many YC founders will ask other batchmates for their advice, feedback, and recent learnings.  When I left Google to start my first company, there was similarly an invaluable network of ex-Google founders to tap into.  This allows you to learn who the helpful investors are, tips on hiring, and about new types of distribution or platforms.  These sorts of peer networks are invaluable and typically quite hard to come by quickly.  YC plugs you directly into this network of peers.

2. Early advice and mentoring.
Beyond peers, YC provides a series of role models and mentors just a few years ahead of the current batch.  YC founders can tap into founders at almost any stage of the startup lifecycle to get advice on what to expect next.  This is where the true network effect of YC kicks in.  By having more startups distributed throughout the lifecycle of a company, YC provides a broad based cross-mentoring network for all its companies.  Each new company helps advise and mentor later companies.

3. Customers & market validation.
One of the most powerful aspects of YC is its built in customer development.  Especially for B2B companies, YC provides an instant initial testing ground and potential user base for the startup's products.  These early customer wins helps with both product testing and iteration, but also provides the startup with fast market validation.  By having a number of early brand name customers (from prior YC batches) using the product, YC B2B companies can both get to revenue faster (helping with fundraising) as well as to some notion of product/market fit (due to fast and broad feedback).

4. Capital.
A number of YC founders have emerged as prominent angels.  They can provide early capital and validation for a startup, allowing it to bootstrap a seed round more effectively.  The first few dollars raised are always the hardest, so early investors are valuable in giving a seed round momentum.

Surprisingly, very few traditional venture firms have an ex-YC founder as a partner.  I would expect this to change and to follow the pattern of Google, where VCs hired a number of ex-Googlers into their firms to access that talented network.

5. Branding.
Each new startup increases its chance of success by going through YC and being associated with past YC successes.  The presence of AirBnB, DropBox and Stripe, as well as the next wave of YC startups (e.g. Optimizely, Zenefits, etc.) increase the chances of each incremental startup becoming more successful.  The brand of the winners feeds back to increase the brand value of the newbies.

PS. 500Startups, AngelPad, and Lemnos Labs are all other examples of programs that exhibit aspects of the network effects mentioned above.  Each program's network effects are modulated by its point of emphasis and focus (e.g. volume of startups, quality, specialization (e.g. hardware, international, etc.) stage and valuation of past participants, geographic location, etc.)  E.g. I know a number of companies who mention the 500Startups email list of other founders to be incredibly useful.  Similarly, with its emphasis on hardware Lemnos Labs startups can help each other with uniquely hardware-centric products.  And AngelPad is currently NYC-based.  A key consideration or lens to keep in mind when considering network effects is ultimately scale & quality of the users in the network.

PPS Just found another take on all this.

Wednesday, August 20, 2014

Building A Recruiting Org

The use of recruiters by a startup will shift dramatically over the lifetime of the company.
As a small startup (e.g. 3-10 people), using a recruiter is usually not as useful as direct founder or employee networking, using LinkedIn and other tools.  In contrast, when I was at Twitter, the company grew from ~90 to ~1500 people over a 2.5 year period.  As your company scales into the hundreds and thousands of people, you will want to bring specialized recruiters, sourcers, university programs managers etc. in-house and potentially use retained external recruiters for executive hires.

0. Early Days: Your Team As Recruiters.
Early on, the best approach to recruiting is to have people on your team actively refer in people from their network.  Similarly, many founders & early employees spend as much as 30-50% of their time early on (e.g. when scaling from 3 to 15 people) on recruiting.  There is no easy fix around it.  You need to just grind through large numbers of people (via networking, LinkedIn, friends etc.) to find the handful of people to join your team.

Some startups I know successfully hire someone who is a mix of office manager / social media manager / recruiting coordinator.   This person will often spend a lot of time scheduling referred candidates and reaching out to passive candidates via email and LinkedIn.  Once the candidate expresses interest they pass them off to a founder or hiring manager.

One hack I have seen a few companies adopt is to have the person doing the recruiting contact candidates from the founders email address so there is no perceived hand off.   This increase the response rate as many engineers may be willing to reply to a founder/fancy title but may not reply to more general recruiting pings.

1. Initial Scaling: Adding 15-20 People Per Year Or More: The In-House Recruiter.
Once a company hits a certain scale and is growing fast enough, hiring in house recruiters makes a lot of sense.  The recruiter initially plays a few different roles that in larger stage companies will get split up including (i) sourcing, (ii) running the recruiting process (scheduling, collating feedback, coordinating with hiring manager etc.), (iii) in some cases delivering offers (although I think often hiring managers or founders can do this).

Depending on the strength of the recruiter (and, importantly, the company branding with your candidates), the recruiter will be able to hire 1-4 engineers per month.  This shifts as the company scales and adds more differentiated roles (see below).

This means that if you are hiring less then 15 engineers a year, you may want to have a part-time or split-role recruiter, grow organically via company referrals, or find an alternate structure with external recruiters.

For non-engineering roles (e.g. sales) a single recruiter may be able to hire a larger number of people per month.  This is driven in part by the referral heavy nature of sales hiring as well as the fact that there are fewer high growth companies for sales, marketing, and business development people to go to.  In contrast, every startup is trying to hire engineers and designers.

Things that impact the ability of the recruiter to be effective includes:
-Brand of the startup with candidates.
-Strength of the hiring manager and executive team as recruiters.  If they are active and engaged, it makes recruiting run smoother and will help to source and close more candidates.
-Breadth of network of the employees at the company.

The importance of the hiring manager and other executives being involved in the recruiting process (informal conversations, extending offers, meeting for lunch, etc.) can not be under emphasized, no matter how strong a recruiting org you have.  The candidates will always want exposure to people in key roles in the company (Zuckerbeg at Facebook is famous for his "closing walks" with mid-level candidates).

2. High Growth: Multiple Recruiting Org Roles.
When a company is growing really fast, the set of roles on the recruiting team tend to fragment.  When I was at Twitter, the company grew from ~90 to ~1500 people over a 2.5 year period.  When growing this fast you need to start to specialize the types of people on your recruiting team.

A. Sourcers.  Sourcers research, cold call, email, and otherwise create a path to passive candidates.  In some cases they then transfer the candidates over to recruiters who will feed the candidate into a coordinated interview process.  Some sourcers manage candidates up through an onsite interview, but seldom beyond.

B. Recruiters.  Recruiters manage the process of coordination of the candidate through scheduling various interviews (phone screens, onsite, executive, etc.) and then circling with the team or hiring manager to determine whether an offer will be extended.  At some companies the recruiter may extend the offer, in others the hiring manager does so.

Your first few in-house recruiters should have experience sourcing as well.  This helps in a number of ways:
1. The recruiter will likely be more effective in sourcing and recruiting specialized engineering roles.
2. There will be less hand offs between people on the team (e.g. sourcer, recruiter, hiring manager, etc.) which means less friction to the candidate and fewer people fall through the cracks.

Splitting the recruiter and sourcer roles tends to work best when you are hiring large number of people of a specific type.  E.g. if you need to hire 50 backend engineers, 30 front end engineers, and 20 PMs, starting to segment recruiting roles makes a big difference.

Additional roles in a larger startup may include:
C. Candidate researchers.  These people may scrub LinkedIn for all the engineers at Google, prioritize them, put them into a spreadsheet, and then hand off the spreadsheet to the sourcers to actually do the outreach / pitch the candidates to interview.

These people usually only really get added to the team as it scales from 100+ to 1000+ people, and you are hiring large numbers of people in the same role.

D. Recruiting marketing.  The folks who develop marketing materials, run ads, organize recruiting events, hackathons, website content, etc. to create an inbound pipeline of candidates.  At a startup, this is usually driven by someone on the team you are recruiting for (e.g. an eng manager for engineering candidates).  Alternatively, the marketing team at the startup may be responsible for this as part of their overall marketing efforts.  Only as a company scales to e.g. a few hundred people or more does the possibility of a stand alone coordinating recruiting marketing role emerge.

E. University programs.  Given the specific timing and cadence of new graduate and intern hiring, some companies will specialize sourcers/recruiting marketing/recruiters specifically for new grads coordination and hiring.  When your startup is still small, instead of hiring dedicated university programs people, you can have your existing recruiting staff pivot to cover this area for the few months when it is most relevant.

4. Executive Hires: Retained Recruiter.
The main nuance for executive hires is the stage and brand of your startup.  For a later stage startup with a well known brand name you may be deflating titles.  I.e. your VP Eng may have been an SVP at another company prior.  But, for most smaller startups, or lesser known companies, you tend to inflate titles - e.g. your VP Eng may have been an engineer manager at Google or Facebook where they ran a team of the same (or larger) size.  If you are inflating titles, your existing recruiters may already have contacts at the Googles and Facebooks of the world.  If you are deflating titles, you may want to engage a retained search.

For a retained search, you may pay an external recruiter some up front fee or retainer to find candidates for you.  In general, these sorts of searches work best if you are hiring an executive for the company versus an individual contributor.  One reason is that executive hires may be outside of your core network, or that executives may be more willing to talk to recruiters from a brand name firm than to someone from a less well known startup.

There are a number of brand name executive recruiters your angels, VCs, or advisors can connect you to.

Tougher To Manage: (Non-Executive) Shared External Recruiter.
In some cases companies will hire an external recruiter to help them hire individual contributor candidates.  These recruiters will either get paid by hire (e.g. a flat fee, or %age of salary) or may ask for equity in exchange for recruiting help.

In general, if the recruiter is split between multiple companies at the same time, they will not yield the best candidates for your company:
a. They will push candidates to the company that either pays them the most per head, or the one they have provided the least attention to lately (to keep that company as a customer).
b. They won't always represent you well to candidates - but will rather pitch the candidate on multiple companies.

As such, it might be better to hire someone for a dedicated period as a recruiter or to try to spend internal company time on it instead.

Thanks to Ardy Daie  and Chris Shaw for comments and feedback on this post.

Other Recruiting Posts:
Recruiting Is A Grind
What To Look For When Hiring Execs
5 Signs A Candidate Just Isn't That Into You
5 People Who Destroy Your Culture
Should You Hire A COO?
Reference Check Candidates
How To Hire Great Business Development People
How To Choose A Co-Founder
How To Choose A Board Member
When And How To Fire An Employee At An Early Stage Startup
How To Fire A Co-Founder

Tuesday, August 5, 2014

We Will Crush You

When a large company tries to buy a startup, it will sometimes use a series of threats to scare the startup into selling.  90% of the time, these threats are baseless.  Unfortunately, entrepreneurs often view these threats as credible and will sell their company early to the threatening party.

Examples of such threats include:

"We are launching a similar product soon and will crush you."
This is usually an empty threat.  If the large company is so close to launching a product that will crush you, why do they want to buy you?  Often, a larger company will indeed have an effort internally that is competitive, but it may be experiencing delays or be under-resourced, executing badly, or simply just not winning in the marketplace.  In such a situation, they will approach your startup for acquisition.

In some rare cases, a company may have a product, platform or API that the startup is using.  The company plans to enter the market and wants to buy the soon-to-be-competitive startup as a reward to that startup for being in its ecosystem.  This allows the platform company to enter its own ecosystem in a way that keeps its platform partners happy.  If this is the case, the threat of being crushed may be quite real.

As an entrepreneur, it is important to differentiate between empty threats, a company that is close to launching a product that is truly superior to yours, and a company trying to fill an internal hole or maintain peace with its 3rd party community.

"We will sue you."
There are a large number of frivolous lawsuits that happen.  A larger company may sue a smaller one as a competitive move to try to drive the startup out of its market or to create an M&A opportunity.  Some companies will use a threat of a lawsuit to help drive an acquisition.

Often, these lawsuits are baseless.  However, if a startup has insufficient cash, it may not be able to bear the legal fees of a lawsuit.  Lawsuits also tend to hang over startups, preventing their ability to raise more money or recruit great people.

I think something like 10-20% of the startups I have advised have gotten sued at one point or another.   Only one of them ever settled the case, and the rest won the lawsuits or had them dropped.  At least in the tech industry, most of the lawsuits seem pretty baseless.

"We are going to cut you off."
Some startups are dependent on larger companies for data, distribution, or other key aspects that drive their business.  The larger company may take advantage of this by offering to cut off the startup from the very service that allows it to exist.  Microsoft was notorious at one point for making its OS poorly compatible with apps that ran on top of it, once the app maker turned down Microsoft's acquisition overtures.  This led to a situation in the 1990s where every VC would ask a startup about their Microsoft strategy, and how they planned to get around Microsoft.

What to do
First, take a deep breath.  Realize that the situation your are in is more common then you think.  Usually, the reason a large company wants to buy your startup is a lack of resources, knowledge, or momentum, to truly compete with your business.  Alternatively, you may have an asset that will cut the time or effort the acquirer needs to build a relevant business.  Either way, you need to determine how much of the threat is bluster versus a real threat to your startup.

As a startup being threatened by a larger competitor, you should spend time with your investors, advisors, and potentially legal team to think through the true threat.  In some cases the right decision is indeed to sell or to change direction to a product that they can not derail directly.  But more often then not you should keep going.  Most threats turn out to be baseless.  Work through the real threat provided by the larger company before giving up or caving in.

Related Posts
The Acquisition Blues
Do Acquisitions Always Kill Products?
What Is Your Startup Acquisition Really Worth?
5 Reasons To Sell Your Startup
M&A Ladder

Wednesday, July 30, 2014

Recruiting Is a Grind

Hiring great people is always hard.  Many entrepreneurs I know look for a magic bullet or short cut hack for recruiting.  The reality is that recruiting is a numbers game.  Ultimately, you just need to work through enough people to make it work.  The below is for an early stage company just getting off the ground (e.g. 2 to 8 people).

1. Timelines.
Once, you as a founder, start spending 30-50% of your time on recruiting, it will still take 4-8 weeks to build up an initial pipeline of people for your company.  Plan on this ramp when thinking through your hiring timeline and plan.  Building a pipeline and closing the first candidates takes time.

2. Numbers Game.
Drawing on your personal network is often the most efficient way to hire people.  In some cases you have worked with a candidate so know they are a quality hire.  Candidates are also more likely to join your startup if they know and trust you.  Barring pre-existing relationships, there is often no way to get around interviewing large numbers of people to fill a role.

We hired a designer at my first startup by grinding through candidates.  Our first attempt was to go through our direct personal networks, but that did not yield anyone.  As a next step, we made a list of companies that had the following characteristics for their design teams: (a) technical designers (e.g. could write HTML/CSS), (b) had good UI design in general, (c) designers not overly specialized (e.g. designers who could do a bit of user experience, visual design, etc.).

Based on this we ended up with 5 companies.  I went through LinkedIn and combed through literally every designer who worked at those companies.  I reviewed >100 available portfolios, prioritized the people, and then reached out to every single person who made the cut.  After 6 weeks we closed our designer, who was pretty spectacular.  It took a lot of repetitive, detailed work to make this happen.

3. Drop Poor Leads Quickly.
If you do not have a lot of experience hiring, you will be tempted to meet every candidate in person for "coffee".  This is a big waste of time and usually can cost you anywhere from 1 to 2 hours including travel time, waiting in line together for drinks, small talk, etc.  I have not found meeting people for coffee in any way increase the likelihood of them interviewing versus a quick phone call.

Instead, as a first step do a quick 10-15 minute phone screen.  If the candidate is a poor fit - you only spent 10 minutes on them.  This save both you and them time.  If they are a good fit, you can have the call run longer or coordinate on the phone for a follow up meeting (be it coffee or a full interview loop, preferably the latter).

There are a number of signs a candidate is not serious about leaving their company (or, alternatively, are not really interested in your company).  You need to identify these people quickly and drop them from your pipeline so they do not waste your time.  A simple example is candidates who are unwilling to talk by phone during their current work day.  This is a clear sign they are not really looking for their next gig, even if they claim they are over email.

The main reasons to drop candidates are:
-Poor culture fit.  You can usually determine this in a 15 minute phone screen.
-Poor functional fit.  You can remove the worst candidates in a 15 minute phone screen.
-Not actually interested in your startup.  They will often let you know if this is the case in a quick phone call.

4. Closing.
Once you have put in all the effort to identify a great candidate, you should focus on the closing process.  In some cases this is easy - the candidate really wants to join your company, you have agreed on compensation, they give notice and join.  In other cases this can be a protracted back and forth due to compensation discussions, multiple offers to the candidate, life issues, or a last minute counter from their existing employer .

Some key aspects to closing include:
-If things start to drag out, set a deadline on both sides to come to agreement or move on.
-Make sure to spend the right amount of team time with the candidate.  This is a balance of letting everyone get to know each other & selling the candidate, along with not taking up too much time the team could be spending on e.g. building product.
-If the candidate announces they are leaving to their existing employer and team it is a good sign.  Once the word is out, they are more likely to join.  I have seen multiple people back out of a job once they have accepted.  You can not count on anyone joining until they show up on their first day.

Related Posts
6 Traits To Look For In Hiring Execs
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How To Hire Great Business Development People
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How To Choose A Board Member
When And How To Fire An Employee At An Early Stage Startup
How To Fire A Co-Founder

What Is A "Good" VC?

People tend to confuse a VC with a good investment record with someone who can actually help startups.  In both cases, these people are called "good VCs", although in the former case they may be quite terrible for a startup to work with.

This confusion was recently re-enforced in a PandoDaily post where a good VC is defined as someone who gets to invest in hot companies.  E.g. "Those companies have their picks of investors. Clearly these non-founder VCs are doing something right."

The ability to convince an entrepreneur to let you invest, or access to invest in a startup, does not mean the VC is actually helpful to the company.  A number of name brand investors are eventually viewed as pretty useless by the entrepreneur once she has had a few board meetings with them.  In some cases, name brand investors can be actively destructive.

The basis for this confusion is that the venture industry is a bundled product.  Right now VCs provide a bundle of capital (investment), advice (helping the startup), and governance (taking a board seat).  The best investors return-wise aren't necessarily the best advisors (although a subset are), and some of the best VCs return-wise act badly from a governance perspective.  People tend to confuse a VC picking a great startup, with the VC being somehow responsible for the company's success.  A number of startups I know have succeeded despite their investors.

The venture capital bundled service includes:

0. Capital/investment.
Some of the very best investors in terms of dollars returned are also really great advisors.  For example, Peter Fenton is known for working hard for his companies, and also has made some pretty spectacular investments.  Reid Hoffman similarly was one of the angels in my first company, and was always incredibly helpful to talk to.  Vinod Khosla is known for pushing the thinking of entrepreneurs.

However, many brand name VCs are actually not super helpful to the startups they invest in.  Rather, they are able to pick the right startups to invest in, and attract entrepreneurs to work with them, despite being poor advisors.  They tend to attract entrepreneurs as follows:
Branding.  This could be through PR, speaking events, blogging, or having chosen great companies in the past to invest in.
Access.  Top tier firms tend to see all the key companies for investment, so even a mediocre person at a great firm can have better access to invest then a great person at a mediocre firm.
Ability to see the future.  Some people are very good at spotting the future and investing in it.  This does not mean they give good advice, however they can be very smart about investing.

These investors tend to have truly outsized returns.  They end up with multiple big hits in their portfolio and make tons of money for themselves and their LPs.  People tend to confuse the ability to pick a good startup with causing its success.  Once a startup has product/market fit and is working, it is often quite hard to derail it.  Some terrible advisors have done really well as investors by betting on startups that largely ignored their advice.

1. Advice (Versus ROI).
Even if you have have the most amazing, helpful comments as an investor, if you are at a lower tier firm you may never have the chance to invest in a break out startup with a dozen funding offers.  Without branding and access it may not matter how smart or helpful you are.  Alternatively, some investors with poor financial returns give great advice to companies, they just tend to pick the wrong companies to give their money and advice to.  Unfortunately, bad company + good advice = bad company.  Similarly, good company + bad advice = good company more often then not (since, as a good company, they either ignore the bad advice, or they have so much traction the bad advice does not derail them).

Reasons great advisors are not always great investors:
Lack of access.  Some thoughtful, helpful people do not have the brand name or access to investment that their less useful brethren may have.  This may be a branding/PR issue, being at a third tier firm, or a lack of prior investment success.

Lack of hustle.  Not pursuing an investment opportunity aggressively.  This can be most impactful if a startup is clearly working and everyone wants to invest in it.

Bad judgement.  One well known investor, and former operator, once told me the secret that transformed him from a terrible investor to a great one.  His view was that he used to look at startups as a strong operator and see all the potential of the idea.  He would get excited about the product area and all the great things it could do.  As an operator, he would imagine how *he* would tackle the market.  This is usually when he made terrible investments.  Instead, he started to ask "what will this specific team and entrepreneur do with the idea".  This allowed him to focus on founder/market fit and improved his return from investments dramatically.

2. Governance/board.
VCs traditionally asked for board seats to both look after their investment, as well as to have a seat at the table to give advice and make decisions (such as choosing the CEO).  As part of their role on the board, investors ultimately are looking out for their own LP interests, but should also optimize for what is globally right for the shareholder base of the whole company.

A lot of the traditional conflicts between investors and entrepreneurs tend to happen at the governance level.  Sometimes it is through self serving advice the VCs give, sometimes it is outright action by the VCs that leads to a poor outcome for the company (e.g. splitting founder cohesion and causing internal battles between founders is one example I have seen).

Some investors can make poor decisions when it comes to broader corporate governance.  They may invite other members of their firm unasked to board meetings to "gang up" on the entrepreneur, or be willing to leak information to the press to endear themselves to bloggers.  As an entrepreneur, once you have taken a VCs capital, you are often stuck with their governance as well.  You should reference check your board members thoroughly.

Is Venture Capital Going To Get Unbundled?
For late stage investing, Yuri Milner effectively unbundled capital (he invested large amounts) and governance (he has not typically taken board seats).  Will a similar set of investors emerge for early stage companies?

So far, early stage investing has only partially unbundled for the following reasons:
a. Early stage companies tend to look for investors who can help.  Entrepreneurs explicitly want investors who can also advise.  Some entrepreneurs are willing to lower their effective price / market cap for helpful investors.  The entrepreneurial market will demand the ongoing bundling of at least some capital and advice.  The alternative would be to raise capital from "dumb money" and then add advisors who earn equity in a company.  However, a fundraising process is time intensive enough that ongoing bundling makes sense for the entrepreneur efficiency-wise.  Why spend a lot of time searching for both capital & advice when you can save time by getting both through one investor?

b. Branding.  Some investors are really great at marketing themselves.  Irrespective of helpfulness, they can still invest in great companies.  This will prevent full capital unbundling.

c. Contrarianism.  Amazing investments are not always obvious and some of the best companies do not always have great funding options early on.  So, great companies may get saddled with poor investors due to a lack of choice early on.  It is only later, when things are very clearly working, that the startup may have more choice on who to work with.  At this point it is hard to remove poorly functioning investor board members.

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