Some Observations Regarding Big VC, One Year Into Investing

It’s been just under one year since I started Haystack and began investing out the fund. Technically, I’m the sole General Partner and thereby the only one who can write a check from the fund. While the title is kind of silly and one I only refer to on legal documents for legal reasons, the obvious reality is I’m a very small investor who, at the moment, is trying to bring more value (hopefully) than the amount I write on each check. I’m a small-time check but I have been around a number of deals and seen the dynamics play out now in real life. About a year into the fund, I’ve made seventeen (17) investments across four (sectors) where I’ve developed a thesis. I wanted to record and share some personal observations re: Big VC that may challenge some widely-held assumptions — I’ll stress again this is based off my limited experience and is only a reflection of my personal experience. I do not see everything, but here’s what caught my eye:

  1. Big VCs have a very hard job. I don’t know how and why this happened, but the narrative over the past few years around VC has been summed up by “VCs have an easy job and don’t perform well.” Not true. Now, they are well-paid (more on that below), but their job is very tough because for any good investment, from Series A on, there is at least one firm to compete with. Competition is fierce. VCs will spend over a year networking just to position around one founder or one deal, and if they lose it, it’s gone. The day-to-day meetings are part of the grind and being part of the community, but most of these folks are outbound in terms of allocating their funds, and most of them have to truly compete against very smart, accomplished peers.
  2. Big VCs are often only truly aligned with founders when putting big money to work. I’ve always felt big VCs in the seed round was a waste of time for both sides. Some firms do handle this well, but incentives are way, way out of line in terms of attention and potentially signaling risk for founders. Also, many VCs still take home big salaries, and even though those salaries need to be paid back to LPs in the event of a return (fees are paid back to LPs before VCs can keep their carry), a sub-$5m check from a Big VC firm managing close to $1Bn+ over three funds is not likely not to going to move the needle. VCs need high ownership percentages, while in this day and age, founders want to retain more. This is why so many people think the VC model is “broken.” Yet, at the same time, VC firms are performing really well, the IPO market was hot in 2013 and will remain so in 2014, so it can be seen both ways.
  3. The size of addressable markets matter. To get Big VC funding, these firms need to see a big market evolving. This could be broad, such as “mobile.” Or, it could be specific, like annual national grocery spend by consumers. Whatever it is, it has to be huge. More often than not, these folks would rather take a ride on something that could be massive yet washout versus looking for too many proof points in a market that isn’t huge or dynamic. This is very hard for founders to wrestle with, in the moment, because they’re pot-committed to their vision and often see a different type of potential.
  4. Interpersonal and soft skills of a founder matter. How a founder emails, talks on the phone, interacts with everyone in an office, etc. is noticed. That’s not to say the founder needs to be a pillar example of manners, but much of this is a people business and inevitably, during a negotiation or somewhere down the line, some awkward or uncomfortable scenarios will arise.
  5. The personal chemistry between a Big VC and founder matters a great deal. Another snake-oil meme floating around the startup-advice world is that it’s OK or necessary to take on an adversarial stance against investors, that it’s founders fighting a good fight against the detached gatekeepers who call themselves investors. They behave so badly that founders need to “handshake” for agreements. In my limited experience, this meme feels misplaced. One, I rarely encounter investors who behave like this (one apple doesn’t ruin the bunch), and two, larger institutional rounds are usually more like partnerships than investments. A VC partner is taking on the prospect of being connected to the founder and company for a long time. Adversarial gestures just short-circuit any potential chemistry and creates a situation where no one benefits.
  6. Some metrics truly matter, but many do not. It can be very confusing and frustrating for a founder who leads a company with a product has lots of registered users or growth in revenue to be rebuffed by a Big VC. The problem here is that global metrics only start a conversation. Investors end up drilling down into the numbers, so they care about ratios of daily users to monthlies, what the scope of engagement is. Big VCs are aware of all the growth tactics and will figure those things out quickly. The revenue side is tougher for founders to come to grips with. It’s not just growing revenues, it’s the rate at which they’re growing and the margins attached. And, they often want to see a few months of these data points. I believe all the smoke and differing standards around what venture-scale metrics mean actually contributes to the potential disconnect many feel between founders and investors.
  7. There is an aura of “fundraising entitlement” among founders floating in the air. I almost hesitated writing those words, but it’s true — that’s what I have seen. I have sat in every chair at the table. The environment right now is there’s so much money floating around (it’s true) that founders will get their slice. Largely, this happens. There’s no way to prove this, but I believe this era of easier money distorts the urgency startups feel to hit milestones or position themselves for the next stage of the company. This can manifest itself in what people call a “Series A Crunch” and is not helped by the fact that talent is fragmented, highly mobile, and entirely comfortable with not spending four years at a company vesting.
  8. Big VC deals don’t usually happen in a flurry, they develop over months. Many of the larger VC deals I’ve seen or participated in took a while to unfold. From the outside or from what one reads in the blogs, these things may seem like shotgun weddings, but in reality, Big VCs “track” potential investments and founders that catch their eyes for months and months. They usually hang out, often socially, and develop a relationship. Both sides are sizing each other up, and the little things matter. Sometimes VCs, over time, can show their true colors and that could turn off a founder — and this works the other way, too.
  9. We seem to have forgotten where all this money mostly comes from. Most Big VCs manage money from big pensions and endowments, or large family offices or corporations. They want to allocate a portion of their assets into high-risk, high-potential categories like venture. But, they either don’t have access to founders or they don’t want to handle it. So, they outsource that job to firms, and firms employ people to manage that money and deploy it. Worth noting here that most partners in funds have also committed their own personal money to the fund. They’re invested, too. A Big VC isn’t paid to do anything but efficiently deploy and properly manage that capital to the point they pay it back, and then some. They aren’t paid to blog or speak on panels, or any of the other noisy activities we’ve grown accustomed to. They’re also not paid to hand out money. In fact, they have to exercise considerable restraint. Many of them will only write 2-3 checks per year, and then they have to monitor those very closely to make sure they’re on track to return that capital. Big LPs want to have partnerships with people who have relevant experiences and good track records to deploy their money. It’s always worth keeping in mind that a VC is balancing many constituents and decisions they give to founders shouldn’t be taken personally, but evaluated in the context of their job requirements.

I felt compelled to write this because for a long time I also held some of the conventional thoughts about Big VC that I now realize were misguided. I thought it would be easier to be part of a Big VC. And, by being a very small investor with a small seat at the table, I got to see just how hard it is. And, I wanted to share that perspective with others. Big VCs aren’t all saints, but neither are all founders. Some handshakes matter, and some don’t. My hope is that this post helps some founders understand that not all the blogs and memes and snake-oil advice on the web about fundraising, getting investment, and how Big VCs work is true or put in the proper context. At the end of the day, it is business — but it’s also driven by long-term relationships, trust, and time.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2014 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus