One of the things the press is fascinated with – and have asked me repeatedly since the CrunchFund was announced – is exactly how venture capitalists differentiate themselves to provide a competitive edge.
The question sounds smart. But for anyone who’s been an entrepreneur it makes about as much sense as asking a baseball team how the colors of their uniforms will help them win the world series.
Entrepreneurs really just want a couple of things from investors. Money, obviously. The brand/marketing benefits of associating their brand to yours. And directed, specific help exactly when they need it.
The worst kind of investor is the one that’s in your business all the time. These are generally the freshly minted MBAs who joined a big venture firm and are trying to impress everyone at board meetings. They like to do things like fire CEOs and bring in “seasoned managers.” Or “lay off half your staff and sell this loser to whoever will pay at least enough that we get our money back.” Mostly they’re just insecure, have no idea what they’re doing, and want to try to hide that by talking a lot.
Far better than that is an investor who does absolutely nothing beyond giving you money. The “first, do no harm” principle should apply to venture capitalists just as much as it applies to doctors.
The perfect investor, though, knows when to leave you alone but also knows when to help in a directed, high value-add way. Most of the time they only help when you’ve specifically asked them. Occasionally if things are going really sideways they’ll step in with advice, too.
In an interview a couple of weeks ago Vinod Khosla spoke with me about how he helps companies. The first way is to be “brutally honest” with them – see my post here.
The second way, he said, is through targeted help that adds incredible value. He was currently spending a lot of time trying to recruit a single person for a startup he’d invested in. This person was being recruited by another big venture firm to start a new company. But Khosla’s company wanted him too. And so Vinod spent time meeting with this person directly to try to convince him.
When he spends time directly recruiting like this, he said, he has a very good success rate. He thought it was likely he’d convince this guy to join his company. “Sometimes the right person can make a young startup 2-3x more valuable than it would be without him or her,” he said, “recruiting these people is a great use of my time.”
If Vinod invests in your company, don’t expect to spend hours on the phone with him every day becoming bestest friends. But when you need a big gun, you’ll have one.
Ron Conway has the same philosophy. He spends almost all of his time helping startups raise money, recuite people and eventually sell. I’ve probably heard at least two dozen stories about how he helped a company pull a victory from the jaws of defeat. Unfortunately almost all of these stories involve him leaning on some CEO or board member of a big public company and will never be told publicly. The most amazing thing is how often he’ll do big favors for startups he hasn’t even invested in.
In fact, he may be doing too many favors. Here’s an email that David Lee (he runs SV Angel, the fund Ron founded) sent out recently about Ron:
From: David Lee
Sent: Monday, October 10, 2011 9:10 PM
Cc: SVA Partners
Subject: Understanding Ron’s Role at SV AngelCONFIDENTIAL – DO NOT FORWARD
Friends and Colleagues,
I want to clarify Ron’s role at SV Angel and how he works with us. This is very important because many of you still email Ron on most business matters, which is causing unnecessary bottlenecks.
Ron is not involved with day-to-day operations of SV Angel. He is not a General Partner in SV Angel. He is the (largest) limited partner in the fund. He directs all of his deal flow to us and we have access to him and his resources. The team and I are responsible for all day-to-day activities such as evaluating deal flow, making investment decisions, meeting business partners and helping portfolio companies at inflection points such as financings and M&A.
Ron focuses on highly-sensitive inflection points – special projects for portfolio companies that have unusually high impact. The SV Angel team and I focus on all other inflection points. We use the following analogy: Ron is the “brain surgeon” and we are the “primary care physicians.” The physician is the point person for all matters and can handle 95% of them. The brain surgeon handles the ‘delicate’ stuff.
We have been using this approach for the last few years and it’s been successful in leveraging Ron’s strengths. I am writing this email because many don’t understand our system and still email Ron only.
Please understand that Ron forwards EVERY SINGLE EMAIL HE RECEIVES to me and the SV Angel team. The only exceptions are those that are highly confidential or sensitive.
If you think it’s urgent, please feel free to cc Ron but keep in mind that we will bring it up to him anyway so ccing him won’t necessarily expedite things.
Also, please keep in mind that he is also very active in philanthropy so he is at full capacity all the time.
To be clear, this email doesn’t mean we are changing a thing. Ron is still as active as ever – as the brain surgeon. But I want to clarify our approach to you so we can continue to provide responsive follow-up and service, which has been Ron’s trademark over his 15 year career as an angel investor.
CONFIDENTIAL – DO NOT FORWARD
-David
The difference between Ron and Vinod is just one of scale. Khosla Ventures invests in far fewer companies than SV Angel, and so Vinod doesn’t have as many people asking him for help. SV Angel invests in 4-5 companies a month. They have a lot of active portfolio companies, a lot of them are really young, and all of them have pressing needs.
This is exactly how we operate at CrunchFund (and to be clear, all the best angels and venture capitalists do, too). We don’t meddle, but we’re there for entrepreneurs when they need us.
So back to that first question in the first paragraph above that the press loves to ask. How are we different? Well, we focus on having a very, very deep network that we can call on when we need to help our startups get something they need. Putting together a round of financing with like-minded investors. Hiring a team, particularly talented product, design and engineering people. And, eventually, helping them with liquidity events.
There’s one last thing that entrepreneurs need, too. Your support. Starting a company is a lonely thing, and there are usually people in your life who think you’re crazy for doing it. Sometimes an entrepreneur just needs to know you actually believe in them to keep their morale up during the tough times. I talk a lot about this in my “Are You A Pirate” post on TechCrunch
Uncrunched 
Everyone knows it requires 3 * “CONFIDENTIAL – DO NOT FORWARD” for it be real.
Just writing it twice is like saying it with your fingers crossed
I should pitch my idea to the VCs. It’s a plugin for your email client that will make slight changes to your email to each person that it gets sent to.
This way you can figure out which bastard was the one that forwarded your CONFIDENTIAL email to TechCrunch/Uncrunched.
I’ll make millions!
that has been done. next idea. 🙂
Remind me never to send you a confidential email.
or tell Mike anything in confidence.
first 😀
not this time 🙂
Really cool thanks Mike. Probably stuff I should have a better grasp on but the insight is awesome! Make the trip down south?
Nice. I like how “CONFIDENTIAL DO NOT FORWARD” has zero weight in today’s world.
These are two extreme cases, because an average investor is neither Ron or Vinod. and the ecosystem is full of the average ones who might not know when to leave alone or get a little more hands on.
exactly. avoid average investors. in fact, avoid average everything.
Love it. Going in the quote log…
This is a great line
Bingo.
Cool. As an aspiring entrepreneur, I was always fascinate about how VCs Internals. This small peek is really useful to young aspiring entrepreneurs like me.
Sorry to chime in with something irrelevant…
I’m not sure if you prefer it this way but when I click on the links in your post it takes me to the target in the same window directing me away from your site. You should select “open link in an external window” so people are never directed away from your solid blog.
Anyways, super interesting stuff and helpful indeed. Best wishes.
That would be invalid markup … right click, open in new tab / window.
What you have mentioned works for ‘entrepreneurs-turned-investors’. They have a very different perspective when it comes to investing vis-a-vis the MBA types who often work for the BIG names and unfortunately end up joining the startups’ board.
This is ironic and kind of peculiar… Now TechCrunch is publishing content from Uncrunched,
Sure this might have made Mike smile for a while.
Michael, thanks for sharing, as an entrepreneur and fellow Pirate, having an investor there when we need guidance and support is all important, especially when we have the weight of the world on our shoulders, expectations of colleagues, clients, investors. Best, Jackie
“… the weight of the world on our shoulders …” Wow! I’m intrigued now… Seriously?
Spot on! BTW, really digging your new blog.
Agree with the concept, but I think “do no harm” is acknowledged more than it’s practiced in medicine. re: “The “first, do no harm” principle should apply to venture capitalists just as much as it applies to doctors.”
Good post, but seriously:
“Starting a company is a lonely thing, and there are usually people in your life who think you’re crazy for doing it. Sometimes an entrepreneur just needs to know you actually believe in them to keep their morale up during the tough times.”
Are you going to change their diapers too?
Mike Arrington – I think your smart, and respect you for lots of things but – if you were my investor I would much rather you tell me how much my product sucks, remind me how odds are against me and we will probably fail, and tell me I am terribly leader – but maybe one day I can be better. Don’t coddle me. Beat me down and motivate me to prove you wrong.
I think you will probably get that enough when you can’t attract users, and the users you do attract don’t want to actually use the product. It’s nice to have guys who have seen or experienced some failures AND some successes to say “you’re smart, we’ve invested in you, keep you’re head up and keep working”.
As reference I’d look at AirBnB. After launching in 2008 they couldn’t gain traction. They sold cereal boxes to keep the lights on. Not until 18 months ago (or so) did they even land on the public’s radar. I’m pretty sure their investors weren’t saying “you’re a terrible leader” or “jeez, it’s been 3 years since you launched, the odds are against you”. These top shelf investors are smart enough to know a good leader when they see one.
I’m just saying, I think it’s good for investors to remind these kids (as they often are) that they’re smart and they invested for a reason. I mean, it’s hard out there for a pimp. Ya Heard?
Greg,
I think when you can’t attract users or users you do attract that don’t want to use the product – something is severely flawed. Do you you want investors saying “your smart and keep your head up” or… Pull your head out of your ass and make a pivot and figure out how to make those users stay?
I know the AirBnB story pretty well. And since you wanted to use that as an example, I’ll play along.
AirBnB had to sell cereal, because their product wasn’t where it needed to be. If I am not mistaken, they started off as a place to stay for conferences due to hotel overload. In the end cereal got them to where they needed to be – Ycombinator, and ideally where they are currently positioned.
But all the more of a sign that AirBnB needed to make a pivot. So do investors need to tell them “you’re smart, we’ve invested in you, keep you’re head up and keep working” or move your ass and find something else that works – because your not a cereal company – your renting rooms in peoples houses. Granted, at the time I don’t believe they had investors – but I think you get my point.
And Greg, hell yea it’s hard out there. But I choose this like everyone else who starts a startup. We are not girl scouts, we are entrepreneurs.
Michael:
some entrepreneurs, sometimes, need hard truth. And then some entrepreneurs, sometimes, need a morale boost.
The wisdom to tell the difference is what sets a great investor appart.
Any other approach, might have you telling an anorexic, sticky thin person to diet, or a fat, very overweight person to feed themselves up.
It’s not just about knowledge, or a rigid set of rules: wisdom and experience make the best teachers (or, in this case, angels).
lauridqeLaureana,
All entrepreneurs need hard truth – not some. As an investor, do I tell you what you want to hear, or rather what you need to hear?
And in reference to “and then some entrepreneurs, sometimes, need a morale boost.” – I strongly disagree. It’s the entrepreneurs or in this case leaders job to keep morale high even when there may not be hope on the near horizon. That’s your job. It’s your job to motivate and boost morale of your employees and company. It’s not a “good investors” job to do that for you. In my opinion, that is the case of a weak leader. If you need an investor to help boost your morale – your in deep shit.
And the reason morale would be low in the first place would be due to you doing something direly incorrect. So an investor needs to tell me good job and keep going, or get your shit together and change?
I know from experience, the second I think my companies shit doesn’t stink, or the second I feel comfortable with my companies or my position is the second innovation stops, and companies stop moving forward but rather moving backwards. I believe a good investor and adviser is more valuable telling me how fucked up we are, rather than the polar opposite.
Perhaps you should read my post on what an entrepreneur is from my blog, because I think you may be confused: http://bit.ly/qR9j8x
– Mike
Mike: this will come as a surprise to you- hang on to your chair:
GIRLS HAVE VAGINAS!
We are all different. Different people need different things at different times.
*Your* idea of what an entrepreneur is/needs, isn’t THE idea. Your experiences are just that: your experiences.
And lower the airs, you are not the only *dude* who has started a company (or two) around here. You are just the douchiest.
Having the insight to tell whether an individual need motivation, morale booster or a huge ass kicking is a skill. Entrepreneurs are human and shit happens. If you automatically fall into berating somebody for something you perceived as weakness, when it wasn’t, you’re burning a bridge. If that’s a road you like to go down as a leader feel free.
I’m fairly certain Arrington would have no problem telling you how shitty your product is. He’d also know how epic your product is despite how shitty you think it is (the point).
Great article!
I’m always interested in what it’s like for entrepreneurs who haven’t raised money or even met with a VC at all to try and take something away from these insightful posts. I’m not even claiming to be otherwise as someone who’s only raised funds outside the Valley but I’ve met all the firms and been reading people like you, Mike, for almost a decade now. The community in the Valley and in other areas that have a strong ecosystem really help you navigate the firms that do the right things and those that don’t.
Word of mouth matters a lot. It’s a little tougher to make sure you’ve got your bearings when you’re outside these hubs and don’t have people in them within your network.
That’s why I think entrepreneurs networks, angellist, and the digging of tech and founder blogs is so important to the investment process for young companies. Do your research.
Great post, Mike. Filled with truth.
And congrats on the new blog, it’s been awesome so far.
One typo: recuite instead of recruit. Great post.
Great post again, really digging the uncrunched vibe
As a founder/CEO one of your biggest concerns is having that control pulled out from under you. If anything, it reinforces the need for entrepreneurs to do their homework before approaching investors.
With Uncrunched Mike has clearly adopted the wikileaks strategy of publishing every confidential email he can get his hands on.
Arrington…
You are the man.
RC admitedly thinks he a pyschic and thats how he invests. He goes by the vibe he gets from talking to that person on the other side of the table. Hes not a counselor or lead educator, if you remember right he doesnt even know how to spell entrepreneur.
Doug Leone: “Instant access to a bunch lousy CEOs funded by a cult of cranky dinosaur VCs so you can field test your uninspired spaghetti code.”
Techcrunch 2011
Interesting stuff. A founder’s support system – not just their VC – should be a safe place to lick wounds and help get built up again – and it becomes even more important if the startup is in a remote location away from an “instant startup community” like in SV. Support systems are like ecosystems – it is hard to work in a bubble as an average person let alone as an entrepreneur.
A significant differentiator with investors is whether or not they have been an Entrepreneur themselves, experience in this domain trumps any MBA from Harvard or LSE.
Smart Money, Dumb Money, Experience Money, Ruthless Money, the Entrepreneur needs to know what they are getting into and treat their funding source as if they were interviewing another co-founder.
Interesting reading – I am not yet at a point where I will use either Vinod’s or Ron’s services, but I am seriously considering incubators like The Founder Institute (http://www.founderinstitute.com). Any first hand information on how effective they are in getting the money and brand/marketing?