“Crappy VC Behavior”
The First of Two Posts on Problematic Investor Practices
Several readers reached out to me regarding my previous post on “The Wisdom of Serial Entrepreneurs,” where I touched upon "crappy VC behavior." One notable perspective from these conversations suggested that founders bear responsibility for selecting "crappy" venture capital (VC) partners.
The Importance of Choosing the Right VC
Collaborating with the right VCs is crucial for startup success. Partnering with top-tier venture capital firms can lead to exceptional outcomes once they commit funding. Ultimately, VCs aim to generate returns for their limited partners through various strategies and work alongside founders and startups to achieve successful exits. Choosing the appropriate VC partner or syndicate can significantly influence a startup’s trajectory.
Finding the Right VC
Selecting the right VC is essential, yet many entrepreneurs—both first-time and seasoned founders—struggle to identify the best partners. The most successful VCs typically possess key these attributes:
Proven Track Record: A strong history of successful investments.
Domain Expertise and Strategic Guidance: Deep knowledge and strategic insight relevant to your industry solution (e.g., manufacturing, military, AI, etc.).
Robust Networks: Extensive connections for business development, service providers, and talent acquisition.
Genuine Commitment: Support for founders, CEOs, and executive teams beyond financial backing.
Alignment of Vision and Values: Shared vision and values with the founders, CEO and startup, fostering a productive partnership.
By carefully evaluating these criteria, entrepreneurs can enhance their chances of long-term success.
Characteristics of Exceptional VCs
Exceptional VCs communicate clearly and transparently, possess deep industry knowledge and financial expertise, leverage extensive networks, and show a genuine passion for startups—all while upholding the highest integrity. In my experience, VCs embodying these qualities include true early-stage investment professionals with names like John, Greg, Vivek, Mike, Rob, Eric, Bob, and others.
Proactive Steps to Avoid Problematic VCs
Founders can avoid problematic VCs by building a Board with long-term growth in mind, conducting thorough due diligence on all investors, securing top-notch legal counsel, and ensuring alignment with VCs' values. Leveraging a strong network of advisors is also crucial. However, even with these efforts, the complexities of the technology industry and investor dynamics require founders to skillfully manage investor expectations and demands, differing priorities, and relationships to successfully drive the business forward. Also true: Sales (ARR) cures all.
Understanding "Crappy VC Behavior"
"Crappy VC behavior" refers to negative or unprofessional actions and practices exhibited by some VCs that can adversely affect startups and entrepreneurs. While not all VCs engage in such behavior, recognizing these practices helps founders navigate the fundraising landscape more effectively.
Common Examples of "Crappy VC Behavior"
Examples of "crappy VC behavior" include:
Lack of Transparency: Failing to communicate reasons for investment decisions, eroding trust.
Overly Aggressive Terms: Demanding excessive equity, restrictive clauses, and limiting founders' control.
Overpromising and Underdelivering: Offering funding or favorable terms that don't materialize.
Unethical Behavior: Coercing founders into unfavorable decisions, providing false or withheld information.
Micromanagement: Interfering in operations and imposing excessive control.
Poor Communications: Delayed responses, inconsistent feedback, and unproductive communication styles.
Misaligned Incentives: Prioritizing short-term gains or investing in rival companies.
Lack of Support: Neglecting the startup after the initial investment.
Reputation Damage: Publicly criticizing founders or spreading unfavorable opinions.
Some advice for the first time founders who encounter this behavior: Stay calm, confident, and patient amidst this kind of negativism and adversity, while maintaining humility and integrity.
Takeaways
Entrepreneurs should seek advice from advisors, investors, and other founders on raising capital efficiently while maintaining flexibility. Building relationships with future investors takes time and should start early, with clear alignment on goals to avoid issues later. CEOs must collaborate with VCs to keep initiatives on track, managing the board meeting agenda or enlisting a board member for help.
Impact on Startups
VCs who engage in these behaviors can harm startups by:
Demoralizing Founders and Teams: Poor communication and lack of support drain motivation.
Financial Strain: Unfavorable terms stifle growth and drain resources.
Operational Hindrances: Micromanagement impedes the team’s ability to execute their vision.
Strategic Misalignment: Prioritizing short-term gains undermines long-term success.
These behaviors create a challenging environment that hinders a startup’s ability to thrive.
Conclusion
Founders must remain vigilant against poor VC behavior, expecting integrity, expertise, and support while proactively building positive investor relationships to ensure their startup’s success.