Partner with a venture capital firm with care

Selecting a healthy VC firm is a critical step in raising venture capital.

Venture capital (VC) firms aren’t simple corporations. Within a single firm’s structure there are competing goals and priorities that can tear the firm apart. The fractures that can end a VC firm may not complete the work for years because of the lengthy time each fund’s investment time lasts. Feld and Mendelson estimate it takes ten years for a firm to die (pg. ).

One area of contention is the benefits to general partners vs. the venture capitalists (VCs) that manage the firm’s funds. A partner gains a portion of every VCs investment, which motivates them to keep their VCs making investments. That’s not so bad, except that a partner doesn’t have motivation to diversify their VCs or even to investigate the performance of individual VCs so long as money is coming in. This can result in one or two VCs making the majority of the deals while the others garner the partner’s approval in other ways. Ellen Pao’s story at a venture capital firm was an excellent example of this.

Pao was an outsider on two counts - she was Asian, and she was a woman. Her work ethic was impeccable and her investments sound, yet she was regularly cut out of important investment opportunities because she wasn’t invited to “special” events hosted by the partners, usually men dominated and women depricating events like strip club parties. When Pao repeatedly turned down the advances of a well-loved VC, she found even close partners who she considered mentors were questioning her work and trying to get her to leave the firm quietly. She was flabbergasted that the firm would approve of the questionable actions of the offending VC, who had a miserable track record of investments, and attempt to push a highly qualified and successful VC out.

Entrepreneurs can approach VC firms with intimidation. The entrepreneur may think, “This firm funded [name of popular tech giant], and here I am with my crazy idea asking them for money. I want their approval so much, because maybe I could be that successful.” Yet this firm might be as disfunctional as Pao’s firm was and the firm ready to implode. The VC may be a zombie - having no authority to invest because they currently have no active fund - and is simply enjoying the wine-and-dine experience. en route to the VC’s next investment. If the entrepreneur is blinded by the visible success of a VC firm such that she cannot watch for signs of trouble, she is in grave danger of taking on an investor that cripples her future with poor judgment, cross-motives, and undue power over her business.

Yes, a disfunctional VC firm is a liability to any entrepreneur who blindly partners with them, but the reverse also is true. A VC firm that is transparent with its investments, humble about its ability to discern the next successful startup, and fair with its terms could be a godsend. An entrepreneur who gains a quality VC partner as their leading investor has both the value of that individual’s wisdom and the influence of their leadership when asking for additional capital from other VC firms. Start off with a corrupt VC and the rest is downhill; begin with a wise VC and the sky is the limit.

The story of Ellen Pao gives me hope. Of course, the VC firm she worked for was astoundingly sexist and disfunctional, but Pao shines in the darkness as an example of a VC who takes care of her entrepreneurs. They may be a challenge to find, but investors with wisdom and love are in the world, men and women whose investment launches self-sustaining businesses by entrepreneurs who thank God that their investors are on their board of directors. If venture capital is the best option for a startup, I would advise anyone to be critical of the VC firm and, instead of shopping for a VC who will agree to invest, to shop for a VC you’d want as a partner. Because that’s what you’re going to get.

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