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March 10, 2008

Let's Play "Blame The VC"

I attended a breakfast run by Tony Perkins and AlwaysOn last week in preparation for their upcoming, inaugural event in Boston "AlwaysOn - East".  I've attended the NYC event a few times and although they are a bit too buzzword compliant, they tend to attract a high-quality audience in the consumer new media start-up market.  Tony and team are now trying to bring the model to Boston (April 8 and 9) and broaden its market segments to appeal to players in enterprise IT, life sciences and cleantech markets as well.

Anyway, the breakfast was a group of 75 or so entrepreneurs, VCs and service providers gathered to give the AlwaysOn team some perspective on the Boston start-up community.  What really struck me was the nature of the dialog in the room.  It was almost as if the local entrepreneurs, bemoaning their lack of success in securing funding, rationalized that it must be due to the inadequacy of the Boston VC community.  In effect, they wanted to play the ever-popular game of "blame the VC".

Here's how the game is played for those of you not familiar with it.  First, assume you are a combination of Steve Jobs, Bill Gates and Larry Page rolled into one that your start-up idea will be worth somewhere north of $100 billion.

Next, approach a number of VCs to pitch the deal.  One favorite approach is the cold email (ask your VC friends how many "transom" or cold emails result in funded businesses and you'll probably hear that the typically long odds of 500 to 1 go to 50,000 to 1).

Then, when you don't get funding, play "blame the VC".  Tell all your friends that those risk-averse idiots wouldn't know a good deal if it hit them in the face.  And especially the ones in [insert your geography here].

By the way, this game is played by all entrepreneurs all over the world - new and old.  One of our portfolio CEOs, a successful serial entrepreneur, pitched 40 VC firms before securing his follow-on round.  It turns out, 39 of those VC firms were total idiots.  Only one had the keen insight to see the value in his company and fund it.  Another of our portfolio CEOs just recently complained to me:  "Silicon Valley VCs all fall into such groupthink.  I have no interest in working with them".  Funny enough, those comments precisely echoed the comments from the Boston entrepreneurs in the room at the AlwaysOn breakfast!

Now obviously I'm being a little cheeky here.  Passionate entrepreneurs should indeed ignore all the "nattering nabobs of negativism" (to quote Nixon's former VP Spiro Agnew in a line penned by William Safire!).  But let's tone down the blame game a bit, shall we?  If you don't get funded, there is probably some underlying, logical reason why beyond the fall back "blame the VC" game.  It's probably worth thinking deeply about what you can do to improve the idea, or modify your pitch, rather than whine about the unfairness of it all.  To quote Benjamin Franklin:  "Any fool can criticize, condemn and complain.  And most fools do." 

Now I do admit, that is an aphorism that cuts both ways!

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Spot-on! I would add that there's always fun to be had in hearing second-hand my reasons for rejecting an entrepreneur's pitch- it's rarely anywhere near the reasons I related. I think some people are inclined to stop hearing what you are saying once they realise the answer is "no".

Perhaps, but there is a huge difference between East Coast and West Coast VCs. When I started my first company, I tried to raise money on the East Coast and found that most of the VCs didn't really understand the Net, we afraid of working with two kids recently out of school even though they love the idea, and wanted crazy terms.

Thankfully, I had great advisors who convinced our team to move out West. We worked with good SV VCs and had a very good (but not Google-esque) exit for them.

Now, maybe it was the particular firms I met with on each side (about half a dozen of each), but there was a clear cultural difference between the 'consultant/i-banker like' VCs in Boston and the 'entrepreneur-like' VCs in Palo Alto. I get asked to advise kids from my alma mater from time-to-time and, in my limited sample, the ones who have moved out west have had a much better success rate.

A lot of folks in the New England area share this fear that there is a lack of visionaries with startup capital. I got a call from a Boston Globe reporter after graduating from business school on exactly this subject:
http://www.boston.com/jobs/news/articles/2008/02/17/youth_movement/

I had a completely different startup back in Boston and had no success raising funds (I wouldn't have invested in my company either). It just so happens that before I left for California, I had the "epiphany" and created an incredible business concept that is getting funded here. So, I can't say anything bad about Boston's investment community, except that some of those investors try to charge entrepreneurs for meeting with them, a disgusting practice that I've never seen here.

If you meet anymore folks who bash the east coast VC community, tell them to contact Highland Capital Partners. Thats a great bunch of folks from what I could see, and they offer entrepreneurs a lot of opportunities.

I think I have a slghtly unique perspective in that I've sat on both sides of the VC - entrepreneur table.. What I think may be more the root cause of the debate is the lack of direct and honest (no matter how direct and honest) feedback. An entrepreneur needs to hear (and listen to) "why not" in plainspoken words. The VC needs to take a few minutes to give it. Without that dialog, the room for "the blame game" seeps in. Ultimately, both parties need each other to be successful.

As the guy who 'stirred the pot' @ the breakfast, I thought I'd weigh in...

The east coast/west coast 'issue' really is a unique Boston phenomenon. Trust me, there aren't any VC's sitting around on Sand Hill Road wondering why those darned east coasters are winning deals...

It's pervasive across the tech community in the northeast, and especially apparent when it comes to the VC/Innovator relationship. It's never as bad as either side make it out to be, I've been on both sides of the table, and also had the luxury of living/working in both the West and East... but the inferiority complex is something that does get in the way and is an easy out for both the VC & innovator when it comes to explaining why deals did or didn't happen.

There was one comment that Boston lacked a certain type of entrepreneur, or there isn't the talent pool that exists elsewhere, and while in some cases that's true, it's a tough excuse for why more deals don't get done in the Northeast.

The bigger issue that I was raising is that the VC/Entrepreneur relationship is changing (and has changed) based on a lot of variables, some are changes in investment needs (lower capital requirements), some are based on business needs (innovators are looking more for distribution than for $$) and based on relationship needs(some of the 'old' VC firms really don't bring to the table the right relations that matter now). The uber point is that I predict we'll see more changes in venture firms in the next 18 months than we did in the past 18 years... if you look at what Accel, Bessemer, KP and others are doing in putting specific % of funds to work on one platform, it's a really interesting example of the shifting sands of how risk is going to be mitigated in this new platform world.

The Boston VC's may or may not be laggards to change, it's too early to tell, but the writing is on the wall that many of them (no matter geographic location) will have to start pitching their services differently, returning calls more often, and working more for innovator's business than ever before.

I will say that the prominent firms who were in that room have been open to and are leading change, but many in the Boston area will not, and instead look to get more into green/LS/cleantech as their new focus, because in the tech space (and to quote Bob Dylan) the times they are a changin'...

Not getting one's plan funded is a very painful experience, and some entrepreneurs resort to the blame game to mitigate that pain. We live in a capitalist economic structure, and the guys with the money decide when and how to invest it. That doesn't make them right all of the time, but it is wrong to impose a value judgment on people just because they don't share your confidence in a particular company, market, strategy, or team (or a combination thereof.) When working with VC's one has to play by the VC rule book, which includes the right for the investor to decide when and if to invest. As frustrating as it is, this is the system we live by. Other funding sources have their own merits and drawbacks, of course, but it is never appropriate to blame someone else for a lack of funding success.

Having pitched a couple of dozen firms in the last few years I can definitely understand how easy it is to just blame the VC for not getting funding.

Entrepreneurs need to approach raising money the same way the approach sales - find the right customer who needs what you have, network in and figure out how to explain to them in a way that gets them excited.

Often it is just a matter of timing and a lot of persistence. You need a thick skin and the ability to get back up off the mat and find your next opportunity when you get turned down.

That being said, there are definitely regional biases but once you understand them you can tailor your pitch to match.

Blogs are so informative where we get lots of information on any topic. Nice job keep it up!!

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