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January 15, 2009

Why Do "Asshole VCs" Survive?

One of our portfolio companies is raising money this year.  It's a great company, run by a great CEO, and it will get funded in a competitive process.  The CEO was briefing our partnership the other day and listed the firms he is talking to.  In another start-up a number of years ago, he had been backed by an unamed firm in Boston, led by an unamed partner, and made them money.  "Why aren't you going back to [insert name] at [insert firm]?" I asked innocently.  "Life's too short," he replies pointedly, "to work with assholes."

At a time when there is likely to be some shakeout in the VC industry, a question that perplexes me is:  Why do asshole VCs continue to survive?

Now don't get me wrong, I don't think the VC business is unique in its profile or behavior.  According to the NVCA, there are 700 or so VC firms and 8,000 industry professionals (including associates, principals, etc).  The vast majority of these folks are decent people.  There are always a few bad apples in every barrell and an industry with type A, competitive people operating with very high stakes is likely to have its fair share.  Talk to any entrepreneur who has gone through an extensive fundraising process and they will eagerly share some their favorite, colorful horror stories.  So why do these VCs continue to succeed?  Why isn't there a stronger, self-correcting feedback loop?

Here's the logic thread:  the best entrepreneurs have choices, particularly those that have been successful before.  They tyipcally seek out the top VCs who are both smart/successful/value-add/relevant AND who are respectful/decent/good to work with (you can see my BCG roots coming through in the imaginary 2x2 matrix).  Even if a VC is charming during the courting process, with minimal effort, reputations can be investigated and references carefully checked as to how they behave when things don't go according to plan.  So why is it that Asshole VCs are able to persist?  Shouldn't the best entrepreneurs avoid working with them and therefore shouldn't they be less successful over time?

One of my VC friends from Silicon Valley suggested one explanation:  "Entrepreneurs get blinded by firm reputations and look past individual reputations.  They don't do their due diligence on partners and check references carefully on the individual board member."

"If I were an entrepreneur given the choice between banging my head against a cinderblock wall for a year or taking money from [unamed partner from unamed firm]," observes one VC friend, "I'd opt for the cinderblock wall."

Ouch.  With fewer financing choices for entrepreneurs likely in 2009, I hope they aren't faced with that sort of painful choice!

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I've wondered this *many* times for many years. Plenty of good VCs I know have wondered the same about their industry.

I think it's a leadership problem (like it almost always is). The leaders in this case are the LPs. No accountability from LPs who it seems have viewed this asset class more as a "lotto ticket" than "science".

With LPs being battered this time in an unprecedented way my hope is that it will finally change. I doubt it though, that would be too much work for them. Sooner they dismiss or lower their allocations in this asset class then do the hard work to separate the individual winners from losers.

Happy to have you on Twitter!

Over the long term, LPs simply follow results. Great entrepreneurs generate great results. So what's really puzzling to me, David, is when great entrepreneurs CHOOSE to work with asshole VCs.

The asshole VCs survive because:

A) A sucker (virgin entrepreneur) is born every day, so the well is bottomless for 1st-time customers, which is all the asshole segment of VCs get. They may talk about "long-term relationships" and "partnering in your success" or something, but they are just when they are reeling you in.

B) They don't care if you come back to them with your next company after they fuck you out of your first company. In fact they don't expect you to from day one. Theirs is not a multi-set game, it's just fuck you once and done.

How can they do this? Because they are pros at it, the way a pro used car salesman can get you to sign for a lemon. They do this every day, you don't.

NOTE: These are only the asshole VCs I'm talking about, the other 1% are great guys! Hehe, just kidding on that percentage ;-)

Assholes don't act like assholes to everyone. I am sure that for every entrepreneur that thinks that some well known VC is an asshole, there are 5-10 who put up with that VC because they haven't been treated badly and have gotten some value out of the relationship.

Also, although I don't want to rain on the "VCs are assholes" parade, I have also found that many times there are two sides to these stories. At least, that's what I say about anyone who has called me an asshole!

2009 should be a year that sorts out the "holes". A-hole VC's are not a sustainable business model. When the financial tide is in like the last few years no one noticed them. Now the tide is going we're going to see who really understands financial risk.

Here's a simple question for an Entrepreneur to ask the VC... how many current investments do you have that are C round and beyond.

What's that saying, beware the C round. Well with M&A values at the $50m level by the time you pass the C round the outstanding and the price per share is really going to have an impact on both the entrepreneur and the VC alike.

Cheers,

Peter

The reason they don't go out of business faster has to do with industry non-transparency. Since everything is relationship driven and false claims are as hard to rebut as are true claims, a code of silence has developed among insiders. It's the reason why you won't post the a-hole VCs name on this blog post (because the guy would respond and then you'd be left defending your comments and yourself). It's much easier to let it go and for it to become someone else's problem. That's, by the way, how Bernie Madoff was able to survive so long....lack of transparency.

The fix?

More transparency. It'll never approach that of public markets in private equity, but certain things like TheFunded will help. And your blog and my blog all help too.

Great post!

As someone that works in this space as an investor, I've asked myself the same question. I wrote something similar about this the other day, specifically on how the personality of many VC's is a major contribution to the model being broken (or the absence of a model altogether). "Why Venture Capital is Really Broken" http://reiboldt.com/?p=464

Don't forget the mindset of the entrepreneur / CEO raising money. (Let me use the pronoun "I" to illustrate.)

------
Here I am, with a company I think is a huge opportunity. I've put my life in it, and so has my team (read "friends.") Future riches are out there if I can only get some cash to build the company. I've talked to a bunch of VCs, and nobody is "just saying yes."

But there's this one VC that is saying he wants to do the deal. I've heard that he can be a bit of a schmuck, but he's been perfectly nice to me. And if I do this right, we should be able to make money together, and making money smooths over lots of possible "bad stuff."

Plus, I probably either need to grow the company or shut it down; going on without real resources is a waste of time. But I've got these other people depending on my ability to raise money to keep their income going, and to create a future dream for them. So I have this responsibility to them to find financing; it's not just about me.

So here's this VC who has money whom some people don't seem to care for. This "don't like" thing seems to be rife within the VC industry; but companies still get built. It must be something I just don't understand.

So, the choice is (a) take money from him, or (b) my dream doesn't get off the ground, and the company fades into the sunset.

(a) is better than (b). I'll work with this so-called schmuck, and do my best to prevent problems.
---------

I could name other factors, too, but I'd bet this is a substantial one.

Unless you hang an "asshole free zone" sign on your door, you will never have an asshole free environment. I think that there are probably as many asshole VC's out there as there are asshole's running start ups today. They have much in common which is what attracts them to one another. But most notable of all is their ability to buy and sell on smoke and mirrors and convince each other that a college degree or higher from an elite school is a free pass to get funded for their "big idea". When so many other great ideas and innovations get passed over just because they didn't have the required credentials to be taken seriously. And so the vicious cycle continues..asshole meets asshole and the economy is in shambles today. Need I say more???

Thanks for your shared thinking, sometimes great entrepreneurs did not have chance to work with great VCs, so to move thing forward, they had to work with "Asshole VCs"

Jeff, you say: "So what's really puzzling to me ... is when great entrepreneurs CHOOSE to work with asshole VCs."

There's more than one flavor of GREAT. Many entrepreneurs are GREAT at inspiring a team, at envisioning new products/biz-models, at inventing and delivering the product.

But the skill of qualifying your partner, and the experience or instinct to realize that this single VC can spoil your ENTIRE board and your ENTIRE venture, well, that skill falls under strategic-partnering greatness.

It's a different intelligence (nod to Dr Gardner), and I've seen people consistently blow that, who consistently deliver great results.

Heartbreaking, really.

PS: See also the "Unified Theory of VC Suckage." http://www.paulgraham.com/venturecapital.html

Here's what I learned when pitching to VCs- 1) If they do not have sufficient knowledge in your space re-route the question as nicely as possible otherwise, it demeans your time and expertise.

If they do have sufficient knowledge in your space and still act like assholes, run in the other direction

You know you’re an asshole VC when:
1. You brag about your “position atop the pyramid” above “sucker CEOs who make $200K per year, work 18 hour days, and have all of their risk concentrated” and “mindless limiteds who oversee widows' and orphans' money.” (These are actual quotes from local VC partners.)
2. You obsess over your car collection and your golf game…and know next to nothing about your portfolio company or its industry.
3. You spend the first 15 minutes of every board meeting name dropping.
4. You talk endlessly about "your" company that went public…in 1991…when you were one of 10 VPs there.
5. Your “value add” is your ability to read a Morgan Stanley report a day before your portfolio CEOs.
6. None of your portfolio CEOs will give you an unqualified endorsement.

Local CEO - are you talking about Dan Nova?!

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