Memo to VCs: Being "entrepreneur friendly" isn't just something you say
It’s been a particularly thoughtful week in VC-land with a trio of high-profile investors touching on subjects in and around investor ethics.
The first example of this newer, softer VC perspective was Spark Capital partner Bijan Sabet who addressed some of the more predatory practices in the venture industry during a PandoMonthly fireside chat last week. Sabet took particular exception with the practice of VCs passing through their firm’s legal bills to their cash-strapped startups and forcing founders and their employees to sign non-competes. Spark ceased both practices many years ago, moves that have made the firm and its partners unpopular among many of their industry peers. Sadly, there's plenty of talk about founder-friendliness in the VC ecosystem, but decidedly less action to back it up – though to be clear, not all are bad.
Sabet crystallized the impact of this type of founder unfriendly behavior through a story about a random passerby he overheard comparing the act of raising from VCs to selling your soul to the devil. His reaction:
I was like, oh fuck. I just felt like, I haven’t been a VC my whole life, but it started getting a little numb that I forgot that we still have a lot of work to do as a community and as an industry. It felt like if we’re still at that point – which we obviously are – it really hit me between the eyes. We can do better.Days later, Foundry Group partner Brad Feld penned a blog post entitled, “Dear VCs: What Happens When Your Words And Your Actions Don’t Match.” Feld warns investors against constructing public personas that are “entrepreneur friendly” and “very accessible,” but then behaving privately in exactly the opposite manner. Worse yet, he uses the example of a current founder who previously did a favor for an unnamed VC while working as an executive at a large company, but is now struggling to get a simple yes or no response.
It backs up a disconnect we asked Sabet about on stage: How everyone can talk about being "entrepreneur friendly" and yet the view that raising capital is tantamount to a deal with the devil. Feld writes:
Sadly, many very successful people simply don’t understand or appreciate [the importance of authenticity between their words and actions]. They put huge amounts of energy into developing a public persona. It could be PR, it could be speeches, or writing, or systematic campaigns over a period of time about themselves and their businesses.
But then their words and their actions don’t match up. Over and over again. It can be subtle or overt. It can be mild or jarring. It doesn’t matter – if they haven’t internalized the idea of their words and actions matching up, there is a long negative reputational effect. Earlier today, perhaps my favorite of the three messages came via a blog post by Bloomberg Beta partner Roy Bahat. Under the unassuming title of “The trust thing,” Bahat delves into the investor-founder relationship which he describes as, “by nature, out-of-balance,” with the potential for one party to do extremely well financially while the other does not, and with a common asymmetry of information between the two groups. Bahat writes:
The ingredient in the startup stew that balances the potential bitterness of these differences: trust. When founders believe their investors will do right by them, even when it may be against their narrow, short-term self interest, and investors believe the same about founders, it’s magic.Bloomberg Beta’s answer to creating this trust-fueled magic, according to Bahat, is radical transparency. He compares the relationship building process to an egg-toss of ever increasing distance, where each demonstration of trust represents a successful toss. Showing that these are more than just empty words, the firm published its full operating manual to Github. The partners also “avoid exploding offers” and “narrate [their] level of interest honestly, whenever asked,” he adds.
Bahat concedes that such openness might make Bloomberg Beta more prone to being taken advantage of than other firms, something he says has indeed happened on a few occasions. “Our lesson from those moments is to avoid the temptation to lock down and tighten up—our lesson is the opposite, give founders more chances to develop trust in us, and for us to develop trust in them,” he writes.
As I wrote last week following the Sabet event:
Venture capital is a service business, and a highly competitive one at that. With success driven so disproportionately by a few winners... [and] with billions of dollars at stake... there’s a lot of pressure on these investors to succeed... That pressure can often exist at odds with acting as good member of the ecosystem.VCs will always be obligated to act in the best (financial) interests of their limited partner investors. The difficult question to answer is when is the short-term benefit of screwing a founder on a few extra points of equity, nickel-and-diming them on fees, or saving a few minutes by ignoring an inbound email turns out to be an incredibly costly decision in the long run.
Sabet, Feld, and Bahat have shown that there are some investors in the industry that are willing to act differently and hold themselves accountable to a higher standard, even in the face of these very real financial pressures. They’re not alone in this perspective, but they deserve credit for doing so publicly and for following up with their actions, not just hollow words.
Update: Shortly after publishing, Bloomberg Beta's Roy Bahat responded via Twitter to elaborate on his approach to founder-relationships:
@mcarney @bfeld @bijan Thanks for the piece, well put! One note, at least for me: we try to be more founder-*like* than founder-friendly...
— Roy Bahat (@roybahat) July 15, 2014