Mistakes That VCs Cause Founders To Make

VCs get a bad rap, but I’ve always enjoyed talking with them. They see a lot of stuff, so, they are great sources of market information. It’s true that they sometimes screw up companies, but I don’t think it is in the way most people assume. It’s rarely that they are greedy, forcing you to take more money than you need or selling a company that shouldn’t be sold. I think the mistakes are of a different category – advice that lacks business context. Founders often take this advice too seriously, and often have their own biases that are stupid, just like the VCs, but let’s look at some examples.

Channel Partnerships

Founders, particularly first time founders, often have this same idea that one massive channel partnership will make their business suddenly jump to hypergrowth. I’ve seen it across my investments too. “Company X wants to sell our product, and even though we are a 5 person company, they think it could $20M in revenue next year for them.” I’m sure somewhere, at some point, this has worked, but usually it’s death for the startup. Why? Because the startup runs out of money before Company X ever makes a sale. A deal like this might take 6-9 months to finalize even if Company X really is into it. Investors see this over and over, and every founder thinks their situation is unique and so, as an investor it gets old explaining why this is a bad idea.

That said, there is a flip side to this. Investors often overly favor the last go to market model of their best portfolio exit, which is stupid because GTM really needs to match your market and buyer and product. But I believe investors overindex on direct inside sales. They say things like “own your own destiny” which is entirely true unless your buyers like to buy through an existing channel. I could write an entire post on what to look for to figure this out but suffice it to say VCs often recommend you sell direct and build a brand even when it’s a bad idea.

Luckily, back in my Backupify days, we had a great Board member who gave us good advice on channel sales. In our first year of rolling out a channel program, we signed up 65 channel partners and they were 3% of our revenue. I told the Board at the end of the year we were shutting down the program. He said “wait, has any partner sold anything?” Three partners had. He said “fire the other 62 and focus on those 3 for a year.”

It seemed stupid to me. If 65 partners can only sell 3% of our deals, how will 3 sell anything? But those 3 sold 9% of our deals the next year. We were too distracted with too many partners, and so we learned, with these 3, how to really do a channel deal. Then we started to expand slowly and when we sold the company, the partner channel was 30% of our revenue.

Buyer Personas

Warren Buffett always says “never mistake precision for accuracy.” I think this happens with personas. Investors always want to hear that “we target B2B companies 100 – 500 employees that use MySQL and sell to the head of I.T.” It’s so crisp and clear. And sometimes, you can do that. But often in new markets, you don’t know where the adoption is going to come from, or sometimes the market will support a very horizontal product, or the buyer profile is psychographic instead of a demographic, but investors like to push you to a clear demographic profile.

At Backupify, we had 9000 customers when we sold, and our largest customer paid us $360K per year, and we had hundreds that bought one seat and paid us $30/year. What mattered wasn’t size or industry, it was whether or not you thought backup was important. We sold to “the broccoli eaters” as we called them. There are people who always wear their seatbelts, floss their teeth, file their taxes in March, and eat their broccoli. Those people also love to backup their data. That was our market. Investors often push entrepreneurs to “focus” when it’s too early to actually do so.

Hire The Stud

This is probably the worst mistake investors make – pushing entrepreneurs to hire some marketing or sales or engineering stud who led XYZ product at ABC big company. It’s almost always a bad idea. That person is almost never the right fit, but every first time entrepreneur feels pressure to do it. It’s compounded by the fact that as a first time CEO, you feel constantly incompetent because of everything you don’t know, and these people seem to have a lot of answers, but, they almost never work out. They can’t deal with your stage and size. Investors though, feel a lot better if they are around.

My point in writing this is to give some examples of specific areas VCs influence founders in bad ways. I also want to show that it isn’t that VCs are morons (although some are), but that they are giving reasonable advice that is just often out of context. It might be great advice at a different stage or size.

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