There is a new “VC Burn Book” going around where founders blast VCs who they feel treated them poorly. This is the kind of thing that crops up from time to time, and I understand why. My single worst experience as an entrepreneur was when a west coast VC, less than 10 minutes into my presentation, stood up and said “Rob, not only do I not like your idea, I don’t like your personality” and walked out of the room. It was pretty painful but, I’m also a pretty difficult person to offend so it didn’t particularly bother me. People have bad days. People have opinions that I disagree with. But I don’t think I’d recommend he behave that way to everyone. VC behavior can be pretty bad sometimes so I understand why these sites exist.
On the flip side though, having pitched over 60+ VCs across 2 companies and 11 years as a startup CEO, and now being on the other side, I find that founders sometimes have unreasonable expectations about how VCs should treat them. Respect and directness are deserved, I think, and I don’t like VCs who don’t offer that, but, some founders believe that every VC should worship the ground they walk on, even when they haven’t yet proven themselves, or they expect VCs should help in all kinds of ways that we really shouldn’t. This is a small minority of founders, but, I think some of them are the ones driving these lists.
It brings me to a bigger issue though, which is – can a VC really help, should a VC really help, and if so, how much?
When I got into the investor side, I was repeatedly told that former operators like me often invest in companies that have problems we know how to fix, but that isn’t how you make money. And I believe that. I can’t invest and then run the company, or hand hold the CEO at every step. CEO is a job where you constantly feel like you are in over your head. You have to be able to figure things out, learn from various sources, etc. VCs need to be careful about carrying a company too much because the company has to earn it’s own battle scars. It’s like being an over-protective parent. It seems smart when your kid is young but then when they get older and don’t know how to operate in the world as an adult, you’ve failed.
On the flip side, some VCs do basically invest and go away. They can’t, or won’t, be that helpful to their companies. And some founders believe VCs can’t be helpful. What I want to share today is some ways my own investors were helpful at times (and one example of when they weren’t) to show what I think are appropriate areas VCs can help.
Focus and Markets
The first story comes from the early days of Backupify. We were doing $300K in ARR, and we had 3 products: a Google Apps backup product, a business social media archiving product, and a consumer social media / email backup product. After we closed our Series A, it became clear we couldn’t support all three products from the development side, and it was also fragmenting our marketing efforts. We had to choose one. After two days of meetings with the leadership team, as a first time CEO I was agonizing over what to do.
One of my investors asked me a question. “Rob, why are you so worried about this? You have paying customers in all three markets, just pick one.” I told him “I want to make sure I pick the biggest market.” His response was “how much revenue are you doing?” I told him $300K ARR. “Rob,” he said “every market is big compared to where you are.” It was a great point. We knew we were struggling in all three markets. Better to be successful in any of them, even if we chose wrong, than lose all three.
Channel Programs and Focus
The second story is also about focus (sensing a theme?). We hired a MBA summer student to launch a channel program when we were about $1.5M ARR. After one year, in which we grew to almost $4M ARR, we had signed 65 channel partners, and they were 3% of our revenue. So I told the Board it wasn’t worth it and we were shutting down the program. One of my VCs says “wait, your 3%, how many partners was it?” It was 4 partners, so he says “Ok, fire the other 61 and put one full time employee on those 4 partners.” I pushed back. It seemed like a waste of money. If 65 partners couldn’t sell more than 3%, how could 4 sell enough to justify a FTE? But he talked me into it, and one year later, those 4 partners did 9% of our new revenue. Now this was interesting. We had focused first on how to make a partner successful, and now that we understood that, we slowly added new partners. We never got back to 65, but when we sold the company, channel partners were just over 30% of our total ARR.
When Investors Are Wrong
The core product we sold at Backupify was hard to keep up with. It was engineering heavy, and expensive to develop. At one point I gave the Board a presentation about how we were going to develop a second product – a Salesforce backup. The unanimous Board feedback was “um, your first product seems hard enough, and you guys are doing good but not great at it, we don’t think you are ready to launch a second product.” I took their feedback and chewed on it a few days, then had a Board call to thank them for their feedback and explain that I was going to do the second product anyway, and I realized they were unhappy and that I was putting my job on the line as a result. It worked out in our favor. As the best funded company in the space, we put pressure on competitors to channel their development resources into a new product too, because they were losing business to us since we could offer more SaaS data protection.
In general, this is how I think investors should behave towards CEOs:
- Provide frameworks for how to think through things, and advice on how to handle complicated situations or situations that are new to the CEO. But focus on advice, not answers or dictates.
- Support CEOs when they make mistakes or go against Board wishes, but, hold them accountable for their performance.
- Do not get in the weeds of the company and try to fix detailed problems unless you have specific expertise, and that expertise is actually wanted by the CEO.
- I don’t believe VCs, or VC firms more broadly, should be overly supportive with tons of operational help. It risks making a company weaker than it should be. As an example, helping to source or hire a few key people from network is helpful, and allows you to work with the company on hiring. Providing a free recruiting resource the company can use for years to source all roles means the company never builds that very important capability on their own.
The other thing I would add is, there are times when VCs can be really really helpful. For example, as an entrepreneur you probably have not sold a company before, or maybe if you have it was one or two max. VCs are part of this process regularly, and can help navigate it with much more expertise and experience than you have as a founder.
Overall, I think VCs can add a lot of value at key points in the business, but it isn’t always in the ways some founders want. Occasionally the bad reviews on these VC review sites come from these unreasonable founder expectations of what VCs should be doing, which is what prompted this post. And or course sometimes VCs try to force things that they think are valuable on a company that really detract from the company’s goals and focus. It’s always a balance. That’s why I believe founders should prioritize alignment and culture fit with a VC over anything else. You want to work with people who want to build a company the way you do.