Frederick J. Beste III
Delivered at the J.H. Cohn LLP Fall Forum Lawrenceville, New Jersey November 13, 1996
Visitors to our office are greeted by "Vamoose," a 2-foot high wooden sculpture of a vulture perched on a 4-foot high road sign in our reception area which says "Welcome to NEPA" (the name of our first two funds). As they walk through our space, they can't fail to notice that our decorating theme is "birds of prey."
There is, of course, a widespread impression in the entrepreneurial world that by some incredible coincidence of nature, all 3,000 venture capitalists in the industry are arrogant, know-it-all, heavy-handed, control-oriented jerks. Over the past 20 years, in the eyes of entrepreneurs venture capitalists have replaced attorneys on the gutter rung of the ladder of humanity.
The opinion is so pervasively held that several years ago we threw up our hands in frustration and decided that the best defense was a good offense. Hence, Vamoose; hence, our wonderful office collection of hawks, falcons, owls and eagles.
There are three very good reasons why venture capitalists have this image problem, as follows:
1. In no small part, it's true!
Venture capital is exciting; it's high profile; it can be very remunerative. From a career standpoint, it's also hard to get into, because it's money-intensive, not people-intensive. Many of its players are bright, top B-school, high-powered "type A's." Accordingly, there is a disproportionately high industry representation of arrogant, know-it-all, heavy-handed, control-oriented jerks. More than once I have heard one of my industry peers admonish audiences of entrepreneurs, "Don't forget the golden rule - He who has the gold makes the rules." As I tell entrepreneurs, "If you sell a piece (let alone control) of your company to a jerk, then you're the dummy!"
In no way am I suggesting that most fund managers are jerks, or even that most large fund managers are jerks. Why, some of my personal industry heroes manage large funds! "Disproportionately high" means just what it says. In short, seller beware!
2. The investment turndown rate in this business is annihilating.
Our little shop sees about 1,200 investment opportunities (charitably defined) per year. We invest in four to six of those. The resulting entrepreneurial disappointment (sometimes resentment) is, accordingly, massive; nay, near universal. Couple this with the heartfelt conviction of practically all entrepreneurs that their extraordinary, often industry record projected performance is, to use their word, "conservative" (put them on a lie detector and the needle wouldn't even quiver), and you don't make many friends. Even though the sad truth is that the majority of investment opportunities one sees in this business feature teams which are literally kidding themselves (supreme confidence is truly the cheapest commodity in the entrepreneurial world), the end result is that venture capitalists often come off as incompetent and high-handed to teams they disappoint.
3. The small business press isn't stupid. If entrepreneurs hate venture capitalists, they feed the fire with gasoline!
What do you suppose the ratio of entrepreneur to venture capitalist subscribers to "Inc." magazine is? A thousand to one? Ten thousand to one? Whatever, you're not going to reap kudos at "Inc." for writing heart-warming stories about great outside (venture capital) partners. Include a venture capital bad guy story or comment, though, and millions of cheers go out across the nation, after which, the subscription renewals roll in.
Obviously, it is my experience that there are great venture capital partners out there, certainly including us. You shouldn't take my or any other prospective investor's word for it, though. What you should do, in my opinion, are the following three things:
1. Check out their reputation. The leading emerging growth company attorneys, accountants, bankers and the like know the local venture capital players cold. They will be glad to steer you toward the good guys and away from the bad.
2. Listen to your heart. Stated in its most elemental way, we reach positive investment decisions when we get "comfortable". Foremost among the comfortabilities we seek is comfortability with the team. You should feel the same way about an investor, and usually right from the start. You are about to embark on a long journey together. It will almost certainly feature some rough road; and you will almost certainly maximize your chances of surviving it if your investment partner has the character, experience and inclination to help you through it.
3. Talk to your peers. This is by far the most important step of the three. Ask for a comprehensive list of your prospective investor's portfolio company CEO's (if they won't give it to you, you've learned all that you need to know). Call most if not all of them, and ask them the following questions:
* Have they been of any assistance to you beyond their money? How?
* How have they reacted when setbacks and disappointments came?
* If you had it to do over again and had some choices, would you bring them on board?
Given the challenges and exigencies of turning dreams, blood, sweat, tears and money into market leaders, you should not be surprised to hear a story or two which gives you pause. Companies do fail; CEO's do underperform for extended periods of time and over the course of multiple rounds of funding, ultimately straining relationships with any investor. But you should be hearing a vast preponderance of comforting stories - stories of support, contribution, patience, understanding, mutual sacrifice, even friendship. If you do, you can be assured that your prospective outside partner is not a vulture capitalist.