Who should not be a VC
I remember sitting in on a meeting with an angel investor who decided to pass on the deal and asking why. Investor: “She wasn’t likable enough.” Me: “Oh yea, what did she do?” Investor: “You heard the way she was talking to me.” Me: “Yea… she was quite direct I guess. But was there something that didn’t match with the dd you reviewed up until this point?” Investor: “I just didn’t like her attitude. She was arrogant.”
This entrepreneur was not arrogant. She was brief, direct, and confident about the future prospects of her company. The company ended up doing quite well.
I’ve seen many angel investors who invested only if the entrepreneurs were properly “respectful” (read: obsequious) to them and pass because an entrepreneur wasn’t likable enough. Note: not that they weren’t ethical enough, not that they weren’t good enough. Not that they weren’t likable enough to do customer acquisition well. Just likable.
I remember a conversation with a guy trying to raise a first time fund where he said “I can’t wait until these guys [other venture capital firms] are sucking up to us for deals.”
Ego is the absolute worst reason to invest in startups and ego-driven investors’ returns will be shit.
To start, they will be shut out of good deals. There’s no such power position where a VC or anyone doesn’t need others. Waiters have customers. Consultants have clients. CEOs have shareholders. Investors have LPs. Politicians have constituents. Everything is interdependent. If an investor’s intent is to dominate “lowly entrepreneurs” and be at the perceived top of a hierarchy where “the other guys are sucking up to us,” boy are they in for a giant surprise. The best entrepreneurs can be discerning about who their investors are, and smart others in the ecosystem won’t send deals.
And how will an ego-driven investor even know what a good deal is? Are people who respond to ass-kissing (ego) going to be able to have good pattern recognition? Of course not. Ego causes blind spots. A founder’s job is to grow a great company, not to make you feel dominant. For the lesser quality deals that ego-driven investors do end up doing, they’ll be a drag on entrepreneur’s time, needing to be babied, and thereby hurting their own returns and reputation.
Good early-stage investors know they are a capital source and service provider. They take an entrepreneur-centric approach — as a patient mentor, a service provider, a connector, a provider of capital — they are self-aware enough to know when to get in the trenches and when to back off; to know their own strengths and weaknesses. Their intent is to optimize for company success, and they are reflective enough to stay to that true north even if invited to do otherwise. They have strong world views and a sense of integrity that are the foundations for their investment thesis. It is a privilege to be able to influence the future alongside entrepreneurs and to bear witness to a successful entrepreneurial journey that you get to play a part in.
What if I’m an entrepreneur and don’t have a choice? I temper this with advice for entrepreneurs who feel cornered. It happens, and “just walk away!” isn’t useful if you’re not flush with cash options, I get it: If you find yourself needing an egotistical investor — 1. Step back — do you really need money from this investor or is it your state of mind and positioning you need to work on? Is it fear talking for you? Are you thinking long-term? Have you been aggressive enough to not limit your own options? 2. If you absolutely must (really do step 1 before going to step 2), balance communicating in a way they receive well with the effort needed to position yourself in a way that plays into their beliefs on power dynamics; that makes you deserving of respect. This is going to be a big time suck. 3. Do not leave anything to handshake agreements or leave anything vague. Cover your ass legally. Keep written records. Be very clear in particular around warrants, board participation, and information rights. When you find your dependence on this person reduced, if they feel slighted, you will be glad you did.
LPs: keep the ego question central when evaluating GPs as part of your fiduciary responsibility even if it’s not part of your standard dd. Observe the GPs when they don’t know you’re looking and do reference checks.