The Curse of Being First
Most startups need to be first in their category, particularly in uber-competitive segments where customer acquisition becomes a barrier to entry. So it stands to reason that VCs would want to be the first in line to engage with a promising new startup. This is not always the case. In fact, the pole position often means we are the first to give a founder/CEO a piece of critical feedback about their company that they’re not ready or interested in receiving – becoming the equivalent of telling them their baby is ugly. And the result is we get shown the exit; not necessarily for being honest or for being wrong (which we might just be), but sometimes for being the first to declare the observation out loud.
Over the years I have seen this happen several times, usually due to one of the following critical conversations:
- Valuation – we present what we think is a fair value and the entrepreneur thinks otherwise. This is the fastest route to the door.
- CEO – we think a more experienced exec would be better to run the operations, particularly if the CEO lacks some key skills needed to drive the operations of the company.
- Capital Raise – often times we have a much different opinion of how much money a company should raise in its round; often it’s related to valuation (company wants to raise less than we feel, to sell less of stock; or raise more, in order to get a higher post-money value).
- Business Model/Strategy – Perceiving weakness or immaturity in some core element of the strategy – which may affect capital uses among other thing – we suggest more thought and review be considered before committing to the course.
- Team – During the course of diligence, either based on references or instinct, we conclude that some core team member(s) is not “backable”
As I think about what I just wrote from the entrepreneur’s point of view, it’s little wonder that we get shown the exit for daring to say these things. How arrogant it is to render such opinions having only spent a short amount of time evaluating a business that a founding team has put their blood, sweat and tears into not to mention, bet their livelihood on? What the hell do we really know about their business? Are we just applying some sort of standard filter, like an SAT?
Some VCs may not share the same opinions and therefore avoid falling victim to the curse. Others may share the opinions, but say nothing for fear of losing the deal. I was taught that doing the old bait & switch is a bad way to conduct business, even at the risk of losing deals.
So my approach is to be very blunt with entrepreneurs and signal my concerns early in a process. If they’re up for the conversation, I prefer to engage in a dialog that is not comprised of definitives or declaratives until I have done enough diligence to have an informed opinion.
Truth be told, my strategy fails frequently. But I feel comfortable knowing that I have been open and honest. Exposing the delicate issues early helps me in two ways. First, when the curse appears, my “cycle time” for deal evaluation decreases, allowing me to process more projects. And second, when the curse has spared me, I often find great new investments for Flybridge built from the outset on very open and frank conversations about the important issues.
By the way, the inverse of the curse – being the last to broach the volatile topics does often work, particularly when others have already primed the conversation. But it’s tough to finesse being “last” without losing the deal to another firm that has moved faster.