Magazine Article | October 1, 2019

3 Big Lies In VC Financing

Source: Software Executive magazine

By Jay Valentine

Jay Valentine offers a brutally honest outlook at taking on outside investors.

Most B2B founders consider the additional growth possible with outside funding. A default choice is venture capital. During the courtship between the founder and the VC, there are some common things founders come to regret.

  1. WHEN TIMES ARE BLEAK, THE VC PARTNER WILL BE THERE TO HELP YOU.

This one is partially true. They will be there. You, the founder, however, probably won’t. You will have been demoted or fired.

You close an A Round. You plan to cautiously spend this money like you spent your own money up to this point. You will hire carefully, bring on the best talent, seek to be profit table.

Oops, mistake!

That A Round is going into building a “world class” sales team. They need leads, so in comes a state-of-the-art marketing team. To handle those leads you need a dozen 20-somethings dialing for dollars. They are going to work from the DiscoverOrg lists you must purchase. Don’t forget those subscriptions to Gartner and Forrester so you get covered. These are VCs; they must know what they are doing. You go along. Actually, you have to, they run the place now.

The A Round is spent, and revenue is not close to ongoing sales and marketing machine costs, so you have to raise Round B.

Oh, no! You missed revenue projections. Tough times. You remember the VC, your partner, will be with you in these tough times.

Right. At the next board meeting, they have a new CEO who has done all this before, and, good news! You are now the CTO, with no direct reports. By the way, you can work from home.

  1. WE BRING EXPERTISE TO HELP YOU GROW YOUR BUSINESS.

This might be the second most common lie you hear from a VC. You get one, maybe two board members. They are likely young and have MBAs from a top school. They had excellent grades and will almost always have perfect teeth. After grad school, they landed their first job at a VC. They beat the kids who went into government, but they are not as cool as hedge fund managers. They never started a business. As kids, they were not the ones with the lemonade stand. They were the ones with perfect grades, probably did not excel in sports, and here they are, advising you on how to run your business.

Don’t believe me?

Hit the websites for U.S. based VCs. Focus on the big city ones, as those are likely to be your investor. Look at the pictures below the partners and check them out. Go to LinkedIn and read some backgrounds. Bet you don’t find a street-fighting founder-type who overcame all odds to get a business up and running. Those people exist. They are not working for the VC sitting on a board of a company like yours.

Bad news. You just gave up 30 to 50 percent or more equity to have the kid who never ran anything in his or her life advising you. If you are taking the SAT, they might help. You’re not.

  1. WE DON’T INVEST IN COMPANIES; WE INVEST IN GREAT LEADERSHIP TEAMS, LIKE YOURS

Go to the DevOps, NoSQL, web analytics, sales automation platforms or other once-hot spaces and look for the founders. Look really hard because they are probably gone. Founders, the spirit and imagination of the company, are driven out during the B Round or certainly the C Round.

They are driven out, first, because the forced dilution of each round vitiated their potential wealth. They bolt. Or get fired. Some depart because they cannot stand the insanity of the management team the new CEO, picked by the VC, installed.

Look at virtually any of the hundreds of B2B C or D Round companies. You will seldom find a founder in any position of responsibility.

The biggest lie in VC financing has nothing to do with what the VC tells you during courtship. It is the implication they will improve your chance of success or the lives of your employees or build a wonderful company. A VC has only two ways to get dough out of your company — an IPO or sell the place.

The day they send the check, a timer goes off in VC-land. The sooner they can get your company liquid, the better off their investment looks. If you think a VC is in for a long haul, you do not know what the word “long” means.

The day you sign that A Round, your reality changes from an independent, self-directed entity to a company with one end — get the VC out through a liquidity event.

That process almost always means multiple funding rounds. These rounds can add up to over $100 million or more, never generating a profit. Every round dilutes employee and founder ownership even more.

REVENUE GROWTH AT ANY COST

A VC has only one measurement — revenues. Nothing else matters. The result is noxious. VC money is rocket fuel, even if the company is not a rocket ship. Fuel becomes like the steroid pumped into the company’s veins to spur revenue growth at any cost.

Sales reps hate their jobs as they are measured on every SPAM email sent, every call made; they sit through endless QBRs (quarterly business reviews), forced to “commit” a customer will make a revenue decision in their favor. Engaging a customer is not acceptable if the deal will not close THIS QUARTER.

Marketing must deliver “event-marketing,” collecting the names of “prospects” who happen by a $150,000 booth at nameless trade shows. Marketing people stop trying to employ imagination and creativity since it cannot be measured at the upcoming VC board meeting.

"The day you sign that A Round, your reality changes from an independent, self-directed entity to a company with one end."

Panic and creativity are mutually exclusive. When fear sets in that one can lose a job and benefits at what might be the worst time, people say anything to get by. Forecasts go wildly off the rails because nobody admits “The customer does not want to do it this quarter.”

When creativity is most needed it cannot be deployed because the VC is sitting at the board meeting, weeks away, wanting to see the emails-to-leads-to-conversions metrics. As revenues stagnate, all the management team can report is some positive change in underlying sales metrics.

VCs are in the same boat. Without more revenues, they report to their investors a stagnating investment. Unlike the startup, they may be repeating such a report for several such investments. They are not immune from this madness.

Creativity is inherently unscalable. Creative people, the lifeblood of the tech startup, are long gone at this point. VC madness drives them out.

Mediocrity is endlessly scalable; it grows on trees. Mediocre people flock to well-funded startups where they use their political skills to augment the talent that departed. The results are predictable. There are endless funding rounds.

The company delivers a product indistinguishable from competitors’. Stock options become worthless. Multiple sales VPs come and go. CEOs turn over.

Mediocrity, unlike creativity, accumulates until there is nothing propping up this once-promising startup but cheap money from lower-tier VCs. The long-departed founders do what creative people do. They found other firms, often starting as consultants to bootstrap new endeavors.

What smart founders do not seem to do is the VC thing a second time.

JAY VALENTINE is the CEO of ContingencySales.com, bringing disruptive technologies to market without venture capital. He is also the VP of sales and marketing for portfolio company Cloud-Sliver.com.