How to Navigate Through Shark Infested Waters as an Entrepreneur
This is a look at what happens behind the scenes for entrepreneurs when they are approached by VC’s. This isn’t about due diligence or anything like that. What this is about, is the internal weaving of connections and communications within the VC world…for entrepreneurs.
I want to take you back to sometime around November, when I started to really get into what happens as you climb the ladder in the entrepreneur world. At some point, you get a good glimpse into a different world as well: called the VC world, or the “other side of the table” as some call it. This is where you’re journey really starts to get crazy. I remember that email to one of my friends “what the f*** is going on here?”, his response: “I’m sorry, but this is part of learning about being a CEO”.
Let’s start with your first contact with the Investor community: the scout.
The VC’s associate: aka scout.
9/10 times you’ll be approached by this guy first. The VC associate- think of him like the VC’s buddy. He’s kind of a mix between a VC & an entrepreneur, or he might be a more “due diligence” oriented type. You can also call him a scout. A scout will either spot you himself, or he’ll be directed to contact you by a VC partner who has spotted you.
Usually, what the VC’s do, is try to send a scout that can relate to you. They will watch you, and try to pick apart your personality. Then pick the best scout to fit your personality. His job is to come in, gain trust quickly (hence the reason for the personality matching), figure out what the VC wants to know, then report back.
If the scout is more formal in his procedure, he’ll probably call you instead of meeting you. Now, he “acts” as though this is no formal procedure. He’s just calling you because he wants to engage in friendly chit chat (but clearly this isn’t really the case when you can hear him pecking away on his keyboard. He lacks any decent spy skills). If you hear that keyboard, keep your mouth shut.
Remember…when in doubt, play dumb. That’s all you got to do. Don’t say anything rude, because they’ll type that down too. Even if you are fundraising, just play dumb. You don’t talk to scouts, you never know who exactly they represent. Alot of times, they really represent VC firms with competitors. And no, an NDA won’t protect you so don’t even bother with one. We have actually seen scouts that sit in the front row of “supposedly confidential” pitches and take notes for competitors. You look at the guy, and you say “wait..isn’t that so and so’s attorney..and aren’t they a competitor to so and so presenting?”. The guy’s sitting right there writing, and tweeting everything.
After the call.
Once you get off the phone, these notes will be sent to every VC partner in the firm; and even cooperative VC firms. Every partner will usually have read them within 24 hours. Then, they partake in a long string of emails regarding the notes. Then…the notes of your conversation are carried into the all famous “Partner Meeting Mondays” to be debated.
VC’s are funny like that. You talk to one, you’ve probably really talked to all VC’s in a sense without even knowing it. They like to talk. They like to talk about deals, entrepreneurs, and all the other partners at the VC firm will know about you by the end of the day. Now, you can always tell how that conversation went: if the first partner liked you, you’ll wake up to 100 more invitations to connect on LinkedIn from all the other VC’s. This is how I somehow magically ended up with a couple hundred connections in venture capital. In my case however, this probably happens because I’m a “voice” in their industry (They make up about 10% of our audience).
You can test VC’s too.
VC’s like to test you. You can also test them back. Don’t be afraid to, because they will. They will test how you react to situations. They mess with your head, so mess with theirs. Try telling each VC something completely off the wall different about your business, then sit back and watch what happens. Wait for it….wait for it….oh, there it is. We can now see the internal workings of who is talking to who; who has good intentions, who has bad intentions, and who is working for competitors.
VC’s are like gangs.
I’ve noticed over time, VC’s divide themselves into groups with different values. Kind of like gangs. We can divide them into 3 categories: traditional, non-traditional, and entrepreneurial. Then they further divide themselves into location, and give themselves a name. Over here, you have the east side. Over there you have the west side. Then you have that one group that is all over called the Sharks.
Next, just to mess with their heads…piss one of them off, and you’ll see a hundred of them unfollow you on Twitter the next day (mostly because they can’t un-connect you on LinkedIn). It’s like a pack of wolves…or maybe more like bowling pins. One pin falls, then knocks down the next, then the next, etc. Then, at the same time…talk good about one, and the others all get jealous, and re-follow you on Twitter. Then they’ll start telling you about how bad the other one sucks. “Hah! What a wimpy fund size!”, they’ll say about the other one behind the other one’s back.
Talk to other entrepreneurs & ceo’s.
Another mistake entrepreneurs make when dealing with a bunch of VC’s, is trying to learn how to navigate through the complex systems and fishy dealings from VC’s. The best advice to you, is to learn from other ceo’s and entrepreneurs in private. You think…because you don’t hear about it, it doesn’t exist. You don’t hear about it, because everyone is too worried about destroying their reputation.
But don’t worry, you’ll get your first shock.
Revised: Ken wants me to clarify what a VC is. Wikipedia def. of a VC:
Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital.