bot is up doc? How one AI-generated tweet got me thinking deeply about how the worst VC can be the best for you

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this is gold, i will read this blog post pic.twitter.com/vdPbq7n6YW

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— Jarrad (Moose) Lawrence (@JarradLawrence) 3 November 2022

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I was playing around with a new AI that tries to tweet like the author (you can try it here) and Moose Lawrence posted this example, which meant something I could tweet.

To my surprise, the more I saw this tweet’s claim that “for startups, the best VC is the worst”, the more I began to realize what my AI bot doppelganger meant.

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Under what circumstances can the “best VC” become the “worst VC” for your startup? And perhaps even more interesting: One of the “worst VCs” for your startup What could be the “best VC”?

To all the other unverified Twitter bots reading this column, I’ll do my best to answer both of these questions today!

 

When the best VC can become the worst VC

Great VCs can be bad for startups because of the way they try to manage their risk, how they pattern-match when evaluating potential investments, and how they sometimes allow multiple portfolio companies to stick to the same template. You can try to force adoption. For success as the best performing companies in the portfolio.

 

risk of being a VC

Maybe we’ve all been so caught up in the risky, arduous journey of leading a tech startup that we forget (or never realize) how risky and difficult the journey is even for venture capital firm founders. Is.

In the beginning, most founding partners in a venture capital fund are expected to contribute a significant portion of their savings to the fund, as a demonstration of confidence in their ability to make smart investments. Then, they are expected to go without pay (or a salary significantly below the market rate) for an unknown amount of time, certainly until the venture firm has enough of its investors’ capital under management, which is normal. Starts with a 2% management fee covering office space, staff salaries, marketing and travel expenses.

If you’re doing well, it’s probably at least four to five years before the founding partner will be able to earn a market salary, and in the meantime, whatever management fees don’t yet cover comes out of the founder. Partners’ wallets. What makes all this worthwhile for the founding partners is their share of the “carry” – the profit gained from selling the fund’s stake in the portfolio companies in which they have invested.

But they don’t see that the carry is in their bank account until all the shares in the startups are sold to someone else (which mostly doesn’t start until 7-10 years of the fund) and then, only after the fund Investors have received an amount equal to the amount they had previously invested in the fund.

It is also important to remember that most funds under management are provided by outside investors (“limited partners”) who are expecting an exceptional rate of return from their investments.

Like, 5x-or-more their money back. Although most funds managed by VC firms have a ten-year period to deliver that high return, most investors begin to estimate final return results based on what they see in the fund’s performance in its first three to five years. Will give

 

A VC’s Hot Streak Needs to Last Ridiculously Long

Which means that all venture capital firms – even the best ones – are being managed by people who are tempted to make it appear like they know exactly what they are doing, every times, even if they don’t (at least, not always). And they have to continue this for the entire ten-year life of the average fund.

When ‘black swan’ events occur (eg, oh, say, extreme weather events due to climate change, a reality TV star becoming US president, a global pandemic, widespread famine, declining economic growth in China and Europe) In war) a venture fund manager must be able to maintain the confidence of his investors. They need to be reassured that, while no one could have actually imagined these Black Swan events happening, venture funding is still in a similar position.

The longer a venture capital fund manager maintains a reputation as a successful navigator of challenging times and has a large selection of future startup value, the more valuable the reputation, and the greater the impact on the individual and firm. If that reputation is lost.

 

This is what leads to the pattern-matching behavior

It is just human nature for any of us to repeat the behavior that has given us success in the past.

So if the VC’s reputation was built on the basis of investing in SaaS startups founded by two cis white male ex-Atlassian engineers and targeting the mining industry, the VC would need to do a lot of work on itself to counter both the conscious. needed. And the unconscious bias that might otherwise lead them to favor similar SaaS startups founded by a couple of cis white male ex-big-SAAS engineers that target similar industries as mining.

Most of the time, the only countervailing force that drives them to act on those internal biases is a prudence and a belief that with greater portfolio diversification comes better financial returns. And as VCs’ reputation for picking winners continues to grow, so does the amount of new deals that cross their desks.

Learn more about new industry sectors, new technologies, and how to relate to founders who aren’t cis, white, and male. Helps to process. you receive?

 

Don’t Tell Investors Which Other Investors Are Interested

Maybe you and your fellow CIS white male ex-Atlassian engineer cofounder just had a great first time with one of the ‘A-list’ tech venture capital firms, or maybe, because they’re really over their biases. Working, a partner at an A-list firm is meeting with you, even if you didn’t fit their blueprint for past success.

You’re excited about how interested they are, and you know their name holds a lot of importance in the industry, so when you walk into your next investor meeting, and they ask you, “More in this round Who wants to invest? “The removal of the name of the A-list VC is a huge temptation.

Don’t do it, even if you’re holding a term sheet from an A-list VC in your hot little hands! Do not mention the names of individuals or firms. Why?

Because that savvy fellow’s strong reputation in that A-list VC swings both ways; Other investors put too much stock into what the savvy partner is interested in, but also what the savvy partner decides they are no longer interested in.

If you’re an angel investor or another fund’s team trying to commit to an investment round, the worst sign they can get is when that widely respected investor you were previously humbled to hear about. In the end don’t decide to go ahead with the investment.

Walking away from an investment round before an A-list firm closes is a sure way to cause other investors to lose faith in the deal as well, and it’s probably the most common way that a great VC can be a bad VC for your startup. . ,

 

We want you to be more like Startup X

Once a firm has decided to invest in your company, they all want to offer you some degree of advice, support and services.

It is cheaper and easier for them if all their portfolio companies use the same legal, accounting, recruitment and marketing service providers. It reduces reporting headaches if you all report your metrics in the same format using the same reporting tools.

It helps them market their next fund to their existing investors if it’s easier to develop a narrative around the investment hypothesis that suggests that a certain type of tech startup is the secret to a VC firm’s success. And if you’re not the kind of startup they first invest in you, there may often be a subtle or not-so-subtle incentive to become one.

I believe that every tech startup is special, unique and different, and as hard as we try to make the next generation of startups look and behave like the last, history clearly shows us that this outlier. There are misfits and oddballs that deliver huge successes.

I know every A-list VC firm’s marketing copy has something like “We’re here for the outliers, misfits, and oddballs,” but you should take a look at the portfolio and decide for yourself what the curtains are. match, so to speak.

 

When could the worst VC be the best VC for your startup?

If maybe we define “worst” as new, unknown, un-reputable, and “without offering a full service”, then maybe the worst VC in town might be the best VC for you, less At least, before.

The fund’s partners are just getting started and need to write a few checks in some new companies without delay – most funds write all their first checks in the first two or three years of the fund’s ten-year life. If they over-optimize due diligence they are likely to take too long, and investors will be disappointed by the perceived lack of action.

So new fund managers are sometimes (not always) more open to ‘outside the box’ startups and founders that don’t fit the traditional mould.

A fund or a fund partner without a lot of reputation at risk is less likely to hurt your chances of closing the round if they decide to exit before the round is completed, so I recommend potential investors. I would have no trouble disclosing that we received a term sheet from Brand New Tech Ventures, whereas I would be very wary of disclosing the identity of the A-List fund to any other investor who sent me a term sheet.

Just say it’s one of the A-list funds, with your sweetest smile ever.

In the end, a new fund is less likely to try to tailor you to their portfolio criteria – they will hire their CFO from the same bank to rapidly increase their ARR as the fund’s top three performers. Hire all your other CFOs, or adopt targeting and reporting standards that will never be a good fit for your team and your startup.

Sometimes, the best VCs can be the best VCs for your startup. but not always. And that’s why the bot isn’t wrong on this one!





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