Coronavirus puts founder-VC relationship to the test

Photo by Scott Graham on Unsplash

At the board meeting of a consumer brand last month, the company’s lead investor disagreed with the founder over a supply-chain strategy. A light argument over Zoom ensued, and, eventually, the investor, who has known the founder for nearly a decade, backed down.

“If I had to do the same thing in person, I’m sure I could have convinced him, and we could have settled the issue far more amicably,” said the partner at a venture capital firm, requesting anonymity.

At play here is a larger issue: the changing venture capitalist (VC) – founder relationship during COVID times.

“We (founders and VCs) are in the business of relationships. It is critical to the company’s growth that the founders and investors are on the same page. Even one misunderstanding can cause major issues,” said Ravi Ramachandran, co-founder and CEO of sanitary napkin brand Nua Woman.

Here is another example.

In the last few months, a partner at a venture fund spoke to a Bengaluru-based entrepreneur over video, five times, but failed to convince him.

Last month, he did finally meet the entrepreneur. “In that one meeting, I learnt more than what I did during the last five times,” said the investor, who did not want to be named.

Why online conferencing doesn’t help

Karthik Reddy, managing partner at Blume Ventures, an early-stage investor, hit the nail on the head.

“On video calls, people are either multi-tasking or often distracted. On top of that, if you aren't communicating enough, cumulatively, you are doing a lot more damage to the relationship than you realise,” he said.

“Meeting someone even once a quarter levels the relationship. The trust is reset and comfort is re-established,” he added.

Investors help founders with hiring, connect with other investors globally, and even become mentors in some cases. Founders help investors with reference checks, become angels in the investor’s other companies and provide an outsider’s view, something fund managers often seek.

Zoom calls are only a temporary substitute. While founders and VCs who have known each other for years may be comfortable on video, assessing a new founder is difficult.

"New relationships are quite hard to establish virtually. There is a lot more back and forth than usual and when the macro situation itself needs clarity, both sides are unsure as to how to go ahead,” said Vinod Murali, managing partner at Alteria Capital, which provides debt to start-ups.

No point talking over phones, let’s meet them

If even events with vague agendas were thronged by hundreds of founders and investors, especially younger ones, during pre-COVID days, it was only for networking.

In a competitive start-up and internet ecosystem, meeting new people is the lifeblood for many founders and investors. Founders constantly meet potential investors and bankers to test waters.

Investors do the same so that they have a leg-up when the start-up eventually raises funds.

“Today, we need to over-communicate. Right now, talking to people is the only thing of real value you can do,” Reddy said.

"Even within existing portfolios, some tough calls had to be taken, sometimes on video calls. Here, we try to establish certain boundary conditions, keeping in mind the interests of both sides. The idea is to find constructive solutions,” said Alteria’s Murali.

Indeed, in the past few months, founders and investors had to take some tough calls like laying off employees, shutting down operations in some areas, saying no to a potential deal, postponing a funding round or asking for a longer time to pay back debt.

The same things done in person, with a mix of cajoling, convincing and an arm over the shoulder would have been much easier, he said.

Let’s look abroad

The transition into virtual deal-making has been tough all over the world. But Silicon Valley seems to be adapting.

The Wall Street Journal reported on May 18 that top VC firms, including Sequoia and Accel, have leapt into fully remote deals, from start to finish, without meeting the founder.

Extended lockdowns have forced them to pursue deals without meeting founders in person. “I think the problem is with just waiting it out—oftentimes, there’s opportunity when others are fearful,” Shaun Maguire, a partner at Sequoia Capital, had told WSJ.

Investors closer home seem to be falling into this bucket, although slower. Two investors Moneycontrol spoke to have been at the cusp of closing a deal fully remote, for a month now, but haven’t yet been able to fully convince the potential investors.

What’s the solution?

For now, early-stage investors, in particular, are communicating as much as possible with all portfolio companies.

Some send out weekly reading lists on WhatsApp (and not email, because it may not be read, an investor who did not want to be named said). Some hold regular webinars, and privately confess to doling out “generic wisdom.” It is still important, as it helps keep in touch.

“Now I know that 20 percent of my portfolio is hyperactive and engaged, 20 percent is decent (at communicating), 20 percent will act when provoked, and some I won’t know whether they are dead or alive unless I prod them,” a partner at a VC firm, who did not want to be named, explained.

Founders and investors, though, realise that over-communicating and other management lessons are only a short-term solution and only for existing relationships, and are itching to travel again to meet new people, even if in a limited way.

The founder of one company likened the current challenge to a Leo Tolstoy quote: “All happy families are alike; each unhappy family is unhappy in its own way.”