The quickest way to sink your business: Listen to your VC
Investors and entrepreneurs have very different perspectives. What happens when the VC assumes it is his prerogative to dole out advice?
November 18, 2013 / 15:30 IST
Ajeet Khurana
Those of you who are hungry for information in the startup space should probably read legendary investor Vinod Khosla's interview in early September 2013. I am referring to the one where Khosla famously remarked, "Maybe some percentage that's substantially larger than 95 per cent of VCs add zero value. I would bet that 70-80 per cent adds negative value to a start-up in their advising."Today, I received the umpteenth email forwarded to me with a link to Khosla's interview. And here I am writing this article. Frankly, I cannot do much more than nod vigorously in agreement. Let’s see why that is the case.Why Do Entrepreneurs Take Advice From Their VC?The obvious response to this question is, "Because the VC gave them lots of money." But that response does not fully capture the problem. When a good deal comes to the table, a VC tries to move rapidly and invest. But no VC wants to get caught in a pricing battle and invest at a higher valuation. As a result, most VCs try to impress prospects with the other values they bring to the table, and one of those is 'advice’.This sets the tone for their relationship, which is founded on the assumption that the VC will advise the entrepreneur. In addition, most VCs occupy at least one seat on the board in their investee’s start-up. And board members are notorious for advising the company's management.Why Are Most VCs Not In A Position To Advise Entrepreneurs?1) The objectives of the VC and the entrepreneur may not always be alignedAlthough both want the company to do well, their approaches might vary. This is because the entrepreneur might be looking at the business as something they will pursue for the rest of their life, while the investor is looking at this as a 3-5 year deal. Further, although the VC's advice might be sincere, it is also 'logical', whereas the entrepreneur's paradigm involves emotions and relationships.2) The VC is concerned with financial returns while the entrepreneur might be looking at much moreOften, entrepreneurs place a premium on their reputation, their legacy and their relationships with employees, customers and even vendors. The VC’s objectives might not be the same. As a result, the entrepreneur may not be able to implement the VC's advice in the spirit that it was intended.3) When things go wrong, the entrepreneur and the VC might react differentlyI have never come across a business that proceeded exactly as planned. When things go downhill, even temporarily, the blame-game starts. I find that some of the most dangerous VC advice comes at a time when the business is not doing well. The responsibility for performance lies squarely on the shoulders of the entrepreneur. During a lean period, the VC could get nervous and start asking a lot of questions. So, at the time when the business demands the most attention from the entrepreneur, the VC also starts demanding more meetings and reports. And the entrepreneur is not always able to meet the VC's demands. This kick-starts a vicious circle.An Entrepreneur-Turned-VC Might Be The Solution But That Doesn’t Work Out EitherOne would assume that an entrepreneur-turned-VC would be the solution to the problems listed in this article. I am an entrepreneur-turned-angel investor myself. But as a category, I have found that when entrepreneurs cross over to the dark side (ie, when they turn VCs), they are often indistinguishable from career VCs.What Is The Solution?Maybe we should take Vinod Khosla's advice where he says that entrepreneurs "should listen politely and just do what they want to do anyway!"The author, Ajeet Khurana, mentors start-ups. An angel investor, trainer, author, entrepreneur and digital marketer, he is a member of the screening committee of Mumbai Angels, one of India's oldest angel networks. Sometimes he blogs about blogging at TipsBlogger.com. He is on the boards of Carve Niche Technologies and Rolocule Games. You can reach him on LinkedIn and Twitter.You can send your feedback on smementor@moneycontrol.com or simply post comments below Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
