Raised money from VCs for my last startup. Series A investor made all sorts of overtures about how founder friendly they were and how supportive they would be.<p>The week after we closed our series A they told me I had to hire a COO. I asked, "You trying to get me to hire my replacement?" "No, we'd never do that. How could you even think that?"<p>Less than two months after we hired the COO they fired me. The COO was made the CEO and he ran the company into the ground.<p>The lesson for founders is to never, ever, ever give up control of your board/company. Always maintain control of a majority of the board seats.
Everyone has their own incentives and when things get tough, they will work to maximize what their incentives say should be maximized - keep that in mind before signing up with investors if you are a founder. The term sheets and final docs - and the specific rights in them - matter a lot.<p>Examples from Charlie Munger [1]:<p>"One of my favorite cases about the power of incentives is the Federal Express case. The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can’t be done fast. And Federal Express had one hell of a time getting the thing to work. And they tried moral suasion, they tried everything in the world, and finally, somebody got the happy thought that they were paying the night shift by the hour and that maybe if they paid them by the shift, the system would work better. And lo and behold, that solution worked."<p>"Early in the history of Xerox, Joe Wilson, who was then in the government, had to go back to Xerox because he couldn’t understand how their better, new machine was selling so poorly in relation to their older and inferior machine. Of course, when he got there he found out that the commission arrangement with the salesmen gave a tremendous incentive to the inferior machine."<p>[1] <a href="https://www.butwhatfor.com/charlie-munger-the-psychology-of-human-misjudgment/" rel="nofollow">https://www.butwhatfor.com/charlie-munger-the-psychology-of-...</a>
Investors for software startups are not that great if you want your business to be self-sustaining without becoming a unicorn or a Ponzi scheme.<p>I'm not saying that participating in bubbles cannot be economically rational, but venture capital today is especially suited for making decisions that are bad for everyone involved, prioritizing future valuation over good business.<p>It's the same growth or sustainability choice we keep failing at as a civilization.
><i>Investors mostly want to do the right thing for founders.</i><p>See, that's an important difference between investors and VCs.<p>A VC firm or division gets (say) $1B, and a deadline: invest it all by end of quarter. All they can invest in are what come through the door. They know most of those have no future. A few do, but not enough to absorb the whole allotment. They can't not invest. What to do? No choice, really; invest it all, with 9 of 10 expected to flop.<p>Having identified, at the outset, which should flop, start milking them. There's no reason to waste that money, even though it's lost to the actual investors. Make them spend their nut where it will do <i>somebody</i> some good. Maybe make them hire a crony, who will hire more. Make them use a pet staffing agency. HR pros are (to first order) all grifters, so provide them one of yours. Make them buy software from one of the not-flops from this round or last quarter's, or somebody you own part of, personally. Be creative. You can draw it out, deposit more cash from next quarter's infusion, and extract that. Maybe they can build, code, patent something of value that can be bought for pennies at the bankruptcy.<p>There are a million variations on this, all used.
My issue with the whole fundraising circuit (esp for low cap-ex startups) is how much you have to strain yourself to convince a non-customer to believe in you
> Founders need to understand that venture investing is a business where friendship is an input or an outcome, and not the other way around.<p>Does anybody know how to parse this?
Another note about 'internal' investors getting preferential treatment as opposed to outsiders: this is usually a result of SHA conditions and elements in the articles of incorporation that stipulate that in case of a sale or issue of new shares existing shareholders have first right of refusal. That this makes for a less competitive environment is something that everybody seems to take as normal, but after reading this article I'm wondering if it really should be normal or of there are other important reasons why this right always seems to be granted.
I strongly disagree with the premise that a founder should keep "internals" at arms length and run a process without them to avoid any pressure from internals to lead and somehow maximize terms.<p>Your existing investors have a vested interest in making you successful. A higher valuation is more acceptable to them than to outsiders (due to being able to officially mark up their investment, which helps them raise their next funds and improve their apparent performance prior to liquidity). Founders also have a far better idea of what kind of support they can expect from an existing investor than a newcomer.<p>Of course, as a seed stage investor, I am biased in my views on this. But I do really believe that making potential adversaries out of your existing investors is a deep mistake.
When I've seen founders try to keep investors at arms length it seems to result in mistrust, leaving investors feeling like they can't get the real story, and thus decreasing the likelihood they invest further. So rather than keeping insiders at arms length, I'd suggest being direct about wanting to meet other investors. I suggest uncomfortable candor over comfortable misdirection.
> In fact, the vast majority of the investors I’ve met, even those that have fired founders, are good people. It’s deeper than that, even. Investors mostly want to do the right thing for founders. There are emotional and business reasons for this impulse, but ultimately the fiduciary responsibility has to win. Founders need to understand that venture investing is a business where friendship is an input or an outcome, and not the other way around.<p>Cynical viewpoint coming in:<p>VC investors are only "good people" because that is what currently drives the market for dealflow. What I think a lot of entrepreneurs miss is that VCs are <i>finance</i> professionals first and foremost. If the market dynamic starts to change, you might see them behaving differently but still aligned ultimately to the interest of their LPs.<p>TL;DR - VCs who create good content, are helpful, are nice to founders, etc. ("founder friendly") in a professional context are only that way because it's generally what has been proven to generate good leads for deal flow.
Isn't the purpose of financial instruments to resolve these kinds of conflicts? Seems like in the days of smart contracts these meatspace concerns could be coded around.