Why VC is Broken … for some of us
I know, I know — we have a gender parity issue in VC — both on the investor and entrepreneur sides.
I know, I know — we have a gender parity issue in VC — both on the investor and entrepreneur sides.
I recently spoke at an entrepreneur summit, where Kapor Capital Co-Founder and investor Freada Kapor was asked how to “fix” VC, and she replied, “Fire 90 percent of (VCs), starting with the abusers and the bigots.”
I’ve been putting a lot of thought into this myself. I’ve struggled with the answer because as a female founder, I and my two female co-founders had a relatively harmonious experience securing venture capital (from men, I should add) that shielded me from the issues I now see playing out. I remain a big believer in what venture capital can enable; we couldn’t have scaled as quickly and to the extent we did without it.
But since my exit I’ve worked directly with dozens of startups — male and female founded. I’ve seen pitches and interacted with nearly 100 VCs and had difficult, honest conversations with many of them. And I see false assumptions and inconsistent thinking on the investor side in areas where, if they applied the same principles that they encourage their portfolio companies to embrace, they too could better serve their LPs, entrepreneurs, and (let’s all hold hands now) the people who need these products, platforms and services.
I’ve also seen glimmers of solutions tried by some firms that worked.
While I am very passionate about addressing abysmal representation of women and minorities in VC, this is not a rant about that. It’s a rant about some of the broken priorities and processes within VC that, if resolved, could significantly impact access to capital and enable success for all VC-funded companies.
Here’s why VC is broken for some of us:
1. Seed rounds provide unprecedented opportunities, but also Brick Walls
I have mixed opinions about Seed rounds. They were less of a thing when I was first raising in 2007, and in our case unnecessary. We’d bootstrapped for 18 months, had launched a beta, had 100,000 user profiles and 1,000 blogs (or sellers in our marketplace, to put in context) on our waitlist hoping to work with us, and we were generating revenue, though not paying ourselves yet. We were a good bet for a Series A. This report confirms that, today, our $3M A round would likely be a Seed.
We had done many things right, in many cases unwittingly as we had not originally planned to build a venture-backed company. That said, I now meet first-time entrepreneurs who have strong ambitions to scale from the start but don’t have the resources or networks to adequately launch without funding. Seed rounds for these folks have enabled a path.
But I often see what seed investor Elizabeth Yin (one of the investors I spoke to about this topic) calls the “Brick Wall” effect, where founders get over the hump of beta development through a seed round, or participation in an accelerator, and they get all the free help they are going to muster, and then struggle with establishing the infrastructure, partnerships, and expertise they need to get them to the next funding milestone.
Since seed rounds come pre-revenue and pre-market-fit, it also comes with a tighter leash. Once a founder secures seed funding, she is encouraged to scale as quickly and cheaply as possible. And that means usually without the benefit of a “Grown-Up” — my term for an individual who has experience scaling such as a Growth PM, Head of Growth, CRO — or, even less likely, a team of Grown-Ups. In fact most investors would encourage their companies to not even bother with a Grown-Up until Series A or B, which puts Seed-Stage founders at an immediate disadvantage. This isn’t a situation faced by first-time founders only; there are also serial entrepreneurs exploring new markets or, say, going from B2B to B2C who have to build networks and expertise from scratch.
As an early stage founder, I loved my Grown-Up. She helped us anticipate roadblocks faster, scale faster, prioritize faster. We hired her on a contract basis and were able to secure her full-time by our Series B. Most seed-stage entrepreneurs don’t have the resources to bring Grown-Ups on-board, even part-time or in any capacity, so they waste a lot of time begging, borrowing, and stealing these resources, and take what they can get at the risk of distraction.
I held an event last year in NYC that partnered up 100 early stage entrepreneurs with 150 investors and advisors who donated their time. After the event, we received reviews exceeding the 90th percentile for usefulness, with access to critical expertise being a top reason for the reviews. I and my project co-founder tried to pair up “microgigs” for advisors who volunteered, that would pay them for a week, a day, even an hour of their time with founders they connected with who clicked. I was surprised that none of the founders took us up on that.
We did, however, receive dozens of requests from founders after the event to circulate executive summaries and set up meetings with investors and business partners, connect them for coffee chats with advisors, or even have us come in and consult — for no compensation, equity or otherwise.
I don’t blame entrepreneurs for trying to get whatever they can for free. In my case, many were upfront that they were asking for a favor. But, also in my case a significant proportion of the founders who have reached out to me were seed-funded and referred to me by their investors. Upon sharing my (much reduced for early-stage startups) rate card with these founders I often was told, “My Board (investors) would never approve.”
After hearing this refrain multiple times, I dug in. I plainly asked one seed-stage founder seeking significant on-site support, what could she reasonably spend for the role? After much hemming and hawing, she offered up a number that was more an honorarium than a consulting fee. And she said, “You already had an exit. Do you actually need to get paid?”
I teamed up with a colleague, a bona-fide Grownup who grew a Fortune 500 sales organization and ushered two other companies to exit before becoming an angel investor and advisor. We brainstormed a sliding-scale model that enabled early-stage companies to “rent” expertise rather than buy it outright, and retain talent at the appropriate level.
For instance, at a consumer seed-stage startup the team could pay for an hour of more senior, strategic advice per week and, say, 10 hours of less-senior, but critical implementation work (to, say, start and maintain social media feeds, or build a marketing list). As the company progressed to higher stages of growth, it could opt to contract for more hours, transition to full-time roles, or even bring consulting talent in-house, if appropriate.
All of the early-stage founders we contacted for feedback were in voracious agreement that this made sense. One especially supportive VC offered that it’s rare at seed stage for entrepreneurs to afford even this reduced level of support. And, in a roundabout twist, two seed-funded founders told me that even at a level that equated to one-third the rate of one experienced executive, part-time, they could never get a reduced solution approved by their investors.
“This is why,” a former colleague (now advisor and scale consultant) said to me, “I won’t get involved with startups until they are at their Series B.”
2. VC spends a pittance on marketing and over-relies on insider networks.
This is a touchy subject with operational VCs, who will argue that out of fiduciary duty to their LPs, they must keep a lid on marketing expense. Other top-tier investors will argue that their marketing consists of the companies in their portfolio that went IPO, or had outstanding M&A exits.
For some VC firms, marketing is strictly a responsibility of each individual partner, consisting of building a personal brand on Medium or LinkedIn and judging a LAUNCH competition. And many VCs carefully suggest that if you can’t connect with them via warm introduction, you the entrepreneur are not networked enough to make it as a high-growth entrepreneur, anyway.
I would argue that these VC firms are drinking their own Kool-Aid and making a potentially fatal assumption that the only companies worth funding are those with insider networks.
But concurrently, firms will ask their networks and portfolio founders for contacts, introductions to other founders, and recruits for other companies in the portfolio.
But VCs’ ability to communicate, and expand upon, their own strengths, knowledge and networks is becoming increasingly important.
And some do it well:
Witness First Round Capital’s enlightening annual “State of Startups Survey,” curated content search for founders, and business-journalist-quality service pieces for startup operators on everything from building culture to recruiting on a budget, to the day to day life of a COO and Chief of Staff.
I read these and was immediately made smarter — granted, after the fact, but still…
Or law firm Lowenstein Sandler’s super-relevant Venture Crush Series, co-hosted by many top VC firms, where even teeny upstarts sit at the table with big-name investors to talk in intimate, unpitchy discussion groups and then get to drink wine and network with them.
Or Omidyar’s Female Founder Dinner series, where they partner with established networks to assemble a diverse group of female founders to talk candidly about their business challenges and advise each other.
Or Andreesen Horowitz’s Guide to Venture-Backed Board Membership, a day-long program delivered in partnership with Stanford University’s Rock Center, where senior female executives and entrepreneurs can get a real view into how to get board roles, recruit a board, and serve on one. You want to attract and engage strong female talent for your portfolio companies? That’s how.
Or True Ventures’ True University event, a two-day event supporting both founders and teams of portfolio companies, which includes hour-long segments from established and exited operators, business academics, and industry thinkers. Anyone, not just portfolio companies, can access the videos from this event.
These efforts cost money and pay dividends not only in raising VC profiles among prospective portfolio companies, but in raising the games of the companies they are already supporting.
3. VC doesn’t fully leverage (acknowledge?) the institutional knowledge it has access to.
I’m encouraged to see that VC in general has placed much more value on bringing in partners with operational expertise along with the business analysts. But there is still a lot of experience being left on the table.
Donna Novitsky, CEO and founder of Yiftee, built her career as a scaled company operator at Sun Microsystems and Clarify before spending nine years as a Venture Partner at VC Mohr Davidow. Her role was to embed with MD’s portfolio companies and help them achieve growth milestones.
“I’m a builder by nature and wasn’t as interested in the investing side,” she said.
It seems to me that this is a powerful strategy and differentiator for VCs to offer up in a competitive marketplace: If we back you, you get to access our operational expertise.
And some firms do this to varying extents with EIR programs, Venture Partners, and one-off arrangements: For example, my C-round investor “lent” us our acting CFO as we prepared for exit. He was very familiar with our company and could hit the ground running; and we, the portfolio company, covered his salary. Many later-stage, and some early-stage, firms have in-house resources that offer recruiting.
Though it’s often unclear to what extent these firms flex their in-house muscles. Most peers who took EIR jobs with top firms did so for three to six months, or until they could find their next permanent role. Some in-house leads shared with me that they are there for recommendations only, not for any actual placements or partnership implementations. In many of these cases expertise comes in the way of informal mentoring networks, or introductions to experienced, out-of-house operators that can provide much-needed advice. (For a full-on critique of this most common form of VC operational support, refer to Point 1 above).
Novitsky admits that her gig was quite rare: VCs typically do not provide embedded operational support, even if subsidized by the startup, and portfolio companies are left to their own devices for scaling. Which means a high percentage of first-time or early-stage founders suffer from the aforementioned Brick Wall Effect.
4. VC prioritizes home runs over base hits.
I should caveat here that I actually like generating revenue and having big outcomes. And I encourage entrepreneurs to think that way. But I do not support stupid, unethical, or unsustainable business models. No VC would, either … publicly.
Still, I suspect that some of the unspoken resistance to diversity in VC is a presumption that certain sectors (Impact, or niche commerce, for example), run by certain entrepreneur profiles (women, or minorities, for example) won’t lead to big outcomes.
It has nothing to do with the entrepreneur, a VC would argue. Yours is just not a big enough business for VC.
To this argument I would submit Sallie Krawcheck’s rationale. The former Wall Street top executive-now entrepreneur, whose company, Ellevest, provides investment products that better match women’s investing styles and objectives sees a big, fat market in amassing smaller-cap opportunities. Not just for rich women, or women with rich husbands, but lots and lots of women who find the products valuable. Women who, by and large, prefer to make smaller-yielding, less risky investments.
This model flies in the face of the prevalent VC model of investing, which largely supports riskier bets. More will fail, but the ones that succeed can go supernova. This is a great model if your company is considered a big bet by investors and you are showered with nine-figure capital rounds. But if you are merely building a sustainably profitable, successful company in a lower-multiple category, notsomuch.
I suggest VCs be more like Sallie, and seek a big outcome by supporting many smaller successes.
Since I don’t run the backoffice of a VC firm I may not know the heresy of which I speak; I’m sure there are more costs involved with evaluating and supporting more companies. But along with more successful outcomes there would be fewer outright failures, no? And there would be many more people who amass wealth and keep their jobs, across a much larger swath of the economy. There would be more problems solved by more companies solving them.
And we would suffer fewer of the uncalculated costs of the “Go Big or Go Home” strategy: the fallout of companies (perhaps whole industries) that probably should not have taken VC money under the expectations of delivering a 10x return. These companies build before they get their sea legs and truly deliver sustainable value. If that anticipated arc of expected exit trajectory could change, or be aggregated with more longer-arc bets, we could start to see an industry supported by overall excellence.
And, OK, maybe a few more women and minority founders in the mix.