The VC business is a funny one and, in my sixth year at it, I am amazed at how much I am still learning with time.  One of the fascinating things about the business is the way VCs process deals, known in the vernacular as "deal flow".

On the one hand, a VC wants to see absolutely every start-up that is happening out there, particularly those led by high quality entrepreneurs.  Obviously, the more high quality deals you see, the more likely you will have the opportunity to select a high quality deal to do.  But there's a more subtle benefit to high volume, high quality deal flow.  Looking at as many deals as possible makes you a better investor – you learn something from every deal you see and are able to detect patterns that can help you in deal selection.  A VC with good deal flow may get an opportunity to review as many as 300-500 deals per year.

On the other hand, a VC only has the bandwidth to do one or two deals per year (assuming they are an "active" VC that joins the board of the companies they invest in – "passive" VCs who don't join the board have greater deal capacity, perhaps three or four per year).  As is the case with any sales process, there are many stages to a deal.  Typically, a deal flows from the first meeting to the follow-up meeting to the light diligence (in-person visit, a few diligence calls) to heavy diligence (extensive market, competitive and technical due diligence as well as personal references) to partnership buy-in to term sheet to close.  To beat the long odds of, say, 300:1, a deal must be compelling at every stage in the process to flow through — VCs are always looking for ways to say "no" more than they are looking to say "yes" (see related blog post:  "Dr. Seuss and the Land of No").

As one wise old VC once told me, "the trick in this business is to spend very little time on alot of deals, and then alot of time on very few deals."  In other words, see everything to be a better investor, but exert a very tough first filter so that you only spend time on very, very few deals.  In my experience, a typical VC has the bandwidth to actively "spend time" or actively work on only one to two deals at any given time and perhaps 10-20 in a year — as compared to those 300-500 they get exposed to.

What's surprising to me is that entrepreneurs often don't seem to know where they stand in the deal process.  Admittedly, VCs aren't known necessarily as great communicators!  But as an entrepreneur, you should know whether you are clearly one of the one or two most important new deals the VC you're talking to is working on.  If not, then you know your deal isn't going to get done and stop wasting your time.  The odds are just too long that you're stuck at the wrong end of the funnel.

Being an entrepreneur means figuring out how to survive and thrive when you often find yourself in way over your head.  An ambitious entrepreneur is always pushing and stretching beyond their comfort zone — creating a company from scratch, evangelizing a new category, taking risks way out of any rational person’s comfort zone.  They rarely want to admit vulnerability, particularly to their management team or board, and so sometimes cover up their anxiety with bravado.  This is the exact wrong way to approach this common situation.

Believe me, I know the feeling.  In my late 20s, I was promoted to the executive team at Open Market — a billion-dollar market capitalization, publicly traded company — and found myself in way over my head.  I would come home at night, shake my head as I recounted to my wife the decisions I was responsible for making, and reflect that I really had no idea what I was doing.

But after a few years, I started to get the hang of it, gaining comfort and confidence in my position.  What happens to a passionate, ambitious entrepreneur who gets the hang of something?  They get bored.  They seek out the next big challenge.  I was fortunate to find it at Upromise, where I was asked to help start the company and serve as president and chief operating officer.  In our first 18 months, we raised $90 million in venture capital, hired over 100 employees, signed up partners and launched the service into the market.  During that period, I again often felt way over my head.  But that’s what made the experience so thrilling.  Whether it was pitching Citigroup’s chairman Bob Rubin to join our service (we were still operating the business out of my partner’s house at the time – talk about “punching above your weight”!) or negotiating a board compensation package with former presidential candidate Senator Bill Bradley, being in over my head was one of the scariest and most fun parts of being an entrepreneur.

How do you know if you’re in over your head in a healthy way as compared to an unhealthy one?  One entrepreneur gave me a good rule of thumb for this just yesterday.  He suggested that entrepreneurs follow an 80/20 rule – they should always feel in command of 80% of the business, but feel way over their head 20% of the time.  It’s that 20% stretch that makes it fun and challenging.  But if an entrepreneur is on the wrong side of the 80/20 rule (i.e., are stretching 80% of the time and in command only 20%), then there is a deeper issue.

Here are a few recommendations for those who find themselves in that situation:

1) Be self-aware.  It’s ok to feel as if you are in over your head as an entrepreneur.  In fact, it’s natural.  Don’t be afraid to recognize it, admit it, and talk openly about it with your board and management team.  Figure out which side of the 80/20 rule you find yourself.

2) Learn your way out…with help.  Seek the advice of the wise men and women around you to learn how to step up and grow into the situation you find yourself in.  Don’t close yourself off to outside advice for fear of appearing weak.  Instead, embrace smart, diverse opinions to help shape your own.

3) Accept life preservers.  Many entrepereneurs are terrible at accepting help.  After all, the reason they’re entrepreneurs is that they enjoy being their own boss and are passionate and often stubborn about following their vision.  It’s hard for them to admit they need help and, sometimes, need a life preserver to pull them out of the situation.  It may mean hiring a COO, hiring a CEO and moving into a chairman role, or other big moves that risk giving up control.

When entrepreneurs are in over their head, it can be awkward.  But it doesn’t need to be.  Be honest and open with those around you and keep an eye out to make sure you’re not on the wrong end of the 80/20 rule!