One of our portfolio companies is raising money this year. It's a great company, run by a great CEO, and it will get funded in a competitive process. The CEO was briefing our partnership the other day and listed the firms he is talking to. In another start-up a number of years ago, he had been backed by an unnamed firm in Boston, led by an unnamed partner, and made them money. "Why aren't you going back to [insert name] at [insert firm]?" I asked innocently. "Life's too short," he replies pointedly, "to work with assholes."
At a time when there is likely to be some shakeout in the VC industry, a question that perplexes me is: Why do asshole VCs continue to survive?
Now don't get me wrong, I don't think the VC business is unique in its profile or behavior. According to the NVCA, there are 700 or so VC firms and 8,000 industry professionals (including associates, principals, etc). The vast majority of these folks are decent people. There are always a few bad apples in every barrel and an industry with type A, competitive people operating with very high stakes is likely to have its fair share. Talk to any entrepreneur who has gone through an extensive fundraising process and they will eagerly share some their favorite, colorful horror stories. So why do these VCs continue to succeed? Why isn't there a stronger, self-correcting feedback loop?
Here's the logic thread: the best entrepreneurs have choices, particularly those that have been successful before. They typically seek out the top VCs who are both smart/successful/value-add/relevant AND who are respectful/decent/good to work with (you can see my BCG roots coming through in the imaginary 2×2 matrix). Even if a VC is charming during the courting process, with minimal effort, reputations can be investigated and references carefully checked as to how they behave when things don't go according to plan. So why is it that Asshole VCs are able to persist? Shouldn't the best entrepreneurs avoid working with them and therefore shouldn't they be less successful over time?
One of my VC friends from Silicon Valley suggested one explanation: "Entrepreneurs get blinded by firm reputations and look past individual reputations. They don't do their due diligence on partners and check references carefully on the individual board member."
"If I were an entrepreneur given the choice between banging my head against a cinderblock wall for a year or taking money from [unnamed partner from unnamed firm]," observes one VC friend, "I'd opt for the cinderblock wall."
Ouch. With fewer financing choices for entrepreneurs likely in 2009, I hope they aren't faced with that sort of painful choice!