The Lies That Make People Hate VC (3/3)
Let’s face it, venture capital isn’t always the best respected profession. The tech community loves to make fun of the European vacations and yacht parties and generally, the tech community loves to make fun of VCs. Over the last two posts on Dam Venture we’ve talked about the not-too-bad lies that VCs tell. The white lies, and the lies in a grey area that don’t really hurt anyone. Today, we’re going to talk about a few of the worst lies VCs tell, and frankly, the reason that people love to hate VCs.
Reneged Term Sheets
We’ll kick it off with something that’s fairly self-explanatory. If you renege on a term sheet (disregarding a few extreme edge cases) you’re a dick, and you shouldn’t be investing in startups. Period.
There’s no such thing as diligence after a term sheet, and you should’ve figured out market price before you figured out that you’re overpaying. There’s nothing more to it.
“I’m Too Busy”
There’s a great TikTok I found a few months ago that says “I don’t know who needs to hear this, but nobody is ever too busy for you.” These are words to live by in both dating and in startups. No VC is ever too busy for your call. Very few theses can’t be flexed. By pretending otherwise, VCs create a fake illusion of scarcity of their time that doesn’t exist. No board member should ever be too busy for your meeting (although we can get double booked). And generally, your VC should work as hard for founders as founders work to build their startups. Very few do. If you’re recruiting for venture, or just trying to network with VCs, I’m too busy = no. By lying here, VCs waste everyone’s time, and can have extremely detrimental impacts on their portfolio companies and the industry broadly.
“We’re Very Hands-On”
Someting people often joke about: most VCs claim to be “value add investors” (and, if you ever visit my apartment our WiFi password is literally ValueAddInvestor), but most investors fall far short of that. After wiring, as a founder you’ll never hear from many VCs until the next round, or even sometimes the IPO.
Truth be told, you have to find the right fit for your company. Maybe you really need hands on guidance to build, but realistically you can get just as much value out of a VC who makes a few good warm intros, wires you the money, and leaves you alone, as you can from one who wants to call you every week. VC-Founder fit is majorly underrated. I personally try to let founders in our portfolio build but provide the right safety net and guidance so that I can be the first person off the bench if ever needed. Either way, VCs should be honest about their value adds, and never claim to provide services they don’t. Doing otherwise is just pure deceit to win a deal.
“We’re Collaborative With Other VCs”
See: All VCs Are Snakes (but Not All Snakes are Venemous)
“Yes, We Do/We Don’t Have Cash Left for You”
This one is a bit mixed, because most VCs (ourselves included) do create strict allocations for our companies based on monthly performance, projected valuation, exit value, etc.
However, over the last couple of years in the valley I’ve seen a couple (and mind you, it is only a couple) situations where VCs, for lack of a better term, royally screwed over startups by lying about reserves.
Whereas it’s a VCs decision and vote of confidence to say they don’t have cash left (and then force a startup into failure, or force other investors to increase their investment amount), lying about having reserves is extremely dangerous and toxic.
By saying that they have reserves and then changing their mind, VCs completely mess up any chance at fundraising a startup would have, and lead directly to a fire sale, an emergency down round, or winding down the business. No other option. I saw this happen in combination with a reneged bridge term sheet last year and the startup had three weeks to go out on their own to raise or sell, whereas they could’ve easily raised in the two months leading up to it. Not cool. Not at all.
Massaging the Numbers
Note that this particular lie isn’t in quotes, because it’s never something a VC says. Yet many VCs will massage their fund performance numbers and track record to artificially make them look more successful. Did they really invest in Uber? Or did they get a Series E secondary that they lost money on? Is their fund actually a 10X? Or is their entire portfolio crypto companies that raised their last priced round in 2021 (and raised big markdown SAFEs since)? These are the important questions.
Even worse though is that I’ve heard stories of VCs avoiding markdowns for years after a company has gone to zero or changing the terms of how they base their MOIC/calculate multiples depending on whatever will increase their fund performance as they approach fundraises. Not only is this a violation of fiduciary duty, but it’s just plain dishonest. Further, it doesn’t really matter as LPs can break commitments/pursue legal action if it turns out a VC lied during their fundraise. Either way, shameful for our class of asset managers broadly and disappointing how often this occurs.
There’s a reason LPs index on track record. There’s a reason founders want to work with VCs with a good track record and an established name. Even if it’s a mild misdirection, and within legal bounds, that doesn’t make it any better. We should strive to a world of honesty and transparency instead of posturing and virtue signaling. Come on.
“Of Course We Did Our Diligence”
I don’t know how deep I need to go into this given recent events in the crypto community but I’m about to drop a bomb:
*gasp* some VCs don’t actually do that much (or any) due diligence. We’re going to talk more about this in a later post, but charismatic people tend to drive fundraising hype waves, which in turn lead to VCs closing quickly with or without the diligence done to underwrite a deal on the back end. Many memos are written after wires are sent, and many memos never get written at all.
Not only is this disrespectful to the LPs that trust us to manage money, but it’s also disrespectful to the founders who are less charismatic. See, when big companies fail it can sour tastes in an entire space (or in this crypto crash, the entire early-stage venture sector) and ruin fundraises for founders who are working hard, have hit milestones, and are very legitimate. Sad to see, and something we desperately need to fix in my class of young VCs.
A Brief Conclusion to the Series
I’m definitely missing some lies here, feel free to drop me an email (andrew@builders.vc) or discuss in the comments and we can put everything together in a compilation for next year. The most important part of these lies is knowing that they’re out there so that you’ll never fall victim to them. All VCs are equal, but some are more equal than others.
And a Brief End of Year Message
So with that, the 2022 season of Dam Venture comes to an end. It’s been a pleasure writing (and frankly, venting), and I’m glad I can conclude by talking about these lies. If anything, the focus of this blog has been generational change. In my generation of VCs I firmly believe we have the ability to fix not only the lies, but many of the other fundamental, structural issues with the industry. But it has to start with us.
Until next year ✌️
Andrew
