It's a Fine Line Between "Slow" and "Stupid"

The venture capital community has been getting slammed recently for moving too slowly. And these accusations, no matter how well founded or not, are beginning to stick. Entrepreneurs loath the idea of fundraising for protracted periods of time, and therefore they are particularly susceptible to this form of VC bashing. But I don't think that the accusations are fair. There are many of us in the venture community who are willing to work hard to get entrepreneurs a quick and definitive answer.

For a long time VCs have been lambasted for taking an unreasonable period of time to get to "no." Yet now the mantra is that VCs take too long to get to a "yes." Entrepreneurs are being trained to expect an answer during a first meeting and anything shy of that is officially "slow." I remember playing gin rummy with my grandmother as a small child and having her urge me to, "play fast and make mistakes." It would appear that some in the startup world would have VCs do the same around funding these days. Needless to say, that strikes me as irrational.

To my mind, there is a distinction between being too slow and not being irrationally fast. Many venture investors, myself included, would characterize ourselves as people investors. We bet on teams. And while we can get a great initial read on an entrepreneur or team of entrepreneurs in a first meeting, that is assuredly insufficient information to fully understand the individuals building a company, let alone the team dynamic. Taking time with a team of entrepreneurs is not about slowing things down. It is all about gathering information: how well do these entrepreneurs work together?; how well do they understand the competition?; how responsive are they to advice and introductions? etc. etc. Getting to know the people you are considering backing is an invaluable part of the investment process and most VCs take it seriously.

What's more, even if you are confident that you have a good read on the folks you are planning to back, there is no substitute for due diligence. Anyone who's been in the venture business for more than a few months has learned a surprising thing or two about a would-be CEO by making a few phone calls to former colleagues, bosses, classmates. Those calls are important -- sometimes to validate your good impression of an entrepreneur and sometimes to disabuse you of them. And no matter how powerfully-good your intuition is, there's no substitute for making the necessary diligence calls.

None of this should be taken to suggest that we VCs need months of time to get our work done. We don't (at least many of us don't). A few meetings and a bunch of phone calls can be compressed into a short period of time. But for those of us who are betting on teams of people with whom we intend to build big companies over the coming months and years, there are no shortcuts. It may be cliched, but it is a marriage. And there are very few marriage proposals made on first dates and fewer still that result in lasting and prosperous matrimony.

Note: This post was originally published on PEhub and can be found here.

Comments

[Jerome Gentolia]

It is ignorant for entrepreneurs to think this way.

If they are investing their own money, I am sure they will take their time and do a extensive due diligence as well. One thing investors have is time. An investor who takes time before making a decision shows experience. An investor who makes hasty decision is setting themselves up to trouble.

It is easy to shift blame on VCs, especially if the entrepreneurs are ignorant on how VCs really work. I see a lot of these VC bashing from entrepreneurs all over the internet.

My take on it! If they feel this way it only shows how clueless they are. Why would I devote more time and invest if I see they can be a huge potential problem as partners.

Partnership is like a marriage and it requires understanding and patience. Why will I marry someone who has no clue on who I am and what I do and how I work?

[Scott Walker]

Hey David - I'm a big fan of yours, but wanted to make two quick points: (i) it's the "slow maybe" (as John Doerr puts it - see http://bit.ly/c7MIRb) that drives entrepreneurs crazy; and (ii) I think it's a bit hyperbolic to suggest that most entrepreneurs "expect an answer during a first meeting." Cheers, Scott

[Zach Hurst]

What do you suggest a reasonable response time is?

Clearly entrepreneurs expecting a same day answer are inexperienced and are seeking short term capital; thus, displaying desperation and complete lack of leverage.

I think there are several factors to consider-- If it’s truly a hot deal, the VC needs to move a little quicker to ensure that his firm gets it before another firm does. If it’s a short term need that is brought upon due to unforeseen scalability and growth, the momentum of the company could be grossly affected if they are forced to shut down their servers while waiting on the next round. Happened to me once and I had to apologize to six million users. The other factor is the preparedness of the entrepreneur when they arrive in the first meeting. Entrepreneurs should expect due diligence and anticipate all the VCs questions/needs prior to arriving.

[Boris Revsin]

Just to weigh in as a Boston entrepreneur here.

All of the stuff above is true. Time is most definitely required to decide if the fit is right... just like most entrepreneurs take their time developing the business.

I think the true reason some entrepreneurs get off-keel is simple: criticism is a tough thing to handle. Nobody wants to hear a "No" (even if you say you do - you don't - not from a professional investor), so they discuss the best part of their business. The due diligence usually finds out the bad, and leads to a protracted no.

The vast majority of vc's we've spoken to or pitched have been smart and on the money. It's only when you're full of it that you get the 3 month due diligence. Or the guy you're talking to is a jerk - and a CEO should learn to read those sort of people quickly.

Cheers,
Boris

[twitter.com/chrisyeh]

David, I'm with you. There's also a difference between being fast and being smart.

Even though I'm an angel, and people seem to think we all write checks after the first meeting, I take an old-school approach. For every company, I ask for three things:

1) To try the product
2) To talk with an actual customer (or failing that, user)
3) To see historical financials

Most folks are ready to do 1), but entrepreneurs seem shocked when I ask to speak with a customer or see financials. Presumably I'm the first person to ask them for such unfashionable things!

I'm willing to move fast, and I'm willing to move without what we now all call "social proof", but I'm not willing to move unless I believe I'm investing in a great product that's part of a real business.

[Henry Preneur]

I understand the traditional process of discovery that needs to take place when evaluating a proposal. But isn't called "venture" capital for a reason? How much due diligence do you have to do before you talk yourself out of investing in a "venture"? If you don't trust your intution then why bother being a VC? Stick to being a M&A or PE advisor. That would be the domain of infinite due diligence. VC is like roulette. Do you sweat every time you put your chip on a number? What has happened is that expectations of VC has exceeded the return ratios. Folks, it is gambling. Like the casino. Most people lose. But when you win, you win BIG! There is an air excitment to VC that doesn't exist elsewhere. That is the big payoff and hopefully you learn a thing or two about spotting talent and transfer that knowledge to the next venture to make the next killing. Venture as in Ad-venture. It is an adventure and your money may not make out alive. Expect it going in and don't think about it long and hard because then it is no longer an adventure, it is drudgery.

[Boris Fowler]

These are all excellent points. Many entrepreneurs today feel like they are entitled to funding and money, but that is not the case. Investors approach spending money the same way everyone else does: they want to make sure they are making a solid investment that will be in their best interest. I found this blog here and it has been really insightful in the dealings with angels and other investors. Here is the link. http://www.caycon.com/blog/ I would encourage people to read this blog. It has really helped me out.

[John R. Sedivy]

By reading this article and the corresponding comments I can't help but think that the prevailing attitude may have been brought about by the tightening economy. Historically I had a perception of VCs as Henry's comment described, willing to take risk in the hope they would hit it big, but not necessarily expecting it. In essence, an adventure.

Personally my perception is that VCs are likely being extra careful as everyone is these days - consumers, banks, businesses, etc. Perhaps when the economy brightens additional risk (and a faster response) will be more fashionable.

Also, I would like to echo the recommendation of Boris about the Cayenne Consulting blog, I have found that site to consistently provide useful information concerning entrepreneurship and investor financing.

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