I love VCs. They are the reason I exist. 7 rounds and 2 exits later, VCs and I co-exist like the sky and the clouds.
Having said so, I deeply reflect on my experiences with VCs in companies that I own, mentor and closely follow & wish that they learn a bit of bonsai.
Why?
Because I firmly believe that:
Small is the new Big, and Small is how big Value gets created.
So, what’s the point?
In most VC funded companies, there is a sudden expectation from VCs to explode value creation just after the funding. To me, that is quite unrealistic.
Like a Bonsai plant that takes time, you cannot ever ‘force’ value to suddenly grow in a company. Growth comes over a longer period of massive pavement pounding, relationship building, slow but sure adoption and acceptance of a product or service and so on and so forth.
In the ‘Outliers’, Malcolm Gladwell actually empirically proves that it takes 10,000 hours to become great – that’s at least 5-7 years of non stop work.
So what happens when newly funded start-ups are held at gun point to grown in value?
Here are 7 deadly mistakes that typically ‘kill’ the business :
1. Good money is thrown into advertising -
Great brands take time to become valuable. No amount of ads can make you valuable. This leads to massive drainage of funds and when the ads stop, the brand becomes invisible again. Ask the 2000 dot com club for more details.
2. Hiring the President of America to run your company -
If you manage to get Obama to run your company, he will probably run it into the ground. These ‘names’ are useless. They come from Fortune 100 companies with 100s of people to take orders. Ask these pow-wow CEOs how many times they have sat outside a client’s office for 2 hours before a meeting to beg for a deal. That’s what happens in start ups and this is not what these guys are used to.
These big shots are great when the company is on a massive scaling up etc.., but not when its starting up.
3. Signing of irrelevant agreements and contracts -
In the bid to show ‘traction’, management is compelled to sign all kinds of MOUs, Letter of ‘Intents’, blah blah… These toilet paper documents rarely get consummated and just waste crucial top team time.
4. Rapid Changes in Business Plans -
It takes a long time for a business to become a business! Funded companies sometimes think of business models like fast food – just ready to buy, try and die! I have seen so many companies fail because they changed what they set out to do and then adopted ‘what’s hot’. Well, by the time they got around to doing that, their original business became hot again!
5. Bad Board Room Karma-
Board room management is such a killer. VCs sometimes begin to take offensive positions and their cross fire assassinates the CEO. In mobile2win China, we had Chinese and German investors and an Indian CEO. They all hated each other! All of them spoke their native language in a common board meeting! One VC told me that he wished the company was dead because he hated the CEO! I politely reminded him that his money was at stake but he just shrugged his shoulders.We finally exited the investors, fired the CEO, and got really lucky with Disney buying us after the resurrection!
6. Bad business deals and decisions-
In the hurry to show revenue and cash flow, sometimes deals get signed at negative values that haunt the company forever. Such stinking agreements become precedents in the markets and strangle the company. Clients never agree to improve payouts and it becomes a vicious cycle.
Management needs time and space to think through a business and how to model revenues and cash flows. It can’t be done in a hurry.
7. Let 100 companies fail as long as we get 1 right-
This is the deadliest problem. VCs sometimes play a simple mathematical game of hoping that 1 out of a 100 investments they make, gives them a 300-500 times return, hence getting back 5 times on their overall money.
Where does that leave the 99 entrepreneurs who didn’t sign up to be part of an experiment?
Its like throwing 100 folks in a middle of the ocean and asking them to swim to the shore. 99 will not be able to – they will drown.
If you did that to the 100 in a swimming pool, all would make it to the wall. Do it 50 times and then take them to the ocean. The results will be different.
I think VCs need to understand that each business and every entrepreneur is unique and approach their investments with lots of time and patience. Their returns will be far more spectacular than what they enjoy today.
Bonsai is a great starting point!
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Hi Alok ,
I liked the article.
In your future blogs can you share your thoughts on answering the following questions:
What is the right time to approach a VC ?
How does one value the company and how much stake should be given to the VC? Specially when the business model is new .
Some tips on the business plan and presentation ( elevator pitch) made to the VC.
Alok,
I can’t believe that you are writing such crap! Stop grand standing and start reducing that burn.
- Rahul
Hi Alok,
Buddy, this really is a very insightful and yet an enjoyable piece of work. Hope some VCs are listening.
To be true, VCs sometimes prove to be VC(ou)s for many entrepreneurs.
Today, as we see a big lot of emerging VCs, angel funding guys and, seed funding guys; all of whom were once successful entrepreneurs. They understood the game of entrepreneurship well and took on the holy mission of helping out other budding entrepreneurs. As it should be, they all have different patterns of selecting, shortlisting and funding entrepreneurs.
However, one thing they often forget is that every startup cannot be measured by the same parameters, even if they all belonged to the same domain. Using your kind of metaphors, I’d say, a bonsai of mango can’t and shouldn’t be slotted together with that of another variety of mango; not to talk about comparing it with apple. A Langda Mango will have almost everything different from an Alphonso variety, except for the name and species – requirement, strength to taste (of success). On the contrary, the VCs mistake at the time of their evaluation. It is at this time that the startups selected to be funded often get carried away to conform to the VCs’ criteria than sticking to their original vision at the onset.
According to me, the relationship between the entrepreneur and the VC should be more like a wife and husband than a father and child. This means not just holding hand like a father and making sure that the child (company) grows, even if the father’s wishes and vision sometimes overrule the kids’ aspirations. It has to be complimentary to each other, in spite of all sorts of differences.