5 Things Most VCs Won't Tell You with August Capital

So I guess I'll start out by saying that Jason M. Lemkin and I— Jason, who started Saastr, have you guys seen Jason yet? Jason and I started both in the same incredible way that all people in the entrepreneurial ecosystem should start. We were attorneys. Turns out that's a— Not the best way to become anything other than an attorney, but luckily Jason and I escaped. Jason and I were both working at a firm called Venture Law Group back in the late '90s when the first internet emerged. And we were these young attorneys who were basically literally attached to our desks and pounding away. Jason won the award for the most hours suffered or something. And he basically looked angry every day, sad and angry. But now he and I have escaped. And now I'm a VC, he's a VC, life is good. And so since we've lived in the past where we were representing you, and we know what entrepreneurs go through, we have been making it our mission to tell you the truth. And it turns out that that just hasn't been the history of venture capital. It hasn't been the history that VCs get up there and go, "Oh, you want to know the truth?" They're usually telling you— I think it was Bill Gurley who said that venture capitalists are always selling, right? And there's something to that, obviously. That's why I wore this fantastic shirt. Because I think you're out there thinking, "I would like to work with the man who wore that shirt. That's how I'm a seller. I'm always selling." But Jason M. Lemkin and I I think are more inclined to say, like, oh, actually, it turns out that there's some good things about venture capital, and there's some bad things about venture capital. There are some good venture capitalists, and there's some bad venture capitalists. And so when this topic was proposed, I sort of sat there— I apologize, I'm like on the side. How's that? But then I'm here. I said, all right, there are a lot of things, actually, that VCs don't really tell you, and in fact, I started the very first venture capital blog over a decade ago. It was called Venture Blog. It was called Venture Blog because it was the first, so I could call it Venture Blog. The second had to call itself something else. I think the second called AVC. Sorry, Fred Wilson. Brad Feld went with Feld Thoughts. But we had Venture Blog. And I started because I thought that the venture industry was one that was extraordinarily non-transparent. For no good reason. Like, VCs were hiding things from you that would actually help all of us. So here's the overarching theme of what I'm going to say about the venture industry that nobody— no VCs tell you about. And that is that it turns out, despite lots and lots of efforts to try and suggest it to the contrary, that venture capitalists are not in charge of your business. Venture capitalists are not in charge of your process. They're not in charge of your financing process. They're not in charge of how you run your business. And they're not in charge of how you sell your business. Now, there are lots of VCs who would suggest the contrary. They, in fact, work very hard to suggest the contrary. And it turns out that it's not true. So for those of you entrepreneurs in the audience, here's the good news. You are in charge. The bad news is you are in charge. Right? You can't blame your VC because it's on you. On the good side, VC also can't tell you what to do because it's not our job. And so I thought I'd talk about 3 aspects of the process of company building and in this context. So the first one is fundraising. There is this mythology of fundraising that is like, oh, I come to I pay homage to the venture investor, and I pitch my business. The venture investor acts mighty and asks questions, which I am commanded to answer. And if all goes well, then that person tells me what the financing is. Right? It just turns out that's not the process, right? The process— no. It's much more like a dating process. I mean this— I'm cognizant in this time of MeToo and harassment and all that, that this is an analogy that I need to be careful with. But for what it's worth, I think this is dating in any sense of dating. And as I think about it, you come to a venture investor to try and get him or her excited about your business. And that first meeting is not about convincing the VC that this is a great company and therefore they will anoint you with capital. It is about building a relationship. It's about getting them excited about what you're doing and more importantly getting them excited about working with you. And the only goal of that first meeting should be a second meeting. Don't be confused into thinking that the goal of that first venture meeting is to get a term sheet. For two reasons. One, it never happens. So that's a good reason to not do it. And secondly, in the rare instance that I'm wrong and it actually happens, those people are morons. Like, you know, did I like my wife after our first date? I did very much. She was lovely. But I did not propose to her that night because that would be stupid. I went on another date and another date and got to know her and determined that maybe she could put up with me for 26 years. So far. And that's the venture process, right? So the amazing thing is you go through this process, you pitch a venture investor, and then the VC says like, oh, I have decided you're good enough. Here's a term sheet where I tell you the answer. Give me an— let me know by tomorrow. That's just not how it works. Again, that's not how it works, it turns out. Yet the entrepreneur naturally has this feeling like, oh my goodness, I've gotten a term sheet now, and this investor has all the cards, right? Here's an investor, they have millions of dollars, they're ready to give to me. I better take it or I'm gonna lose it. So here's the secret of venture capital, which is when someone gives you a term sheet, that term sheet's not going away. My year is to spend— to to hear about 1,000 businesses and meet with 100 and get excited about 10 and dive into 5 and work really hard and give maybe 2 term sheets. So I've gone from 1,000 opportunities to 2 where I've determined that I want to fund you. So if I give you a term sheet after that, 1 in 500, and you say, David, I'd like an extra week. Do I really go like, well, nope, I guess I'll try for another year. Damn, that whole year was a waste because you want an extra 4 days. No, that's not what happens. That person says, but don't you love me? Like, why do you need more time? You should take my money. This is when the tables turn. This is when the seller, the seller the buyer becomes seller. This is when I used to be like, I don't know about your company. Suddenly I'm like, please pick me. And don't forget that. It turns out that the second someone wants to fund your company, then you're in charge. And you get to say, I'm going to take as long as it takes. And I'm going to find the right partner for me. And don't be confused into thinking like just because you want to give me money, that therefore I have to take it, right? And I like to think of that, this is called an exploding term sheet, right? I'm gonna give you an exploding term sheet. You need to give me a decision by Friday or it explodes. And I like to think of that more like the exploding VC, which is like, please give me a decision by Friday, or either I will actually let the term sheet expire, in which case you're an idiot and you have exploded, Or you go like, "Oh, never mind. How about next Friday?" And that's the right answer, which is give you, the entrepreneur, the time to decide who is the right investor for you. All right? Here's the second piece. You've gone through this process. You've decided to take investment from some venture capitalist. By the way, here's another myth, that you have to take venture capital. You don't have to take venture capital. Like, if you have a business that— can generate enough capital that you can feed it back into the business and grow, then you never have to take venture capital. It's not like venture capital is some honor. Hey, I raised venture capital! Whoopie crap, it means you sold some shares in your company. That's not a thing. It's an enabler. If in fact it makes sense for your business to take money in exchange for shares of your company so that it will accelerate the business, then do it. There are plenty of amazing entrepreneurs who built huge businesses without taking money from me or anyone else in the venture business. Right? So just because VCs exist doesn't mean you need to take venture money. Doesn't mean that you shouldn't. There are all sorts of reasons to take venture money, but just remember VC is not in and of itself a prize. It's the means to an end, and the end is to continue to build an amazing business. So you say, "Hey, David, I really like you, and I think that it'd be great to work with you and August Capital, and I give you $8 million, and I buy some part of your company, and then we get to work in building the business." Now here's the second one I've seen. I've been on lots of boards. I've been in the venture business almost 20 years now, so I've sat in on a lot of board meetings. A lot of board meetings. There are VCs who then think it is their job to tell you how to run your company. This is a bad idea. Why? Because most VCs don't know what the fuck they're talking about. It's like, you know, first of all, some of us haven't run businesses. Secondly, those of us who have run businesses ran a different business, not your business. If they ran your business, why are they funding your business? It doesn't make any sense. So it is not the venture capitalist's job to tell you how to run your business. And yet I sit in all these board meetings where I'll hear a VC say, hey, you know, at the next board meeting, can you do me a favor and show me this metric and that metric and this metric and blah, you know? And the poor entrepreneur sitting there like, okay, you know, like, you're on the board. The answer to that is no, I will not show you those because I don't care about those stupid metrics. Because they don't— they're not relevant. You know why they're not relevant? Because you don't know what you're talking about. That's not how I run my business. So when I'm in these board meetings and someone says, like, I want you to provide this information, I always say the same thing, which I say to the CEO. Oh, is that how you measure your business? Are those the metrics that are relevant to how you measure your business? And if the entrepreneur says yes, then I say, great, it would be awesome to see that data. Since that's how you're measuring your business, you should have data on it. And if the entrepreneur says no, then I say, oh, why don't you measure that? And they inevitably say, because that's stupid, and we wouldn't measure these stupid things that you asked us to measure. And then I say, then yeah, maybe you shouldn't provide us with stupid info. And then the venture capitalist who's requested it looks at me and says, like, you're a jerk. But on the good side, the entrepreneur doesn't have to provide information that is not a good use of his or her time. Venture investors aren't in charge of your business. It is not our job to tell you how to measure your business. It is not our job to tell you what direction to take your business. It is our job to advise you, to share our opinions, to try and help you. All of those things are true. But VCs should not confuse themselves for operators. It is not what we do. We sit on the board, we have a fiduciary duty to the company, and we have a fiduciary duty to our investors, and we're trying to do those two things simultaneously. We're trying to make our shares worth more money so we can give more money back to our investors, and we're trying to make your company more successful, which conveniently is directly related to making my shares worth more money, right? And that doesn't mean, oh, I'm going to tell you how to run your business. All right. The last thing that VCs are not in charge of is selling your company. That's not our job either. Now, some VCs used to be investment bankers, and they think that's their job. But those VCs who were investment bankers also tend to be the ones who tell you how to run your business along the way, which they don't know anything about. So at least they know something about selling your business. But you should be just as likely to say, I hear what you are saying. Thank you for your opinion. It is neither the venture investor's job to tell you to sell your business— hey, this is a time you must sell your business— nor is it in a venture investor's interest to tell you you can't sell your business. And yet there's this mythology that says like, oh, VCs tell you what you have to do. Like they tell you when the company must be sold, or they tell you absolutely can't sell the business. Well, here's the thing about it. Let's say a VC tells you you have to sell your business and you're running a company and you don't think it's the right time to sell your business. Who's in charge of that process? Right? What would— how would that happen even? I would go to a company and say, hey, Salesforce, you should buy my portfolio company. They say, great, I'd love to meet with the CEO. And then the CEO says, yeah, yeah, I'm not really interested in selling. And that's the end of that process. The same is true for an entrepreneur who says, "I want to sell my company." And you say, "I don't think it's the right time to sell the company." They say, "I hear what you're saying, but blah, blah, blah. I want to sell this company. Now is the opportunity. Now's the time." If the VC says, "No, this is the wrong time," who's running the company? I go back to my earlier point that VCs are not the right people to be running your company. So, if you aren't running that company, who is? Who's running it? So if you think the right thing for your company is to sell that business, there is no rational venture investor on the planet who will say, no, you can't do that. They might say, as I have on occasion, say, oh, please don't do that. They might say, like, I think it's kind of a great company. Wouldn't it be awesome if you didn't sell it? And then that entrepreneur will say, like, I don't know, I kind of get rich if I sell it. And you kind of go, yeah, but you could be richer. You know, like you might be richer if you don't sell it and you wait and you sell it later. And on occasion, the entrepreneur said, yeah, all right. And on occasion, the entrepreneur said, nah, I want to be rich today, or I want to sell the company today because tomorrow it is in big trouble or whatever. And you say, oh, sell it. Like, sell it. You should totally sell that company. My bad, I thought you were doing great. Nope. Turns out this company's sucking wind. Oh, sell it. By all means, sell it. So, as I said, I could go on forever. I think I have like 3 minutes left, but let me just say, none of this is to say that venture capitalists can't be helpful to your business. None of this is to say that you shouldn't take venture money, that VCs don't have lots of things they can do to help, right? All venture money is not fungible. Money may be fungible. A dollar here is the same as a dollar here. But there are lots of venture investors out there. And there are good venture investors and there are bad venture investors. But the good ones understand that it is their job first and foremost to win your trust to win you over, to get you excited about working with them. And the reason is that you'll get excited about working with them is that when you then do work with them, they won't think it's their job to tell you what to do. They will think it's their opportunity to help you be successful, to celebrate the successes, to help you through the challenging times, to bring their perspective and their relationships and their capacity to fund your company with more money, et cetera. All of which to help you build a bigger and more exciting business. And those same venture investors who are good at their job and who are helpful to you will help you find that moment in time when either you can take the company public or you can sell that business and celebrate that win with you and not be a friction in that process, be someone that helps and supports it, right? So know that there are alternatives. Know that as entrepreneurs you have choices. And make sure that you're— that you've spent the time to know which thing you're getting, and, and make sure that you get the version that you're excited about over the next 10 or 15 years. I've been on boards now for 13, 15 years. You know, you know what you're getting with me, and if that's gonna scare you after 2 years, like, don't do that, you know. But if— but if you are excited about building this partnership for the next 2 decades, then you, you're gonna you're going to have a great partnership, and that investor is going to be sitting alongside you and helping you and cheering you on for the foreseeable future. So I think that's all I have time for. Thank you so much for listening, and good luck.