Entrepreneurs to venture capitalists: We’re looking for 5 traits

Entrepreneurs to venture capitalists: We’re looking for 5 traits

May 23, 2014 3:30 PM
Ryan Caldbeck, CircleUp

I’ve met with dozens and dozens of VC investors over the years, both formally and informally. Some passed on my company. Others we passed on. I’ve also had hundreds of conversations with other entrepreneurs about their experiences with venture investors. These opportunities have given me a good understanding as to what makes a great (and not-so-great) venture capitalist. I also worked in private equity for years before starting CircleUp, and this experience has given me the added perspective of having sat on both sides of the table.

Don’t get me wrong, VCs as a group are hard-working and their jobs are not easy; they need to process a lot of information in very little time; they need to be right more often than they’re wrong; and they’re responsible for large sums of other people’s money. It’s a stressful job. But there are still some simple ways for almost all VCs to improve. Mostly, it comes down to being the sort of person that other people want to do business with. The world is small, and reputation matters. If you want to stand out as a VC investor, these simple rules will lead you to the very top of most entrepreneurs’ lists.

Rule 1: Show integrity

Don’t talk about it. Don’t put “We have integrity” on your website. Just show it. Don’t ask me for my A round deck when you just invested in a direct competitor last week (yes, that’s a real-life example). Don’t call me back for a second meeting and then tell me — at the end of that second meeting — that you simply don’t invest in this space. You knew my space from my first email to you. That’s another real-life example, and while the investor in question may have had good intentions (he told me at the end of the second meeting that while he couldn’t invest, he hoped our meetings had been “helpful”), we probably both would have been better served if he had disclosed at the outset that my space was simply one in which he did not invest.

I know VCs that have told their partners to bring in potential companies just to extract information. That practice disrespects the entrepreneur, leaves him with a poor impression of that VC, and simply runs contrary to the basic principle that we should treat others as we would like to be treated. Rules that make for a good life, make for good business. Conversely, the VC who disrespects an entrepreneur for some small advantage will find that he lost far more than he has gained. Apart from damage to his reputation, he most likely will miss out on what would have been a third meeting … after the entrepreneur’s company has proven to be successful and is raising a B round in which the VC would have loved to invest.

Rule 2: Stop saying, “We only invest in billion-dollar businesses”

If I had a dollar for every time a VC had told me, or other entrepreneurs I know, that they “only invest in billion-dollar companies,” I might have a billion dollars. Given the rarity of the billion-dollar unicorn (hat tip Aileen Lee), it is not only delusional to think that any VC firm only invests in such companies, it distorts the market. Moreover, it makes it sound as if the majority of VCs are just wrong more than 99 percent of the time. Entrepreneurs need to build a compelling argument, we get that, but there is nothing magical about the $1 billion number in any real financial analysis.

Rule 3: Be on time

When I schedule a 2:00 appointment for a meeting, I expect that the meeting will start at 2:00. I am, after all, asking that someone else take time out of their day and that they rearrange their schedule so that they can meet me at the agreed-upon time. To the extent that I don’t care whether I show up on time or not, I convey a message loud and clear that I don’t care about or respect the person with whom I’m meeting. Unfortunately, it seems almost the norm now; so much so that a venture capitalist who lives his life — including his business life — respectfully, greatly enhances his image, simply by appearing on time.

I don’t think it’s too far off to say that over 80% of VCs from top-tier funds show up late — very late — for meetings. One shining exception to this disrespectful practice is, fittingly, a shining VC firm: Sequoia Capital. Sequoia Capital not only has recognized the problem, it has created an interesting internal policy as a result. Sequoia Capital actually fines its partners for every minute they are late for a scheduled meeting. The fine goes to the entrepreneur that was made to wait. Most entrepreneurs I’ve talked to, whether Sequoia passed on them or not, have proactively remarked to me how they felt respected.

It should not go unnoticed that one of the most respected VC firms in the country respects the entrepreneurs with whom it deals — and shows it. That demonstrated respect may just be one key (and easy-to-replicate) reason why entrepreneurs like working with them.

Rule 4: Respect what you don’t know

If you are not an expert in financial tech, or social, or mobile, or organizational behavior, or hiring, or product development, or marketplaces, or anything else, it’s OK. No entrepreneur will think less of you. In fact, if you stop suggesting solutions and start asking questions to learn, you will forever endear yourself to the entrepreneur in front of you.

I made this mistake often when I sat on the investor’s side of the table. I remember making suggestions to companies based on 5-10 minutes of context. The implication is that the investor — me, at the time — is so smart that I could have figured out in 5-10 minutes what the entrepreneur could not, even though he had been struggling with the problem for months or years. Looking back now, the word “arrogance” comes to mind (and it probably came to the mind of the entrepreneur at the time). Accept the fact that just because an entrepreneur is asking you to invest doesn’t mean you know more about every part of her business than she does; it only means you have access to more money. So if an entrepreneur talks to you about the challenges of the business, don’t jump to the conclusion that he’s asking you for advice. The safer conclusion is that you have before you an entrepreneur smart enough to see the challenges of business. If you sense that he might be asking for advice, at least start with some questions that might lead to him discovering his own answers. He will feel better, and you will have seen how his mind works. Socrates knew what he was doing.

Rule 5: Say no. But actually say it

Entrepreneurs just want an answer. We’re adults, and we’ve heard “No” plenty of times. We hear no every day, from customers, suppliers, candidates we are recruiting and other investors. We can take it. And you know what else? If we hear no for the first round, we are actually more likely to meet again with you in future rounds when you might be more interested. That runs counter to how many VCs perceive the situation, but it’s true.

At my accredited investor crowdfunding company, CircleUp, we’ve been fortunate to raise three rounds, all relatively quickly. The most recent ($14M B round) took less than four weeks to complete, and we met with fewer than five firms. I say that not to impress (I don’t think raising money is impressive), but to emphasize the point that no matter how well things are moving, you are anxious about the fundraising process. I was anxious in every round. I just was. When you meet with an investor and they say something like, “This is going to be huge. We need to do this deal,” you begin to get excited about what comes next. One investor said that to me in our A round, left the meeting and then never called or emailed again. Another investor in our B round, after meeting with us twice, called one of our major investors (twice) to say how much he loved the deal and that he “absolutely had to be involved here.” Then he disappeared, and never called or emailed to explain why. I expect that any entrepreneur who asks me about him will hear that story. Not because I’m trying to be vindictive, but because that’s the data I have on him. I’ll contrast that with an investor I met in the A round. After 30 minutes he told me he wasn’t interested, and had a very well thought out argument. I obviously disagreed, but that’s not the point- I just appreciated his sincerity. Since then, I’ve referred him multiple deals — not because I think working with him on CircleUp will be a fit, but because I respect him and I respect how he does business. He is direct. Entrepreneurs love that. Time is our most precious asset and it’s very frustrating for us when someone wastes it.

The explanation I’ve heard from many VCs about this sort of behavior is that they don’t want to say no because they fear that if they formally pass on a deal, they’ll never have another shot at it. They believe that if they don’t formally pass, the relationship can continue. That’s a fundamentally flawed understanding of what’s happening on the other side of the table. Entrepreneurs — who are all chronically anxious, no matter how well things are going — just want to know where they stand so they can move forward. If you give them some sort of explanation along with a formal “no,” they will appreciate it and want to meet with you again in the future. My rule of thumb, and I’m not alone here, is that if an investor passes and gives thoughtful feedback I will call them again.

Those that just never respond? I can’t imagine working with them again. That happened recently. In our A round a top-five VC firm met with me, heard the story and never gave me a formal no or an explanation. About four months before our B Round, they started reaching out both directly and through one of our major investors to re-start conversations. We didn’t end up meeting, in large part because of how they treated us in the A Round. I want partners that are wiling to communicate the tough news — to be candid and forthright with me. And I think most other entrepreneurs want the same thing.

Ryan Caldbeck is cofounder and CEO of CircleUp, an accredited investor crowdfunding platform focused on consumer and retail companies. Before he started CircleUp, he worked in consumer-focused private equity at TSG Consumer Partners and Encore Consumer Capital.



About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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