Babbling VC

Skip the Books! Find A Mentor and Build a Network Early in Your Career

I made the mistake in my career of too often reaching to books. I greatly enjoy reading but all too often in life, experience is much better. Actually doing things gives you so much more than reading about it, especially if you make mistakes and learn from them. We all too often get caught up in trying to read about so many subjects and analyzing things instead of just going for it. Avoid this if you're a budding entrepreneur, especially early on in your career. Once you've managed to get things under control and you're established in your field, it's great to read books. This helps you tweak things to get better. But first, you need the actual experience and people involved in your career path.

As I wrote in the title of this blog, first find a mentor. There is nothing more important in becoming a better entrepreneur than having a good mentor. It doesn't necessarily have to remain one mentor either. Find the right people to give you advice at the right stages in your career, be it one, or be it twenty people. Nothing is better than having a go-to person to discuss your issues with. Optimally, it's someone in the same industry but I've had mentors in my career who had nothing to do with the industry I ended up in. The first one was an eye doctor. It's simply someone who can give you outside advice and who has some background information on you and knows how you tick. The best advice I received at times in my life stung. My mentor simply happened to know my weaknesses and faults after which he slapped me in the face with them.

Further, start building a network. You need people to help you open doors, get introductions and so forth. If you come from money and mom & dad provide you with this, good for you. The rest of you, get to work. This is reality. No book will help get you in someone's office or help you close a deal. That's what you personally end up doing physically. Networks help. If you have spare time, go ahead and grab a book. If you don't, focus early on in your career on expanding your network and getting put in touch with the right people. Read the previous paragraph and have your mentor put you in touch with people if necessary. It's tedious at times but I can't count the number of occasions I've been helped out in my career by having someone in my network who put me in the right place at the right time. In hindsight, it even looks like you knew what you were doing! Sure, there's some luck to this process but you have to be out there, working at it all the time.

The Flawed Terms in VC Deals

My partners and I have given an extensive amount of thought to the contracts we negotiate when investing in start-ups. After about a year of debate back and forth and executing on multiple options, we've become convinced that many terms we used to add to our contracts are basically crap. I also feel that the mentality in the industry of using boiler-plate contracts to begin negotiations is flawed. I do admit that we have a standard contract which we use as a template but basically we put as little in it as possible and add as necessary. Most deals I've seen in the past start the other way around. Take a template from a lawyer which includes everything plus the kitchen sink and then whittle away at it as part of the negotiation. Why did we switch to what we call our contract-lite? Basically to avoid all the bad blood which comes into play when negotiating with a start-up.

It's very difficult to standardize contracts but one thing which I'll focus on as an example is the drag-along clause. It's simply a bullshit term which makes sense to lawyers but not to us or most entrepreneurs. Have we had it in contracts before? Yes, it's made it way into many contracts. Will we never use it again? We'll try to avoid it but it's inevitably going to show up in certain situations. Why do we see the drag-along as unnecessary?

1.  First of all, the drag-along is one of the clauses we saw really hitting a nerve as part of negotiations. It's actually a really weak term in a contract, especially in Germany, where in hindsight you could have many legal implications by triggering it. 

2.  It psychologically terrifies the entrepreneur because he starts playing out the scenarios where it could be triggered. The reality is far from what he or she often believes is inevitable. We're not out to invest in companies and take them over to optimize our gain, screwing the founder in the process. Unfortunately, a drag-along stinks of this no matter how you dress it up. Further, the dynamics of a deal are totally different at the initial investment in comparison to the exit phase.

3.  It's often, if not always impossible to sell a company without the founder. We invest early in businesses. We also invest predominantly in management/founders and not just concepts. Hence, in all likelihood, when we sell the company, the buyer wants the founders as well. Historically, we've seen that the best exits we've had almost always had the original founders still running the company or in some senior management position. The buyer always wanted them for at least the transition and earn-outs always came into play. Combine a drag-along clause and earn-outs demanded by the buyer and you have a mess on your hands.

4.  You can easily negotiate other clauses to be both beneficial and fair to both the VC and the entrepreneur allowing you to avoid the bad blood which creeps up when fighting over a clause which is so one-sided.

Do we have the perfect solution? No, not yet in my opinion. We still end up having lots of discussions which revolve around the value the founder sees in his business and his role as opposed to our view of this. This post could be ten times as long were I to go into each and every term we've decided to pull out of the initial investment negotiation. The drag-along is just one term which I think clearly shows our thinking on this and it's an ongoing process. Nevertheless, we made the conscious decision to make the contract as "lite" as possible to be able to close the deal quickly and smoothly without lots of back-and-forth. 

Other VC's will have their own view on this. There are probably as many views as there are VC's. Add the lawyers to this equation and you can multiple that number by a factor of N, where N equals the number of lawyers out there. Still, we will continue trying to make our contract as simple and straight-forward as possible. This is necessary to close deals quickly and get to the important execution part on the side of both VC's and entrepreneurs. No matter how good your contract, without execution, it's basically the basis for a pissing contest without winners.

Working at the Office is so 1.0!

I initially was going to skip writing this post but figured having already written the comments on Fred's blog, I might as well add my two cents here and re-purpose my efforts. Fred posted "Getting Out from Behind Your Desk" yesterday. I have to admit, this post from Fred surprised me a bit and here's my first response in the comments to his post:

Fred, as some people have commented, I'm also a bit surprised that getting out of the office (and visiting your start-ups) isn't a greater part of your day-to-day activities (leaving out Zemanta, as that would be a tough commute regularly).

When we git pitched, after we initially decide to pursue a deeper dive into the investment, our first step is to visit the company. I consider this absolutely necessary to continue digging into a potential investment. In the course of due diligence, I also try to "work from" the offices of target companies to get a feel for the vibe. It doesn't always work in every case but I find it so eye-opening (both negatively and positively) to see how a company ticks and what goes on there. I always make it a point to visit my investments at least every couple of weeks just to do face-to-face meetings. It adds so much value and includes so much which gets left out when only the phone or email are used for communication.

My ultimate goal would be to basically be office-less. I'd love to simply always work from the offices of my investments. Unfortunately, this is unrealistic as there is day-to-day stuff back at the office plus all the pitch meetings. I think my partners would have issues as well were I to completely go off-site but this is because we only have one office. I think a lot of VC's who are remote satellites from their home offices are already doing this to some extent. It seems like Mark, who already commented up above, is doing this in some regard.

Here's my second response after Fred commented that he likes to be in the office for the interaction with his partners:

Basically Fred we have our regular "Monday meetings" ( we do them on Wednesday.) In this case, all three partners are together. We also have a formal pitch from a company for all three partners which happens somewhere in the middle of the D.D. process, after which we can really hash out all issues each partner may have. Further, we are all in the office at least one or two days a week. We may not all speak with one another but one or the other (we are also three partners) is usually there. Finally, we do use the technology available to us on a fairly spontaneous basis (email and phone). I prefer the face-to-face more with target companies and portfolio companies. I know my partners fairly well (as should most VC's) to not need to be face-to-face with them constantly, or definitely not as much as with the start-ups. Nevertheless, as I said, this is a process I too am constantly reviewing and trying to optimize as I surely have not yet found the perfect solution.

These two comments basically summarize my approach. In general, I've long lost the appreciation for office work in the traditional sense. Having one office, with a desk and telephone there, where you go each and every day and interact in one place with your colleagues. Sure, there are positions where you obviously have to go to the same office. Yet, as a VC (or mostly anyone in tech nowadays), you are simply no longer tied to your desk. Further, you get so much external input when working at other locations, interacting with people on their turf. Sure, you may miss some water-cooler talk around the office, but as I posted way back when, this is no longer necessary to be successful at your job. Honestly, I could live without but if you can't, start using Twitter, Facebook and IM's for it.