Trustworthy, hands-off venture capital

I recently came across “The VC-CEO Brand Gap” chart in this study on the role of brand in venture capital. The chart shows the attributes which startup CEO’s seek in venture capital firms, and those which venture capitalists emphasize when trying to convince startups to take their money.

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The biggest gaps in what entrepreneurs really want and what venture capitalists think they want are in the areas of trustworthiness and hands-on input. Specifically, entrepreneurs want trustworthy investors a lot more than investors think they do, and they want hands-on investors a lot less than investors like to think.

When I first started investing, I also thought that I could deliver the greatest value to our startups by being hands-on. I wrote them lengthy emails about the strengths and weaknesses of specific product features, shared articles about what their competitors were doing, and constantly thought about people I could introduce them to. Even though I was performing each of these activities with positive intentions, after several years of pursuing this hands-on approach, I discovered that my efforts didn’t help our startups.

The startups with great founders who ultimately became successful were already aware of the product changes they needed to make, were informed about what their competition was doing even before an article was released, and proactively reached out to me when they wanted me to introduce them to someone. In other words, my proactive inputs in these areas weren’t valuable to the founders. In some cases these uncalled for interventions even created additional unnecessary work and stress for them.

A byproduct of my hands-on approach was that I invested in several companies where I didn’t have a very strong initial conviction because I falsely believed that I could fix the company’s shortcomings after making the investment. In other words, my hands-on approach was not only not benefiting the startup, it was also harming the quality of my investment decisions.

With experience, I’ve learned that the entrepreneurs in The VC-CEO Brand Gap study are correct. A hands-on approach by investors harms both startups and investors. What the best entrepreneurs need is not hands-on involvement but a trustworthy relationship. This means two things.

First, investors need to trust that the entrepreneurs they invest in will work hard and make the right decisions on daily activities like developing specific product features and being aware of their competitive environment. This approach not only enhances the productivity of the entrepreneur, but also improves the quality of a VC’s investment decision making.

Second, entrepreneurs need to trust that their investors will be transparent and fair in their interactions with the entrepreneur. This doesn’t mean that investors will always agree with what the entrepreneur thinks, or that they will always act according to the entrepreneur’s wishes. However, they must always be upfront in sharing their thoughts and the underlying reasons behind their actions with the entrepreneur. Examples of such trustworthy behavior include following up on commitments to engage potential employees, investors, business partners, and acquirers, clearly communicating what performance targets the investor needs to see in order to make a follow-on investment in the company, and not harming the company’s chances of finding funding elsewhere if the investor decides not to invest in the company’s next round.

By replacing the effort which I used to dedicate to pursuing a hands-on approach to the daily activities of our startups with a new focus on building trustworthy long-term relationships with our entrepreneurs, I’m now able to contribute far more to the success of our startups than I was contributing in the past. The better investment decisions which result from this approach are also a valuable bonus.

Also published on Medium.