One thing that became clear to me when I switched from entrepreneur to VC is that our product is our service and our people.
We don’t make an app that consumers can use.
We invest in great people trying to do great things.
When a customer turns down a startup’s product, they are basically saying, “we don’t want to use your product”.
But when a startup turns down a VC’s offer, it means, “i would rather work with someone else”. Assuming the offer was a fair one, that can feel pretty bad especially when the VC really feels strongly that they want to invest. It means they chose one person over another.
As a result, I’ve seen VCs do strange things when they get turned down or if they feel like the investment opportunity is slipping away. Sometimes, it works. I’ve seen a VC on the verge of losing an opportunity get it back and actually lead the investment. I’ve also seen the opposite where everything becomes painful and awkward and can lead to erratic behavior even with the best firms around.
Recently one of our portfolio companies was raising a new round of capital. It became a very competitive process where the founder was trying to make a decision between a number of great choices.
One of the VCs in contention was working very hard to get in but in the 11th hour, just a day before the founder was going to make his decision, this VC bowed out of the process altogether.
At the time, I thought it was an odd thing to do. I thought to myself, hey, this person seemed really interested. Did I misread it? Were they not passionate about this company and team after all? Did their ego get in the way and they didn’t want a reputation of “losing the deal?”.
In this particular case, I don’t think it was any of those things. The VC that bowed out just felt that there has to be mutual enthusiasm between the founder and the new investor. And during this process he didn’t feel like it.
A great relationship requires mutual interest. It can’t be one sided.
Even though I think that VC might have ultimately been able to make the investment, I respect and valued that decision.
All of this also ties into why I don’t like the idea of exploding term sheets as well. It’s best for the startup and VC to make the time and figure out if there is a good match without some artificial timeline.
And if you don’t feel the love in return than the relationship probably isn’t going to be good one anyway.