When I was a VC, I found the hardest part of the job was delivering the tough message of “no” to entrepreneurs. Nobody likes saying no, and it’s very hard to hear when you are invested in idea/company. Stuart Ellman and Jim Robinson of RRE Ventures have just published a good post highlighting some of the difficult messages they have to deliver. It reminds me a bit of the “you are the problem” post I did when I first left the venture business last year. Stuart and Jim’s piece is worth reading if you are curious to understand some of the issues VCs face when delivering tough news to startup executives.
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March 18th, 2010 at 10:41 pm
Healy,
I think the whole tough message issue can be avoided if VCs and entrepreneurs agree in writing upfront, before investing, on definitions of mutual expectations as well as of success and failure of Founders. CEOs, and top Managers. This will help Entrepreneurs anticipate and deal with their own failures without any need for tough messages. VCs and Entrepreneurs should follow the dictum of "No surprises."
This tough message issue is no different from a marriage where spouses have to have a tough message sessions with each other, which shows that the pre-nuptial expectations were unrealistic or delusional. Communications and calibration should be a continuous process in marriage as well as startup ventures.
Nat Kannan
CEO
Jeeva Portals, Inc.
nkannan@jeevaportals.com
March 19th, 2010 at 5:19 pm
Nat, I'm not sure I agree. I think there is a tacit/verbal agreement already. I understand where you are coming from, but it's not a lack of agreement that causes the issues, rather it is human nature. Everyone believes that open communication is for the best, but when it comes to telling someone "no" or "you are not meeting expectations" or "your ownership in this company is in danger of being wiped out" the nature of being a person and hearing a brutal message takes over.
March 21st, 2010 at 7:01 pm
Healy, I have personally never had much problem giving early warning to my direct reports that their work does not meet expectations long before a crisis and let them know that all their sweat equity will be lost.
I think frequent and fair evaluation process is a must for every one up and down the chain, including the Board Members who claim to bring value.
Nat
March 21st, 2010 at 7:57 pm
Did you have some sort of a written contract in place that governed the delivery/timing of this tough message(s)? Could be an interesting case study…
Also, re: a specific point. If a company is not doing well and need to raise additional funding, one of the points in the RRE investors' blog post is that VCs tend to invest $ in a company at the same valuation or in a bridge round instead of biting the bullet, delivering the tough message and doing a down round. I do wonder if the RRE folks are missing one of the important points of this "sticking the head in the sand" mentality – if you are the CEO of a company having a tough time, would you rather take a bridge financing or negotiate with your VCs for three months as they try to cram down your ownership? I'd rather take the bridge and keep focusing on running the business. While taking a down round is probably the "right" thing to do, the amount of effort required to negotiate and close one is going to be onerous to a company that should be focusing on turning itself around. Very curious to hear your opinion.
May 3rd, 2011 at 10:50 am
[...] true! Saying no is the biggest part of being a VC or an angel investor. And I hated doing it when I was a [...]