Making hard investments: VCs pitching to entrepreneurs, not the other way around.Posted: March 6, 2014
Imagine that you are approached by literally thousands of folks every year. Nearly everyone you will meet would love to take your money, is particularly nice and says you’re a great guy and the right partner for their company.
If you are not careful, you will start believing it. You will get used to entrepreneurs reaching out to you – not you to them; they will come to your office – you wont bother taking the first meeting at their place; they play to your timeline, to your terms. And from all those people you meet you will invest in the ones you think are the best. And because in venture capital it can take many years before you realise you may not be very good at your job, you will go on like this for years and years. “We have such good proprietary deal-flow”, “we see nearly every deal on the market – they come to us” is what you will think and say.
What is actually happening is that you are engaging and getting feedback from the wrong side of the market. You have become an adverse selection investor. It’s a common VC movie that does not end well.
A clear observation of mine is that – as a rule of thumb with exceptions – the best investments are usually the hardest. You have to fight to get in; fight hard to convince the entrepreneur you are the best partner. You’ll get a few knocks, it’s humbling.
But it’s good for you, keeps you on your toes. Don’t need funding right now? – how about we take out those seed investors in an attractive secondary and put in a little fresh money on top at a much higher valuation to make this work? Being creative, finding ways of having the best companies and entrepreneurs accept your money – not finding the easiest (laziest) way of investing money in whoever walks in your door.
The best deals are when VCs are pitching founders.
For some folks this is an observation from the church of the bleeding obvious. And they are right. But I still see it every day. That is why I am very happy to observe increased competition in the European VC market. It is good for everyone.