Venture Capitalist Bill of Rights – Article Four: The right not to have your money pissed away!

Pardon, the coarse language, but I feel strongly about this one.  After 13+ years as a venture capitalist, I semi-jokingly say that I have only one criterion that a management team needs to meet in due diligence: will the CEO and the other execs on his/her team steal from me?!!!  Yes, that is how jaded I have become, but its true.  However, I should add that my definition of stealing is a lot wider than the one you will find in the OED.  For me, stealing includes: stealing (of course, but in the traditional sense), lying, obfuscating, misleading, being financially careless, but most of all, running out of money without accomplishing anything while pretending that you are (i.e. “pissing my money away”).  How is that stealing? You broke a promise to me: you said you would invest my money wisely and, instead, wasted it along with my time.

That does not mean failure is pissing away my money – it isn’t, even though you end up in the same spot.

A CEO we recently backed at FirstMark and whose company we helped start, failed the first time out of the gate with us.  We had backed his company in 1998, right at the start of the final phase of the tech bubble. As with any early stage company, we struggled at first to get the right business model, but he communicated clearly as events developed and what we learned as a result.  He made his board part of the discovery process and we were never surprised at any point.  But, just as we started getting a little traction, the collapse of the tech bubble began and it was clear that we would not grow fast enough to succeed in this very difficult environment.  The company had just signed a $500,000 deal which would have kept everyone employed for a little longer, but would have only postponed the inevitable.  With reality clearly facing him and after consulting the board, the CEO made the decision to wind down the company.  He returned the money to the customer, paid suppliers, gave severance to the employees (he took none), shut the company and had a little left over to give back to his investors.  Before they turned the lights off, his team took the sign off the building, signed it and presented it to him and thanked him for all he had done for them.  This CEO failed, but he pissed away nothing.

On the other hand, we recently sold a company we (FirstMark) had started in our basement for several hundred million dollars.  It was a nice exit, but it could have been nicer.  The CEO we brought-in wasted dollars on questionable strategies and questionable people.  He never achieved his operating plan and was never straightforward on this point, constantly changing goals, forcing his board to review past documents to hold him and management accountable. We fired him and the company got back on track, but we were lucky: this company did not deserve to succeed.  Nevertheless this CEO pissed away our money and the return could have been much higher.

Failure is part of life and it is most certainly part of the life of both a VC and an entrepreneur.  But an entrepreneur pissing away my money is not part of my life and should not be part of yours.  Some of you will point out that the CEO in the latter example was not an “entrepreneur” but, rather, an executive brought in to run the company.  Still, he had enough equity and was brought in early enough (in theory) to be the “entrepreneur” and the company was certainly entrepreneurial.  But, yes, you are right, and this is one of the reasons that now, we will not invest in a company unless we have an entrepreneur who we think can take the company all the way to success (as opposed to having a guy who has “been there, done that” come in and take the CEO position after we invest).

As we discussed in the prior post (Entrepreneur Bill of Rights – Article Four), taking money from an investor creates a moral obligation on the part of the entrepreneur to invest that money wisely to the best of his/her ability to generate a large return on investment for the investor.  When you piss it away, you break this obligation.  And, because you have broken your obligation to me, I no longer have an obligation to back you.  You no longer have a right to expect me to be there for you when you need me.  This is the crux of the VC/Entrepreneur relationship.

So here is my very partial list of actions that constitute “pissing away” my money (feel free to add others!):

• “Spinning” me
• Surprising me
• Being surprised when you really should not have been
• Failing to establish, failing to measure or constantly changing business objectives
• Completely ignoring my input and then failing
• Repeatedly missing launch dates as the product is “finished”
• Failing to “ask for the order” from customers
• Tolerating poor performers for too long
• Hiring people who are not smarter than you
• Engaging PR with no measurable objective
• Taking xpensive office space
• Building-out expensive infrastructure
• Hiring too many support staff
• Excessive travel
• Investing “ahead of the curve” when the “curve” is not established and is very unclear

By the way, this is why the “Entrepreneur Bill of Rights – Article One: You have the right to own 50% or more of your company” is so important: when you and your team own that much of your company, you are actually not pissing away my money – you’re pissing away your money!