Monday, June 02, 2008

Active Investors

When we were raising money for Kendara we had a number of conversations with David Cowan of Bessemer ventures. He had funded Visto which was cofounded by a number of our friends from the Java group. One point I remember him making was that we were 'Assuming Success' which meant that the value of the system would be most apparent when it had achieved critical mass, but that it would be difficult to get this traction without already having it. I didn't agree with him in our case, but I have seen several startups making that mistake.

He was very busy, and said he couldn't be a primary investor on our deal, but that he would be interested in being a passive second investor. This sounded great to me as we already had very active interest from a couple of investors including Jon Feiber at MDV. In conversation with Jon, I mentioned the idea of a passive second investor, and he basically said, "yeah, I'd like to be passive too". But he wasn't and said that if we were going to get a second investor it needed to be someone very engaged in the business. We ended up working with him and Tim Haley of RedPoint Ventures.

Its a slight contrast with Paul Graham's philosophy. From YCombinator About
We try to interfere as little as possible in the startups we fund. We don't want board seats, rights to participate in future rounds, vetoes over strategic decisions, or any of the other powers investors sometimes require. We offer lots of advice, but we can't force anyone to take it. We realize that independence is one of the reasons people want to start startups in the first place. And frankly, it's also one of the reasons startups succeed. Investors who try to control the companies they fund often end up destroying them.

Both Tim and Jon had seats on the board and more than influenced certain actions like bringing on a CEO.

Paul et. all clearly contribute and I'm sure heavily influence a variety of decisions the founders make. Its interesting that they don't wire this kind of power into the terms. Maybe, with the small equity they have (2 - 10%), and the number of teams they process, they simply don't have time or incentive to fight, or take on the real (time consuming) responsibilities sitting on the board entails.

It works out right for the entrepreneurs too. Nevermind legal action, pissing off PG isn't going to be in the best interests of any founders career objectives. The equity is too small to get too worried about, and not having to worry about board approval or meetings is definitely a significant burden very small companies may be better off without, if they can get input in other ways.

EIR (Entrepreneur In Residence) programs at VCs seem to work on similar terms. Small amounts of money, lots of interaction and advice. Without specific legal restrictions prohibiting EIRs from working with other companies, the goodwill generated from the program creates a strong bias towards that VC. And again, its very reputation oriented.

No comments: