1. I founded a company called Evernet in the 1980s, funded by Kleiner Perkins and others. Vinod negotiated against at least one founder, me, hard. Then KP made sad but traditional VC errors along the lines of changing the company's strategy from a good idea to a bad one, bringing in the wrong operating management and all that.
2. So I tracked news and anecdotes. Vinod prided himself on being a tough negotiator on behalf of his portfolio companies. But various other stories of negotiating hard against entrepreneurs were out there.
I should clarify that in the 1980s, even more than recently, there was a general screw-the-founder philosophy among VCs. I once asked a popular and likeable VC what some rules of thumb were for equity splits. After some back and forth, the VC said "You don't get it, Curt -- it's whatever we can get away with." But Vinod seemed like a particularly tough exemplar of the trend.
3. I advise 20-30+ tech companies at a time. Most are VC-backed startups. Khosla is the 2nd-worst target of negative VC anecdotes I hear, details of which must however remain confidential.
Wow, was surprised to find the beach comment on the top :-) Amongst people who know Vinod I have heard a common theme but he is included in the list of inhibiting potential for second guessing everything, and creating an unhealthy tension in the founding teams. But isn't that the way of things? VC's want their investment to thrive, and because they have money and you don't they will always assume they know how to make it thrive and you don't. The only difference is how much leeway they give you.
This is the time I need to pop up every so often. Vinod has a very negative reputation in the Valley. He used to be known as the biggest anti-founder VC when he was at Kleiner. He'd come in, use sharp elbows to push founders around and out, then companies would crumble. He's learned but not enough.
His new marketing of himself has helped (as has Rabois), but you can't change who he is. When given a chance, he'll take advantage of early stage startups. That's why you don't see many companies he's made. And he's been at it a long time - 27 years! He gets in the way because it's all about him and his huge, insatiable ego. He's much more old school VC in that way - but in the Tom Perkins vein, not Don Valentine. It's his way because it's his money.
The only way to keep Vinod honest is to get other investors. If he's your lead, the knife isn't far from your back.
Repeating as public service announcement of what folks in the know tell each other:
Vinod has a very negative reputation in the Valley. He used to be known as the biggest anti-founder VC when he was at Kleiner. He'd come in, use sharp elbows to push founders around and out, then companies would crumble. He's learned but not enough.
His new marketing of himself has helped (as has Rabois), but you can't change who he is. When given a chance, he'll take advantage of early stage startups. That's why you don't see many companies he's made. And he's been at it a long time - 27 years! He gets in the way because it's all about him and his huge, insatiable ego. He's much more old school VC in that way - but in the Tom Perkins vein, not Don Valentine. It's his way because it's his money.
The only way to keep Vinod honest is to get other investors. If he's your lead, the knife isn't far from your back.
Disagree. I think some of these VCs are just trigger-happy when it comes to dealing with founders. I don't know why this is the case; may be they think it's easy and they know better.
How often do you hear VCs talk about how much they're on the founder's side like Vinod Khosla. At almost every turn, you'll hear Vinod go on about his reverence for founders. He does however add that this is not always the case. Sometimes, he says, founders must be asked to leave. When Vinod tells you to step aside, I think he'd most likely be right because you know his intentions aren't malicious. Do I think it had gotten to that point with Travis? My answer would be no.
Another point: A founder of a "hyped" company can always turn down an investor at a high valuation for another investor at a lower valuation (that presumably offers some other sort of value-add).
The situation Vinod describes would therefore only exist if founders either:
a) Didn't agree with him about the role of an early investor, or
b) Were not optimizing for their company's success.
------
edit
------
It's also worth nothing that if (a) above were common and I were a price-sensitive value-add investor I'd give interviews exactly like the one Vinod gave to Techcrunch.
I'd attempt to convince entrepreneurs that they shouldn't focus on valuations and should instead focus on the benefits investors (like my firm) provide. This isn't an uncommon argument (though it normally happens behind closed doors). Google Ventures, for example, is known to make it [1].
Different motivations AND different evaluations of the company and market between the VCs and the founders. Also different risks and rewards for the VC and the founders.
Sometimes the VC thinks that the market the startup is in is a bubble and the VC will push for growth over long term health. Sometimes the VC is right and sometimes they are wrong.
I've seen this play out where the VC pushed for growth probably to get acquired. The VC may have been mostly right since the market was a bubble that popped. One competitor was able to pivot though and ended up with 4X. Most competitors failed. Perhaps the VC wanted the money or perhaps the VC didn't believe in the founders.
Sometimes the startup has no market and then the VC may push for actions that lead to acquisition. Sometimes the founders demand additional incentives in the acquisition.
I've seen this play out since the VCs probably at best break even and want to wash their hands and the founders threaten to stop the deal since they lost out on salary and stock founding the company.
This helped my understanding of VC/founder relation much better. Thanks for putting a broader perspective to the situation described in the original post.
VCs aren't assholes, generally, but their standard terms are a bad deal for founders, generally. I've thought about this a lot over the past 25 years. In the past I've seen VCs do really bad things (like force decisions that set the company back 18 months bad.) The problem is, when you get a "good" VC that doesn't force bad decisions on you ,the cost of the money, mostly in deal terms, is too damn high.
And when you push back on them about this the response is you get are generally:
"This is a standard term" eg: everybody else is doing it. Well, tough. I'm actually reading before signing.
"If we don't have this method of double dipping [one of the four different ways they are doing so], then you could take the company and sell it for the money we put into it and that would be a bad deal for us." You mean your share of the company in such a situation isn't equal to the amount of money you put in? First off, I don't believe you because this valuation is kind of a joke and you've spent weeks telling us scary stories to try and keep it down, and secondly, your inability to get the equity you want for your money is your problem, not mine. That is like saying you think you're getting a bad deal so you want to cheat me to get a better deal? So let me get this straight, I took real risk and built up sweat equity, but you want my shares to be discounted effectively because you don't trust me? Ok, how about we discount your shares because I don't trust you? (I don't trust anyone who doesn't trust me. Usually they're projecting their own intentions.) Also, all you're doing-- at best-- is putting money in. Money can be acquired from any number of places and methods. The expertise we gained while building the company is irreplaceable and the knowledge of our own product and the risk we took getting it to here is far more valuable than your money. So, we have a split of the shares that accounts for that. The shares you get account for all of that.
"trust us". Nope, if you don't trust me, don't do a deal with me.
Don't even get me started on founders vesting their shares. You build a company, you have sweat equity, but the VC wants to reset the vesting? Why ? You can't vote unvested shares. They will give you a song and dance about "what if a founder leaves?" Well, we covered that in our articles of incorporation because we're not idiots, but they will ignore that and insist that "all founders must vest all their shares". (this is more common on early VC deals.) That's straight up taking paid for (with equity) and earn shares and turning them into a class of potential shares. Nope Nope Nope. Give founders part of the option pool as an incentive, fine. But reseting is just setting you up to be sucker punched when they want to replace a founder (because they don't like how things are going and need a scapegoat, no matter that it's the worst thing for the business at that point. But Tada! All your shares you already earned are now vesting again! Look at that! Even thought the other founders don't want you out, you don't have enough votes!
I think that the culture of "startups" over the past decade has become a bit cargo cult where there's a specific plane you build to get the money to rain from the sky.
This is: Go to accelerator, do VC deal, take the VC money and buy growth, use that to do another VC deal, rinse and repeat until you either stumble onto a working business (Uber, AirBnB) or you go bust (get Satisfaction)
The problem with this is that the cost of those VC deals are not in the founders interests. Far too often they hit base hits and build viable fast growing companies and then get taken out and don't get adequately compensated (and all the non-founder employees really get screwed.)
The other problems with this is once you take money from a VC you're locked into trying, and repeatedly betting the company, on being the next Uber. Being 37 Signals is not sufficient. Being Github (before the A18Z investment) is not sufficient.... even though both of those are obviously great fast growing companies that would make their founders and employees a lot of money at a liquidation event. And such event is far less likely under VCs because they want a $1B valuation (in fact their fund NEEDS a $1B valuation to cover all the losers)... whereas a $50M, $100M, $250M or $500M valuation (with no dilution from taking VC money) even though it's drastically smaller would result in the founders and early employees getting rich, and even the later employees getting a nice bonus.
Take angel money on good, clean, simple terms. If you need that to get going, go for it.
I think the age of the VCs is past. They just haven't realized it yet.
Ok, whenever I say things that are critical of VCs I get a lot of responses that are sorta knee jerk defenses of VCs. I've been working for startups and founding startups for over 25 years. I've seen it back when it was much worse and it cost a lot more to do a company. I've ridden this industry from BEFORE the dotcom bubble started to inflate. I'm speaking form experience here. Even when the VCs are "good" - in the top %10 of the VCs I've had direct experience with-- the deal isn't good for the founders in the end. They paid too much for their money.
You want VC money. Ok, why? Because that's your dream? Your dream should be to build a company.
Your plan should be to build a compelling product or service that really makes people go crazy with desire to throw money at you for it. I'm talking about CUSTOMERS.
All the time you spend dealign with VCs takes away from that and the deals aren't good.
You need money? Ok, go on Angel.co, get backed by a syndicate. Find Angels in your community. Charge for your product from day one. If github can do it, you can do it. Plow your profits into growth and product development. Take as little money as you can to get top product market fit. VC money is wasted before that point anyway. Even angel money should just be used to keep the lights on until you get to product market fit. Once you haver that, you have revenue, maybe take some more angel money to jumpstart marketing, but plow your operational profits int growing the business.
Don't delude yourself into thinking your pokemon website is a billion dollar business. It isn't.
Don't even waste time chasing VCs. By definition that are bad at picking and they will try to force you to bet it all only our pokemon wiki being a billion dollar business.
GS may have made a bunch of mistakes, but I'm using decades of experience here to reach my conclusions.
If you go thru YC or TechStars (but not any other accelerator) then maybe you might have a real business that could be a billion dollar business, but even then why not raise angel money instead of VC money? And I mean angel money on terms like the YC deferred-valuation deal that replaces convertible notes. (can't remember the name at the moment.)
Don't do any deal with liquidation preferences or any other kind of shenanigans. (And don't wave your hands about why VCs need LP in front of me. Your math doesn't add up, it can't add up.)
The model will never change until VCs realize they are dinosaurs. Or let VCs fund late stage deals, I'm sure their terms are not so terrible (unless the company is dying.)
you are right, I've worked with a few. Problem is that it's a cost to the company they often don't want and they don't value the work (I think this is what SA is trying to change). Also, vetting/hiring folks etc. is it's own burden. VC pushing this gets rid of the friction and forces founders to take this seriously.
Agreed they may have divided loyalty, hopefully mitigated by a very temporary relationship and the fact that at early stages, VCs and founders should be super aligned, at least around the ops numbers (sale decisions, etc. are a totally different ballgame for sure).
He had an incredible amount of early traction. For every startup/VC dyad, there's going to be a power imbalance. Either the founder(s) and their company are in high demand (rare), or the VC is (typical).
The side that has the leverage is going to get the best terms. Normally that's the VC. (Liquidation preference, your first born, board seats, etc.)
Oh yeah!
There were the VCs who stopped us from doing the google business model.
There were the VCS who made us spend half the money they gave us on another portfolio product that didn't actually do what was promised, setting us back 2 years. (Yes 2 years!)
I've seen countless conflicts among the founding team because VCs push bad decisions on them and some of the founders fell like they have to follow them because they want more money form the VCs and the other half of the founders know the VCs are full of it.
I've seen VCs push out good founders, leaving the weaker founders behind in the company-- so they could have more control.
Notice all of these examples are VCs. Seen a LOT less shenanigans perpetrated by angels.
The VC in this case was most likely acting in economic self interest, but not in the interest of the entrepreneur (or so it would appear).
This is a far cry from your headline that VCs "hate" entrepreneurs. VCs have a fiduciary responsibility to act in the best interest of their LPs. The best VCs work to align the interests of all parties involved, but when they conflict, the VCs have a duty to act in the best interest of their investors, just as entrepreneurs have a duty to act in the best interest of theirs. Using phrases like "VCs hate entrepreneurs" is beyond sensational and distorts the relationships and responsibilities of all parties.
For the record, I'm not a huge fan of the VC model, but for entirely different reasons.
Well, what you are essentially saying is that if you need money, VCs can and will make you dance to their tunes. That much has been confirmed by Parker Conrad himself, so I agree. It's not really a red flag since he could have a number of reasons for leaving that are not related to the business. But I guess a VC would use anything as an excuse to control and manipulate things.
This really puts a giant question mark on why anyone would bother with a non-CEO founding role. Startups are hard enough as it is, adding to it the potential of losing all your equity because you had a falling out with the CEO makes it almost not worth the trouble.
Engineers getting into partnerships with domineering business types should definitely watch out for this and evaluate their options. At least when you work for Microsoft and leave after 2 years, they cannot claw back what you earned over that period of time.
Hmm, was the feud has anything to do with whom their investors backed to be the CEO? I am not so sure because it's common to see that some VCs would prefer to have a co-founder as the CEO instead of bringing an outsider, who might not understand the business model.
I've heard many horror stories, VC seems to be a two-faced industry. And their #1 stated legal goal is to maximize shareholder value, whether or not that is in line with the founder's initial vision / whether or not that means firing the founder to maximize profits.
Of course there are success stories as well, YMMV.
1. I founded a company called Evernet in the 1980s, funded by Kleiner Perkins and others. Vinod negotiated against at least one founder, me, hard. Then KP made sad but traditional VC errors along the lines of changing the company's strategy from a good idea to a bad one, bringing in the wrong operating management and all that.
2. So I tracked news and anecdotes. Vinod prided himself on being a tough negotiator on behalf of his portfolio companies. But various other stories of negotiating hard against entrepreneurs were out there.
I should clarify that in the 1980s, even more than recently, there was a general screw-the-founder philosophy among VCs. I once asked a popular and likeable VC what some rules of thumb were for equity splits. After some back and forth, the VC said "You don't get it, Curt -- it's whatever we can get away with." But Vinod seemed like a particularly tough exemplar of the trend.
3. I advise 20-30+ tech companies at a time. Most are VC-backed startups. Khosla is the 2nd-worst target of negative VC anecdotes I hear, details of which must however remain confidential.
reply