Nine biggest VC mistakes in a downturn

Larry Chiang · October 15, 2008 · Short URL:

Some ideas for venture capitalists, if they know what's good for them

VCs are smart, rich, and direct billions of dollars to invest.  You need to learn what is inside of their head.  I not only give a window in but help you identify mistakes that they will make during this little downturn.

The genius from the following nine tips comes from hours and hours (and hours) of listening to VCs pontificate. I listen cuz there is a nugget or two in the heap of shitake.

The result is this post.  And it will take you less than 10 minutes to read.

-1- Stop reading the news and start making some news. We can arm-chair quarterback what we would do on the boards of Facebook, eBay, or Yahoo but we should draw the line there. Predicting Federal Reserve maneuvers, Lehman/Morgan/Merrill fix-its or congressional bail-out ramifications sounds like you are second guessing Ben Bernake. Never out alpha the most powerful man in America. Make news with your 'silver lining' media platform. As a direct result of the temporary downturn, portfolio companies like Duck9 are adding real value and we seek similar companies that will blossom when paths to IPO re-open.

-2- Legislation is cyclical. Plan on taking SOMETHING public. Be the visionary and cite the temporary rocky stature of Sarbanes Oxley.  Remember, once everyone knows how to spell 'Glass Steagall', it is time to repeal that law too. Oh wait, that was repealed which is why we are at a DOW of 8763.

-2b- Parroting genius is what got you through HBS/GSB.  Repeat after me, "My firm invests with the fundamental belief that there will be a path to public markets as an option for our portfolio companies like Duck9 to raise money selling stock to Johnny Middle-America. Technological innovations just may lead America out of this near-term rut and DC would stimulate that by reversing SOX".

-3- Pick a platform/investment thesis and stick with it.  Recessions make millionaires and depressions make billionaires.  If it were true in the 20s, it is more true today.  Be the breath of fresh air on Tony Perkins Venture Summit panel and plod forward with technological progress.

-4- Being too smart can be dumb.  Hey look.  The fundamental truth of the matter is this: One year of investment banking experience makes you smart enough to be dangerous.  If your friends are all VCs.  If your basketball buddies / vacation buddies / golf mates / Vegas crew are all VCs, you are in a VC bubble.  Smart people are smart independently, but dumb as a collective. If your firm runs on a blackball system, then you already know this all too well. (Blackball is where one partner can kill the whole deal).

-5- Moonlight.  Remember when you were in b-school and you two-timed your b-school course syllabus with that cute startup on the side?!  It is time to start cheating on your VC job. Remember to read my Facebook note, "8 VC Blunders" which talks about mistakes made jumping from VC to Entrepreneur. Think about growing a pair and cowboy up after you vet some of the risk in your own startup.  How? By getting to cash flow positive in your moonlit project and avoiding the "9 VCs You Don't Wanna Meet."

-6- Do not over glorify the boom of 2003-2008. Remember that you were not making carry before the depression of '09. So lets go ahead and write off '08 + '09 and rally for a good 2010.  Me, I'm on track to sell Duck9 on 11-11-11, and marketing my book, "What They Dont Teach You At Stanford Business."

-7- Stop using the phrase "exit strategy."  In a deep recession (aka a Depression), we look to survive and celebrate miniature liquidity events versus fire-sale selling.  A mini liquidity is a one-time dividend payment. Geniuses talk perpituity. Leave the "Exit strategy" talk be centered around a method of clean exit from your GSB girlfriend. 

-8- Send condolence cards and support temporary losers.  Nothing gains more personal emotional capital that hugging a loser.  Me, I backed all three presidential candidates - Clinton-Obama-McCain. In no other time in history do all three candidates have such high probability of all eventually becoming president.  Be Machiavellian about it by saying, I'm supporting you because I KNOW you will be president someday and I just wanna come to your innauguration party. OKAY?! 

-8b- Parlay goodwill into equity purchased below market value. As a Vulture Capitalist, cash in some of that emotional bank account by guilting the bounce-back entrepreneur you loved way back in 2008. How? When 2011 rolls around, get them to cut you in on the back half of their b-round while they are simultaneously closing their c-round on a 3x bump in valuation.  Your partners will be in awe of you because they would be happy with a slice of the C-round but a wedge of the B-round makes you look Ceasar-like.

-9- Be the investment banker.  Offer to buy and merge a distressed startup grouping of assets.  Be the board member who acts as quasi CEO doing a quasi roll-up.  In downturns we coagulate distressed assets, sprinkle a little value, slap up a new umbrella organization with a nice logo, dawdle in some adult properties and WA-BAM: a little liquidity now vis-a-vis revenue and fees and an IPO for later.  I have no idea what I just regurgitated. But at the last i-bank conference I spoke at, that diarrhea-of-the-mouth got me applause from men who have never clapped for anyone but Derek Jeter at Yankee Stadium back when they
were good.

-10- Sell something you don't own. BlogWorldExpo is 100% owned by one dude that you can charm into giving you a fat commission upon sale to IDG, UCMS, CBS, etc.  It isn't urban myth the young VC that conned equity without investing a dime so lets stop smellin' it and start sellin' it.  I would start by floating the sale to a Chinese government entity. Admit it, the irony would make sense and meet everyone's agenda.

-11- Start building shareholder value.  We don't pay you to invest, we pay you to promote the shitake out of what we ALREADY invested in. Fund VII may be underwater, but entrepreneur #115 within fund #7 might refer you to entrepreneur #140 in Fund VIII.  Make #115 into a HERO even though you won't earn a nickel of carry. Karma can be tracked measured and channeled.
-12- Get fired (or put on probation) by your Managing Director(s).  If you're not getting warned or put on probation 2x per year, maybe you're not working-the-VC-party hard enough.
-13- Film School-ify.  Don't  have the backbone to do a dangerous deal in the SF tech industry. Practice locating you balls down in a festering playground of dealmaking activity: Los Angeles.  LA is SF and Silicon
Valley's better looking and dumber sister city.
More good news..., you are ALREADY flying down to Burbank for hawt ass soooo, you mine as well palm press that Stan Rosenfeld deep-throat contact and lever it into a CAA (creative artists agency) meeting about creative financing for ______ and ________.  The blanks could stand for "Stocks and
Blondes",  a Universal studios secret project.  TRANSLATION: it is secret cuz it is in limbo.  You can push that Universal project into greenlight status by...

a) Borrowing against the Amazon DVD sales,
b) Unloading prequel rights to Mark Cuban's 2929,
c) Doing an exclusive rental deal with BlockBuster,
d) Selling the overseas rights to Japan and Europe,
e) Placing ten sponsorships for product and location - We are shoothing 30+
pages inside a Crate and Barrel stage on the Universal lot.

and voila-- you have a 'GO' project with the $175k you just fundraised. Now all you have to do is lever fuzzy accounting and sell 120% of the equity you don't own.  Make it up to people you screw by cutting them in on the sequel.  Careful there VC executive!  You were close to doing real work for a moment by leveraging your best asset... the "bait-and-bait-more" VC maneuver.

-14- Get back to your roots.  Stop learning farsi, japanese or mandarin.  It will not help to invest in some faraway land of milk and honey.  Keep your Asian fetish but hone your investment strategy into something YOU KNOW intimately.  'Young adult financial services' was your first deal, your first legitimacy and your first exit... time to go back to what you know (and what the industry thinks you know) and lather-rinse-repeat.
My book due out 09-09-09, but you can read a preview version FREE online. 

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