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Disrespectful
Investor Attitudes
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more info or to get on our mailing list, contact cpart2@corporate-partnering.com
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Date: 2/1/2001 9:32:50 AM Central Standard Time Please keep my name and email address confidential. I've been reading with great interest the "debate" occurring in TMR regarding VC investing, the intentions, and some of the technical manifestations that may result. This is not a personal comment directed at anyone - I'm just using the available quotes to illustrate a point. Curt's summary on Bob Geras: I'm sure he does like helping people. However, the issue is attitude - not helping people. I can help an entrepreneur without providing capital. If I do provide capital, then the entrepreneur should be thrilled that he chose me - not just thrilled that he was able to get my money to build a company. From Bob's Guidelines for Private Venture Investing: It is a fact of human nature that people often have short or "convenient" memories. This sometimes results in what I call the "WHAT HAVE YOU DONE FOR ME LATELY" syndrome. It is usually manifested by the entrepreneur developing a somewhat suppressed underlying resentment that he is on the firing line, working long hours every day and you, the investor, are going to reap a significant piece of the potential rewards by having merely cut a check. He obviously forgot that your willingness to take a significant risk by investing helped to put him in business and thereby afforded him this opportunity to build a substantial net worth if the company succeeds. Did you see it? "......usually manifested by the entrepreneur developing a somewhat suppressed underlying resentment. He obviously forgot that your willingness to take a significant risk by investing. ...." The attitude is wrong. Unfortunately, this attitude is pervasive in the VC community, especially in Chicago, and WILL NOT CHANGE in our lifetimes. Single-handedly, Flip almost changed it. A little over a year ago, as divine as preparing to go public, one of the accountants had sent out a rather innocuous email regarding setting up a service to the partner companies that included "financial controls" so that financial reporting back to the public entity divine interVentures could be quickly and easily consolidated. Apparently, (so the story goes), Flip read "controls", when the intent of the accountant was merely to articulate a service that would create some structure to the financial reporting of the partner companies. Flip went ballistic. He sent everyone the famous "Culture Check" email. Someone sent it to me, and it was definitely worth saving, so I've reproduced it below. Hidden within this effort is either the single most wonderful or hideous service we can provide. We will define the 'divine' culture right here. We will succeed or miserably fail right here. I know some of what I am about to say in this email may sting, and I apologize in advance if it does. I do not intend to hurt anyone with what I will write. I am very proud and happy that we are making this effort. I have high hopes for it. I am proud that we have attracted some of the best people on the planet Earth for this endeavor. I however do see the potential for this to destroy 'divine' at the same time. I want to make sure we take the tremendous human intellect and capital we will be deploying here and guarantee it accrues to the benefit of all of us, especially our partner companies. It is imperative that we do this with tender loving care. Let's aim so that this is an offered service to our partners. If their boards want to avail themselves of this service then they can request it and get the best of the best to help them do this well. Let's also make sure that if they think it is bullsh** then they can tell us to cram it and we cheerfully comply. Let's make sure we remain faithful to the reality that these are independent companies and that we are their humble servants at their beckon call to help. If I ever hear that this service is used in a Gestapo fashion, or if it is done with the slightest hint of ego or superiority or if a partner company CEO is ever belittled in the process or if this is forced on the partner company I will first (expletive deleted) and then fire them on the spot. Have I made myself perfectly clear? We work for them, they do not work for us. We report to them they do not report to us. They are our friends, peers or superiors but we are subservient. If you want me to ID the sentence that set me off then it is the following; "help ensure that adequate financial and operating controls exist at our partner companies." I would like to think the emphasis is on HELP and not to stick our noses where they are not wanted. It is the boards of those companies and their 'Audit Committees' that are responsible to "ensure that adequate financial and operating controls exist." It is not what 'divine' does. We provide capital, infrastructure, mentoring, collaboration and support. If the board composition of our partner companies is right then this will be done. The team will be able to perform as a service to our partner companies the following activities (ONLY IF GIVEN PERMISSION BY THE PARTNER COMPANY AND IF IT IS REQUESTED BY THE PARTNER COMPANY CEO or BOARD): And when this service is performed the only folks that will be given access to the information will be the CEO and Audit committees of the respective company. This service will be performed for the benefit of the CEO of each respective partner company. It is in our hands to make this a beautiful or ugly experience. Only if we sell this and deliver with compassion for the independence of our partner company will this work. Flip My understanding is that the entrepreneurs who saw this message applauded. How refreshing to find someone that could finance their ideas, and help them build companies, without imposing on them, the holier than thou attitude. It really is too bad that the market collapsed when it did last year. Flip was on to something. That's why the VC community in Chicago and elsewhere were so angered by him. Given a choice, who would you look to finance your company. There really does need to be a Consumer Reports on VCs. Let's start with Chicago. You can easily expose a lot of the attitude with many of these people by setting up a Web site with registration to avoid the malicious comments. Until that attitude changes, West Coast VCs will continue to pick off the best ideas, and move those companies to the West Coast. Until the attitude changes, Chicago will never encourage companies to stay in the Midwest, let alone encourage them to seek capital here. What is the legacy that is being left by these VCs, and their attitudes? How many people have left voice mails or sent emails to prominent VCs in Chicago that were never, in any way, acknowledged? How did they get their "prominent VC" reputation? Have they been around a long time?, did they "luck into" a good deal, and use that deal success as evidence of their intelligence and vision? How many people have had one brief exchange, and then never heard from the VC again? How many people have been told "Not interested", and provided with a very cursory reason - a reason that bordered on the ridiculous, and clearly indicated that they didn't even read your plan? How many people have been told "Not interested", and figured out that the VC didn't even look at your plan - let alone give you a silly reason? Deal flow is their lifeblood. If that deal flow dries up because they are getting poor grades, so be it. Will it be a positive legacy, or a negative legacy? Collectively, they should care, but individually, they clearly, clearly, clearly, don't appear to care - regardless of whether anyone genuinely likes to "help people". Does the Mayor give a damn? How old was that Harvard, Ill, Motorola plant that is being closed down? 4 years? What's next? What will Chicago be known for in 30 years? What will Chicago remember as the missed opportunities? - 5 years down the road?, how about 20 years down the road? I could also have included Bob's guidance to avoid facial expressions in this note about attitude - "DON'T GIVE HIM THAT WEAPON TO MANIPULATE YOU" - but I think that would be seen as "piling on." It really is in the attitude. |
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From: "Curtis E. Sahakian" cpart2@corporate-partnering.com I find nothing wrong with Bob Geras's Guidelines for Private Venture Investing. I think they make sense and anyone doing any private investing would be ill advised in disregarding them. The investor/founder relationship is not the simple win/win one that may people make it out to be. It's my personal belief that Flip would most likely respect and agree with most of what Bob says, than not. Unfortunately the investor attitude you complain (and the rationalization for much of the VC overreaching) about comes from being burned a few too many times by entreprenuers who are willing to do and say anything in order to get access to other people's money. Here is a link to Bob's guidelines if anyone wants to see them in their
entirety: If you are investing in privately held companies, don't leave home without them. Curtis Sahakian |
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From: Robert Hendrickson rhendrickson@gkm.com Curtis, I read your article yesterday. In large part I agree with your points, but would add that the ratio of vulture- to venture capitalists is a function of the geographic region and industry focus (as well as the prevailing capital market outlook). While my first-hand experience with Chicago-based VCs is limited, I can attest that the demeanor of those I have dealt with is markedly different from those on the West Coast with whom I have met. My impression is that this has to do with the scarcity of VCs here who have founded venture-funded start-ups one or more times prior to transitioning to the role of VC. Therefore, it is rare for local funds to possess both the empathy and multi-faceted domain expertise required for a true partnership between money and management. -Bob Bob Hendrickson From: Gregory Witek GWitek@PagePath.Com I have just finished reading your "dot-coms strike out" e-mail of Jan 1. Aside from the cramping in my white knuckles, the urge to strangle someone, and 2x blood pressure, I am left with primarily a sense of relief - that we WERE a "failure" in getting funded this past April. I spent so much of 2000 thinking of us as failed at obtaining outside funding - and missing our chance to make the advertising reps wealthy. What a waste. Here we are today, lean, mean, a successful product, albeit at 1/50 the rate the "advisors" had proposed, and growing. All privately funded with 1/10 the "need" we forecasted last year, and looking (not desperately) at about $2 million more in a private round to attain profitability. It was a courageous piece. And a soothing read for me and mine. Thank you. Gregory Witek at PagePath Technologies, Inc. From: Sami Siddiqi sami@emigratus.com Curtis: I enjoyed reading your article. I know exactly what you are talking, as I was starting my firm in last few months, I experienced it all and that's the reason, I did private funding and said no to VC. Sami Siddiqi From: Todd Bogwill toddbogwill@raydium.com Curtis- Just read your latest letter that was featured in today's May Report. All I can say is thanks for the information. I feel as though I owe you some sort of consulting fee. Short of that, the least I can do is purchase your book, in which that transaction will take place after I finish this email. A word of advice: you may want to consider purchasing flak jacket. I think you pissed off a lot of VCs. Regards, Date: Wed, 03 Jan 2001 21:56:02 -0600 Curtis Sahakian put together a very thought provoking piece, although I don't think entrepreneurs are quite so naive. Most of them are hardcore believers who recognize this aspect to VC but hope to succeed in spite of all these things. Kind of like that crocodile hunter on cable. If you grab it by the tail and hold it just right you don't get bit... I guess in the end the only thing you can count on is the lawyers end up with all the money ;-). Keep up the good work Curtis, I hope there will be a part 2 -C From: Leo Schlosberg leo@heavyware.com I read and listened and watched a lot during the period of time (Sept 99 - June 00) when I attempted to raise capital for a company that had started off as part of an existing business which I had bootstrapped. I was never comfortable with the VC approach. Among the factors limiting my effectiveness was a lack of respect for people who were obviously making stupid investments (b-c, for example). Eventually I came to understand that I was concerned with building a business that produced ongoing revenue, and they were in the business of buying and selling stock. They no longer seemed stupid, just on a different page. One VC who turned us down after a look had invested in eToys. eToys was a great idea for a small business with a capitalization in the 100-500K range. It was ridiculous when capitalized in the tens of millions. Despite eToys current, and appropriate, situation the VC got a very good return on their investment. I was never comfortable with the kindergarten aspects. I had done some 2-year projections based on a vague future one could reasonably guess at. My financial advisor insisted we needed 5 years even though he agreed they were meaningless. The VC's, he said, also knew that such projections were worthless, but wanted to be sure I was capable of it. I enjoyed your letters in TMR because they were a fresh and astute analysis with a bit of subtlety. They made sense to me. Most of what I did and occasionally do read in the dotcom does not make sense. I myself had noted that the word "entrepreneur" is now used in a very different sense than previously. It recently came to mean a high-level, high-initiative founder who can create a business plan (whether real or not), raise capital and quickly become an employee who shares greatly in the proceeds from further capital raising and finding a bigger fool. I marveled at how VC's were able to create a start-up culture that was simultaneously participative and exploitive. 18 hour days and low pay for a shot at big bucks??? Thanks for some interesting reads. It made so much sense that I was amazed that I had never come across such a perspective before. Did you make this all up or get it from someone else? Leo Schlosberg, Founder leo@heavyware.com HeavyWare(tm) Date: Thu, 18 Jan 2001 07:26:24 -0800 (PST) Hi Ron, Someone told me today that Curtis Sahakian had mentioned my name a few times in the latest TMR. Since my AOL account got zapped last night, I couldn't check my email this morning and missed it. I got to your site through Explorer just now. I can't forward the emails Curtis referred to stored on AOL until the problem is fixed, but I will. Not one of the emails agreed with him. Curtis and I had a friendly, but spirited phone discussion after our first "point, counterpoint" in the TMR a couple of weeks ago. He is obviously a bright, articulate guy with certain set ideas with which I totally disagree, and evidently he has much more energy (and/or time) than I do to be able to turn out such continuous voluminous discourse. I would love to be able to spend the time to address each of his points, both the few with which I agree, and the many with which I don't. I'd enjoy it, and we both, and possibly your audience, might be entertained and maybe even find it a little useful if they didn't get eyestrain or fall asleep in the process. But sadly, I really can't do this full time! I don't know, Ron, but I must've spent the past 35 years on a different planet than Curtis did. I just don't have his same diabolical view of life. I don't believe that the great majority of either investors (VCs or otherwise) or promoters are out to swindle each other. Early stage investing is a very risky business. Some startups make it, most don't. There are an infinite variety of reasons for either outcome, most of which are beyond the control of any of the participants. Our nation sadly has become one of "victims." Too many blame others for their misfortunes or for the consequences of decisions they made earlier, which seemed right at the time, but which they may now regret with the benefit of hindsight. It takes courage and integrity to accept one's share of responsibility for what happens in life and move on. I don't feel that encouraging people to play the blame game is doing anyone a service and benefits no one.........except, possibly, some lawyers. Bob Geras From: "Chicago WebGeek" chicagowebgeek@hotmail.com I read your item from Bob Geras and I am just an outsider peering in wishing to make an observation. VCs are in business to make money first. I'm sure helping out their fellow-man fits somewhere down the list.. third, maybe fourth objective. But in the end, increasing the portfolio is the goal, at least for the VCs that wish to remain VCs. Is every VC deal as underhanded and manipulative as Curtis described? Certainly not, but you only need one or two dirty plays to turn a game in your favor. Certain parties would lead us to believe these things never happen. That is a sure sign it happens more often than they want us to believe. Please at least respect our intelligence when you start your spin. Also, regarding Darcy grabbing e-mail addresses from your report, she's been doing that for nearly a year now. After I first emailed you in April (and I had never used this account prior) I was receiving I-Street mailings. Ron, whatever happened to the art of subtlety when being underhanded and deceitful? |
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From: chicagovip@yahoo.com Ron, Read you everyday. Had to say the VC article was the best article on insider VC practices I have read. I would love to hear what an anonymous VC insider would be willing to provide as the real skinny from the other side. From: Arik Schenkler shenkler@netvision.net.il Curtis shalom, I was very impressed from your article about VC. I surfed your site - the corporate-partnering and it is a very good resource. I'll have to surf again to check it to its full. I have seen that you are looking for help in the 'partnering' idea. Let me know what exactly - you need. I am doing a consulting on WEB business development - http://exactresponse.com/bizdev.html and partnering (linking and bundling and ad swapping and other web ways) is part of it. So, I am interested. Another thing is that I want to use your article. I am going to use it under your name, with your email and with a connection to your web site, is this acceptable ? Thanks, Arik Schenkler - CEO From: Chris Herzog zog@stg.com I just wanted to drop you a note to say I really enjoyed your recent article about the reality of VC funding, management, and control in The May Report. I would have to agree with you that even experienced business people can be misled or misdirected if they aren't familiar with how the process works, what drives it, or what the end goals of the various participants are. You may not recall but we met years ago at a Chicago High Tech Association event at La Margarita back in 1991. At that time, we were barely a year old and focusing on providing migration services from proprietary environments (especially Prime Computer systems) to UNIX. In the intervening years, we've returned to our "roots" by focusing on software product development for hardware OEMs (mostly in the networking and telecom industries - the growth of the Internet infrastructure industry hasn't exactly been bad for us). We've grown from the 4 people we were in 1991 to 30 now - it's been a great experience and a whole lot of fun. Hopefully we'll run into each other again soon but I just wanted to drop a note to say I enjoyed your article and appreciate you taking the time to share your experience. Chris Herzog From: David Thompson DThompson@PagePath.Com Question - Are you related to a Sahakian that ran the Iran Zamin International School in Tehran Iran? I realize that yours may be a common Armenian name, but I had to ask. I attended there in the late 70's before the revolution. Comments - Our company, PagePath Technologies, at www.pagepath.com http://www.pagepath.com , attempted to get funding around the time of the market correctiona nd VC pullback. VC's did not believe our concept was sexy enough as we are a "meat and potatoes" concept. They didn't like our "meat and potatoes" (printing) industry either. As a result, we never got funded and have maintained a reasonable burn of $60k/month. We have stayed at 7 employees now have hundreds of customers and 160 paying our way. We have just begun implementation of a distribution deal with the largest distributor in our targeted portion of the printing industry. We are in the process of inking a deal with a large OEM to give us full access to their sales staff, install base and to be included with their new machine releases. We are still in a cash crunch, but have outlasted many of the companies VC's chose to invest in as opposed to us. God willing, we will survive through to projected break-even in June and to full funding. My comment would thus be that VC's have a lemming mentality, that is exacerbated by arrogance. This caused them to make many investments that are now viewed as significantly flawed. VC's snubbed their noses at real businesses, ignored the need for projected profitability in reasonable time windows, and weren't impressed by managers who controlled their burn in deference to "free" market share, are now holding the bag on many poor investments. How does the Proverb go? Pride goes before destruction, and a haughty spirit before a fall". My sympathies to their investors. My kudos to ours, albeit small, who took the chance with us. David Thompson From: Curtis: Good overview of the VC world and the description of the infamous "wash-out" round. As for lawsuits against VCs, I would imagine a lot of these founders not having the stomach for another multi-year battle. It'll be fun to see. Best Regards
From: Michael Smock Silakhan@Silakhan.com yeeeeeeeeeeeaaaaaaaaaaaaaaaa a fuckin home run! great letter in the May Report.... Great job!! -- MOMENTUM From: RCermak@jawzinc.com Dear Mr. Sahakian: I apologize for bothering you, however, I just got around to reading The May Report and wanted to complement you on your comments. Although I have never started and/or failed as a dot.com, I was overwhelmed by the manipulating of founders and their companies by the VC community. Not only did your views open up my eyes, I have forwarded this piece to about ten different people, each of which are planning start-ups and looking for financial assistance. It's rather demoralizing and depressing to think that such ruthless tactics are being used on naive and assuming people, however, its the age old story, "what goes around, comes around". If it does for the mercenaries, they will have gotten their just reward. I have a question, several of my associates and I want to apply for a patent on a technology product (peripheral) that one of the associates has invented. Preliminary findings indicate that his is the first of its kind. Do you know of any patent attorney's that would consider participation in a new venture as a replacement for their service fees. We are not well healed, however, the product has a great future with the likes of a Microsoft. If you choose not to respond I will understand, nevertheless I sincerely want to thank you for having written such a profound letter and hopefully opened up the eyes and minds of others. Bob Cermak Keep your data safe! Download a free trial copy of JAWS Data Encryption
for the Desktop. From: Stephen Meade Curt: However it is Ron's, "band of snitches and anonymous sources" that keep him going. I find it interesting that all things positive are written with name disclosed, even if it is deemed controversial. However, the negativity or criticism is behind a veil of non-disclosure. I have entered into the ring as well and feel that much of the dialogue in TMR was a result of something I started. The objective was to get people talking about more relevant issues than who got laid off. I applaud your effort and the attempt to draw out the people who are hiding. If they want their voice heard, they should have their name seen. Great writing, I will look forward to something from you again soon. Thanking you in advance, sincerely Stephen Meade CEO/CRO (Chief Relationship Officer) From: Chris Cleveland ccleveland@dieselpoint.com Curtis, I did a quick web search and got a definition of Contract of Adhesion. You would think that VCs could avoid having the funding agreement classified as such by allowing the other side to negotiate a little and make small changes. The whole concept is a bit scary because it essentially allows courts to strike any provision of a contract that they don't like simply by calling it "unconscionable". Judges ought not have that kind of power. Chris From: Curtis E. Sahakian cpart@interaccess.com Chris It's a legal theory which is generally used only as an excuse for courts to rectify unfair conduct on the part of a party who abuses a disparity in bargaining power, sophistication or attention span. Judges are careful about using it... But it is there for them to use when they have a wrong that needs to be made right. It's probably a good reason to make sure that whoever drafts your "click wrap" license is capable of exercising self restraint... especially with consumers. VC's do allow the other side to negotiate a little and make small changes. But it is pretend negotiation and the important provisions are not negotiable. If you can prove that there are certain provisions that are constant across all a VC's deals and they help it exploit a fiduciary obligation to the portfolio company... I think you have a wrong that needs to be made right. It isn't the strongest theory I would reach for, but I would certainly include the theory in a VC lawsuit if the facts permitted it. And I would want to investigate their practices in other transactions. Curtis From: "Curtis E. Sahakian" cpart2@corporate-partnering.com Ron, I said that I would send you the emails I got in response to my VC email to you. Here they are. I anonymized them. Some of them are pretty interesting reading. I talked to Bob Geras and he is a great guy... he clearly means well... he is just in my opinion plain wrong. Bob was kind enough to collect anonymized copies of the email he received and then send them in an email to me. You may want to ask him to forward that on to you. I'll copy him this email. I put together a self validating response to Bob's two emails on the subject. I fleshed out what I had said in the first email with more substance. I wrote it in a way that people can independently verify its substance without having to rely solely on anecdotal evidence from Bob, Curtis or anyone else. I am sending you this in another email. I would appreciate it if you would print it in your next issue. Thanks Curtis Sahakian PS: Perhaps you might want to collect it all (including Bob's prior two emails) and assemble it into a single VC issue. From: "Chicago WebGeek" chicagowebgeek@hotmail.com I read your item from Bob Geras and I am just an outsider peering in wishing to make an observation. VCs are in business to make money first. I'm sure helping out their fellow-man fits somewhere down the list.. third, maybe fourth objective. But in the end, increasing the portfolio is the goal, at least for the VCs that wish to remain VCs. Is every VC deal as underhanded and manipulative as Curtis described? Certainly not, but you only need one or two dirty plays to turn a game in your favor. Certain parties would lead us to believe these things never happen. That is a sure sign it happens more often than they want us to believe. Please at least respect our intelligence when you start your spin. Also, regarding Darcy grabbing e-mail addresses from your report, she's been doing that for nearly a year now. After I first emailed you in April (and I had never used this account prior) I was receiving I-Street mailings. Ron, whatever happened to the art of subtlety when being underhanded and deceitful? |
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========== Read you everyday. Had to say the VC article was the best article on insider VC practices I have read. I would love to hear what an anonymous VC insider would be willing to provide as the real skinny from the other side. Once again kudos to the writer! ========== Curtis, I wanted to say that your piece in TMR was tremendous. I had always suspected what you were saying was true as I had watched some of the most bizarre behavior during board meetings. As a former COO & CTO and now advisory board member of one of the divine companies I concur with your statements about the operations of VC companies. If you would ever want to converse on this let me know. Thanks again for such a tremendous piece. ========== Curtis, I read your article yesterday. In large part I agree with your points, but would add that the ratio of vulture- to venture capitalists is a function of the geographic region and industry focus (as well as the prevailing capital market outlook). While my first-hand experience with Chicago-based VCs is limited, I can attest that the demeanor of those I have dealt with is markedly different from those on the West Coast with whom I have met. My impression is that this has to do with the scarcity of VCs here who have founded venture-funded start-ups one or more times prior to transitioning to the role of VC. Therefore, it is rare for local funds to possess both the empathy and multi-faceted domain expertise required for a true partnership between money and management. ========== Per your letter in the May Report, you presented a very gritty and (likely) the most realistic portrayal of the real goal and motives underlying VC I've seen. You're description reminds me of the gangs that entrench themselves into a small business through whatever means possible (legal or not) and then slowly bleed the company dry for their personal gain, and to hell with the founder or employees. The only thing that has changed is that the VCs have lawyers and money rather than strongmen and guns. ========== I read your piece in TMR. Very insightful but equally disturbing for the long term. It seems that the only founders who end up made good are those who have been pushed aside and diluted, but the stock is so high that they get rich anyway (although not on the scale of the VCs, but good enough not to complain.) First, What would you recommend in VC contract negotiation, especially re: budgets and burn rate. Now, when VCs are more hungry and founders are even more desparate, is there any negotiation term that's acceptable. Is there a healthy option? Second, what does this say to founders when they know the truth. Why go through hell and still lose the company even under optimal circumstances? Is the only realistic option to take the VC$, run like hell according to the VC's terms, but look to sell the outfit quickly to a bigger outfit in your field as a wholy owned subsidiary? Maybe get better terms on product control as a "product development manager"? ========== Nice letter to the May Report. Very useful. What's a "contract of adhesion"? |
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