Venture Capital, Pitching, and Business Love
Get over yourself. Be nice.
That was just some of the advice venture capitalists got at the last session of the National Venture Capital Association conference in San Francisco on Wednesday.
Just as entrepreneurs have boards of directors they need to satisfy, venture capitalists have limited partners, or L.P.s. These are the managers of endowments, pension funds, and other big pools of money who give money to venture capitalists to invest.
In a panel called “Rants and Raves,” each of four L.P.s was given five minutes to say what they like the most, and what they like the least, about venture capital and its practitioners. There was plenty to like, but it was the criticisms that were the most memorable. Especially those from Jamey Sperans, a managing director with Morgan Stanley.
In his presentation, Sperans offered five things venture capitalists could do better during the fundraising process, when they're asking to manage his money. But Sperans’ comments provide excellent food for thought for anyone trying to raise money or making any kind of ask. Here are his five tips.
Sure, this sounds simple. But Sperans says he gets lied to every day. Some of the lies are doozies, while others appear to be white lies.
Sperans considers being hyper-promotional a lie. “What you ask us to do as investors is completely insane,” Sperans told the audience of venture capitalists. “We’re asked every day to give money to people we’re just getting to know for 12 to 15 years. It’s an act of lunacy. And it’s a game of trust.” Erode that trust--in any way--and it’s game over.
One Felony or Two?
Sperans said that during one negotiation, the venture capitalist said it should be the second felony, not the first, that would be cause for termination. Obviously, that negotiation ended quickly. But Sperans is making a larger point: There is information content embedded in everything you do. The way you treat your colleagues in the negotiation room, the way you treat the people on the other side of the table, the way you treat the secretary: They all matter. These are all things that tell Sperans if you’re a good person, and a trustworthy person. And as he said repeatedly, it’s all about trust.
Beware the Lake Wobegon effect
In Lake Wobegon, as envisioned by Garrison Keillor, the women are strong, the men are beautiful, and all the children are above average. Venture capitalists, he says, would also have you believe that they’re all above average. As a group, they may all be smarter than the average bear, but as an L.P., Sperans is not choosing between a venture investor and an average bear. He’s choosing between venture capitalists. And they can’t all be above average.
“By definition,” he said, “half of you are below average. As investors, very few of you are extraordinary bets. When you come to talk to people like us, who talk to people like you every day, a little humility and a little self-awareness goes a long way.”
The Great Dispersion
Average returns in venture capital are not good. Even the top 25% of venture capital funds, Sperans said, are bad as risk-adjusted bets. “I want the top decile or better,” he said. “I need the outlier event.” What does that means to the folks pitching him? “Think carefully about your business, the proposition to the entrepreneur, and what makes you guys truly extraordinary.”
Show Me Some Love
Sperans knew this one was not going to be popular. “I believe in the power of love in all things, but I believe in the power of love in business and investing,” he said. “I know you’re snickering already.” He said not many people talk about love in a commercial context, because “it feels soft or it feels like a lawsuit.”
What he’s referring to, Sperans says, is “the emotional disposition certain people have toward the work they do and the people they do it with. “ He’s sick of hearing about passion, because it’s so self-centered. Instead, in some people--both entrepreneurial teams and partnerships of venture investors, “there is a deep and abiding respect and selflessness that is really uncommon and really powerful.” He says the two groups that raised the most money from him showed business love, although he asks folks not to try to fake it. “It’s really painful if you do,” he said. He closed with a quote he attributed to William Penn: “Let’s see what love can do.”