Alignment Between Entrepreneurs and VCs
Alignment.
You hear this word thrown out frequently in business conversations. It is a wonderful thing to aspire to, but very hard to achieve. Perhaps even harder to achieve in entrepreneurial settings between the venture capitalist and the entrepreneur, where the stakes are so high and the ever-present risk of dysfunctional behavior leading to a Start-Up Soap Opera.
Ever since I began the research for my book, I have been spending time thinking about why VC-entrepreneur alignment is so elusive. And so when the Kauffman Foundation asked me to give a presentation to their recent class of young VCs, I decided to take the opportunity to develop a few thoughts that teed up the key issues.
In short, I concluded that despite all the aspirational rhetoric about VCs becoming more “entrepreneur-friendly”, there are structural reasons why VCs and entrepreneurs are not always aligned. In negotiating term sheets, performing the inside-outside financing dance, discussing exit scenarios – and many other elements of the start-up journey – misalignment between VCs and entrepreneurs is common, natural and inevitable.
VCs and entrepreneurs have a hard time dealing with these areas of misalignment because they are human beings. And like nearly all human beings, they have a hard time facing conflict dead on. Conflict makes us uncomfortable. No one wants to be the “bad guy/gal” and so try to gloss over real differences or sweep them under the rug.
I argue instead that VCs and entrepreneurs should explicitly acknowledge these areas of misalignment and talk about them openly and directly. Only by naming these points of conflict and appreciating the other side’s point of view, can you really begin to develop the solutions to these points of conflict. As Mark Pincus of Zynga told me when I interviewed him for Mastering the VC Game, “Don’t be a victim. Don’t look at the [conflicts and drama] personally, look at them structurally.”
Anyway, here’s the presentation I gave the Kauffman folks the other day that laid some of these issues out. I still consider it a work in process (like everything I do!), so let me know what you think:
Jeff is a partner with Boston-based VC firm Flybridge Capital Partners. Read his past peHUB posts, or follow him on Twitter at www.twitter.com/bussgang.
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- Should Entrepreneurs Be More Like Teenage Girls?
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Terry Jones said on July 28, 2010
Hi Jeff
I also find alignment a very interesting topic, and think it’s worth working hard to try to achieve. One current topic that receives much attention is with the employee option pool. Witness the many comments left on the recent post by Mark Suster and one from earlier in the year by Fred Wilson. I think there are serious inherent problems in the traditional way of creating an option pool ahead of time, and some of the problems are with non-alignment (whether to hire, whether to fire). That’s a pretty minor issue, but one that should be solvable with more discussion.
I also have a great quote on the importance of alignment of interest from Thucydides that I can dig up for you if you’re interested.
Terry
Terry Jones said on July 28, 2010
BTW, here’s the quote I was remembering. It’s an excerpt from the speech of the Corinthian delegate to the Allied Conference in Sparta, as reported by Thucydides:
“From every point of view, therefore, you have good reason to go to war, and this course is what we recommend as being in the interests of all of us, remembering that identity of interest both among cities and among individuals is the surest of all guarantees.”
From page 107 of the Penguin edition of the History of the Peloponnesian War.
Terry
Jimmy Trikeriotis said on July 28, 2010
Hello Jeff.
Interesting and HOT topic. As i call myself a entrepreneur ans in numerous occasions have tried various VC in USA and Canada, There is always “issues” that need to be solved and i thik that being up front and honest is the best way but most of the time this is not the case and in many occasions people misunderstand the nature of the seeker and his emotional state as well as his pathos for his new emerging company and therefore it becomes difficult to close since that VCs usually want a big piece from the pie. Yes Vcs need it as many upstarts fail but that again is a part of the original misalignment between the two parties.
Once again i am looking for a VC to fund some of our product/projects and the same stories will come up. I think that the two sides have a big understanding gap of their actual needs and how to move forward.
Jimmy
Jeff Bussgang said on July 29, 2010
Thanks for the Thucydides quote, Terry. Not enough Greek literature brought to bear in the start-up world! I sense a blog post…”what entrepreneurs can learn from Homer?”