Dissecting the Marriage Between VC and Entrepreneur
The venture capitalist-entrepreneur relationship can be complex and at times akin to a marriage. To get a better sense of how this relationship really works in practice I sat down on camera at the 2014 EY Strategic Growth Forum to interview Jeff Fagnan, Partner at Atlas Venture, Stephen Neeleman, Founder & CEO of HealthEquity Inc., and Jeff Grabow, EY US Venture Capital Leader. Below are some excerpts from the interview:
Dr. Woody: How would you characterize the venture capitalist-entrepreneur relationship?
Jeff Fagnan: “It is a marriage. A lot of VC-entrepreneur relationships last longer than the normal marriage. The other thing about it is it’s easier to get rid of a spouse than it is to get rid of an investor or a founder. So I think people have to go into this with eyes wide open.
We talk a lot about social contracts. The social contract is much more important than that actual legal document that we enter when we are funding. We will not invest unless an entrepreneur or founder has done a dozen reference calls, really talked to all the entrepreneurs we work with, and really understand: Here’s how Atlas works, here is how Jeff works, and here is what you get in this equation.
We try to do the same thing on the other side. Understand their values, understand how they were brought up, and really understand what they want out of this from a company perspective, from a financial return, and from a life perspective.”
Dr. Woody: From an Entrepreneur’s perspective, what do you look for in building that trust with a venture capitalist and aligning your values and mission?
Stephen Neeleman: “I think he (Jeff) is exactly right. You have to do due diligence on your side. I remember when our first VC came in they encouraged us, call up these folks, talk to them. We talked to all their CEOs they offered to us and some they didn’t… I think the thing that was the most meaningful question was: When something went wrong, how was the response... Based on that feedback we did not go with the firm that offered us the highest share price. We went with the ones that offered us the most amount of trust because we knew that this was not going to go perfect. Just like a real marriage.”
Dr. Woody: As an outsider looking in at a lot of these relationships what are some of the strains you see develop in the relationship over time and how can they be nipped in the bud?
Jeff Grabow: “One of the typical ones we see is when the company scales will the entrepreneur scale as fast as the company scales and how that’s dealt with… It’s interesting, sometimes you talk to entrepreneurs and they think about Bill Gates or Mark Zuckerberg and there is only one of them… What it gets down to is: How do you find somebody that you know is {with you} because you are all marching towards the same goal and there will be bumps in the road, so how do we know we will come to a good answer.
The critical things happen in real time and by dealing with things in real time it helps minimize the things you are not addressing. Because, if you are not addressing those things you are going to have build-up, you are going to have reduced performance, and you are going to have a lot of inefficiencies, which are going to lead to some very difficult conversations. So, if you are able to get them out earlier you can bite them off a little bit at a time.
To view the entire interview click here.