It’s been said taking money from a VC is like getting married but there is no divorce. I actually got a divorce. I think a real divorce might have been easier.
My lawyer who’s done over 1,000 deals (he has eleven attorney’s in his practice at a major firm) said he’s only seen it happen once. I’ve talked to hundreds of entrepreneurs and been involved with four companies and I’ve only seen it happen once. I would love to hear other experiences if people have examples.
There are a couple of factors going on:
- A VC fund lasts at max around ten years
- At the end of this time shares in an illiquid company are useless to the VC
- In order to “make” the fund VC’s need 10X returns on companies
- Every VC deal will certainly have preferred shares with special rights
- You as the Entrepreneur have signed up for this
Everybody agrees 90% of companies aren’t really VC material. This isn’t an insult on the company it just reflects the fact you can’t leverage loads of money. If you throw more money at the market it doesn’t grow.
We unfortunately were in this case. We’d doubled sales staff and it didn’t leverage. We spent tons of money on marketing which didn’t have an effect. Most importantly however, we had watched three company’s raise more than $10M each in our space and all three had flamed out. Unfortunately the market just wouldn’t move as fast as anybody hoped. It wasn’t a bad space we could grow at double digit rates and make good money, but it wasn’t a hockey stick curve. We had a great recurring revenue model and had 99% plus renewal rates.
It started to get to the end of the VC’s funds and the failing about began.
Our VC’s wanted to bring on a board member that had left a huge company that wanted more in board compensation that the founders were getting paid. We politely (not really) said no. Actually we told the VC’s they could pay the compensation and of course at that thought they got alligator arms.
We agreed to bring on some of his high paid consultant friends if they split the cost. They agreed, the biggest recommendation was that we get better offices, wear better clothes (and probably lease expensive cars)…..what a load of shit. The VC reneged on splitting the costs.
Meanwhile the board member came on anyway. He really wanted to run a company. The VC’s took me out to dinner and told me should really bring in some outside management it really was their fiduciary responsibility. The board member was really pushing behind the scenes to get me fired. All sorts of behind the scene machinations that only a person skilled in big company politics would even think of executing happened. I was “unprofessional” I really couldn’t “scale” I had a simple response:
Buy me out. Buy out 100% of my shares in cash and agree to buy out the other founders if they wanted and they could get what they wanted. Again…..alligator arms.
I had seen this scenario too many times:
- Hire an expensive mercenary.
- They assemble a team of expensive VPs with a large support staff.
- Huge projections get made
- Everyone oooh’s and aaah’s at the PowerPoints and Excel charts that took person years to build.
- The big company execs don’t realize nothing happens at a small company unless you personally take initiative. Nothing comes to you by itself.
- Nothing happens.
- Projections get remade, new initiatives with fancy names are dreamed up inside the company. Expensive execs don’t realize that anything done internally doesn’t mean shit at a small company it only matters what you do outside of your company.
- The company runs out of money.
- The company can’t raise money because it has less traction than it did before.
- A bridge round is proposed. This is a polite term for prison yard gang rape.
- The expensive execs are more than willing to take the bridge round and keep jobs for another six months.
- The founders shares are wiped out with anti-dilution clauses and full warrant coverage that happens when the bridge round isn’t repaid
It wasn’t going to happen to me, but I could see how if you were inexperienced you would go along for the ride, why not hire the super expensive great looking executive we’ll grow this thing for everyone.
Now it was on…..on like Donkey Kong
Outside board member fired.
Our board meetings devolved. A highlight was when one of our VC’s got up and yelled at the top of his lungs: “you guys are so fucking unprofessional” and slammed the conference room door. One of the founders suggested I lock the door as that would really be unprofessional.
The VC wasn’t responding well to our tactics. He would propose hiring a consultant, an investment bank or friend, etc. and we would say no. He would push and push and then we would propose a board vote (we controlled the board). Not getting what you want really pisses off many VC’s they’re just not used to it.
We had three things going for us:
- We didn’t raise a ton of money
- We kept a majority of shares
- We were profitable.
After several months it just became too painful. The lead VC exercised his put and dragged the other VC along. It was painful for us as well. Paying your VC’s more than double their money back in these times was hard but we were able to do it. The thing that really hurts is that you pay back a multiple of the attorney’s fees which you never got as well. You really sit there and think I’m working my ass off just to pay these guys their multiple, but it’s what we signed up for and it’s what we did. I’m sure the feeling is mutual and from a VC prospective you’d say these guys promised me a huge growth company and didn’t deliver. Divorce is never fun.