How you react defines the relationship

February 23, 2011

Bill Draper – industry pioneer and author of The Startup Game – recently discussed his career, entrepreneurs, and the evolution of the venture business at the Commonwealth Club in San Francisco.

The wide-ranging interview (recounted here at The Wall Street Journal Venture Capital Dispatch blog)  covered several topics critical to a successful vc-entrepreneur marriage: maintaining long term relationships, communicating good news and bad, promoting honesty in business, and maximizing board effectiveness.

Draper wove several money quotes throughout his remarks; here are a few of our favorites:

“When an entrepreneur has a first board meeting, we called that the ‘Oh sh—meeting.’ That’s when the VC finds out the bad news he didn’t know when he made the investment. How the VC reacts to that defines the relationship – it either becomes more brittle or closer.”

“We often tell (entrepreneurs) they have underestimated the timeline” – toward becoming profitable or becoming an exit candidate, for example. “They’d say, ‘No, we’ve doubled the time we think it will take.’ Then we double that timeline, and very often that’s not enough.”

“When the bubble burst (around 2000), it was a very scary time. We had sold off a lot of investments when the bubble was rising, or even at the peak, and we were feeling probably less humble than we should have. We had a convertible debenture, and when the two years were up, we said, ‘We’ll take our money back.’ It later sold for a billion dollars to Amazon. If a VC looks you in the eye and says he hasn’t made mistakes, he’s lying.”

“I used to always say to the CEO, ‘Why don’t you charge $2 per reservation, instead of $1? He’d say, ‘Bill, you don’t get it, we want to own the market.’ Or I’d say, ‘Why do you lease the machines, why not make them pay you for them?’ He’d say, ‘Bill, you don’t get it, we want to own the market.’ Thank God he didn’t take my advice.”

“Make sure you have operating experience, do your homework, try to be humble at all times, think about each opportunity from the entrepreneur’s standpoint, and be gracious to all of them, because they are the future of this country.”

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