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Talk to the long tail
In Paradox of the Power Law in Venture Capital, Ho Nam urges entrepreneurs to do their homework on their potential financial partners:
The track record of VCs is overwhelmingly skewed by a tiny handful of winners. However, as an entrepreneur, if you try to assess the reputation of VCs by only looking at home runs, you may get a skewed view.
In good times, investors will be supportive. However, how will they behave during bad times? Even great companies go through ups and downs. If your startup is not one of the big winners (which is likely, based on probabilities), how will your VCs behave? Will they abandon ship, or worse, will they turn negative or downright hostile?
VCs check references before making investments. Entrepreneurs should do the same and check references before taking VC funding. It is critical to talk not only to winners but also to the long tail companies—you will have plenty to choose from… There will be skeletons in every VC closet (disgruntled entrepreneurs) so be realistic in how you assess VCs and what they can do for you… some VCs will work with companies to the end, treating people fairly and with respect. Some VCs will not. You’ll get a much better sense for this when you talk to the long tail.
We gave the very same advice to entrepreneurs a few years ago in Due diligence – mine, yours, and ours.
(M)ost firms will have a good ‘rap’ so it is absolutely essential to verify through your own independent efforts that the partner you choose will be a good fit.
The entrepreneur-VC partnership is a long term one, with shared skin in the game, and so the incentive is to communicate good news and bad to communicate good news and bad forthrightly and in real-time, with both partners promoting transparency and honesty promoting transparency and honesty. That begins during due diligence, when it’s critical to resist the implicit pressure to sugarcoat the negative, and carries through to what legendary venture capitalist Bill Draper calls the “Oh sh- meeting.” calls the “Oh sh- meeting.”
We encourage all our prospective entrepreneur partners to speak with as many of our current and former entrepreneurs as possible – some successful, some less so – in order to get a feel for what we are like to work with in good times and when challenges arise.