VC Cliche of the Week
This blog focuses a lot more on technologies and markets than the people side of the venture capital business, but people are by far the most important aspect of an investment opportunity.
The person who gave me more cliches than anyone else was a partner at my first venture capital firm, Bliss McCrum. He was the king of the cliche.
And he had a saying about investing with bad people that I find myself using all the time.
Bliss would say, "If you lie down with dogs, you’ll come up with fleas".
If I look back at the biggest mistakes of my career, and there have been plenty, it’s pretty clear that investing with bad people, no matter how good the opportunity was, has been a bad move.
There is this common view that if the VCs don’t like the management, they’ll simply replace them. It’s not that easy. You can do that, but it takes a lot of time and energy to make a management change. And it can be expensive in terms of the carnage that a management change can cause in the company culture and focus.
And the really bad people (the dogs in Bliss’ cliche) are the hardest to get rid of. They tend to hire weak people all around them and manage the board instead of managing the company. It’s often too late to save the company by the time the problems are well understood by the Board.
And then there are the issues of fraud and unethical business practices. If you invest in a company and join the Board, you are putting your reputation into the mix (lying down with dogs). If the management is cooking the books or ripping off their customers or lying to wall street, you’ll be sucked into it along with them (coming up with fleas).
There are things you can do to protect yourself (D&O insurance), getting good lawyyers, conducting an investigation, firing the management, etc, but by then the damage is done and you are screwed. Trust me, I’ve been there.
So, the best thing to do is avoid bad people at all cost. It has gotten to the point that we’ll pass on a deal if we have even the slightest hint that there are people issues. It’s just not worth taking the risk on the people equation. We’ll take risk on technologies and markets all day long, but not on people.
Because if you lie down with dogs, you’ll come up with fleas.
UPDATE: As Hank says in the comments to this post, the same rule applies to entrepreneurs raising capital. Not everyone in the venture capital business is on the up and up and you need to do your diligence.