There are two intertwined things that entrepreneurs and their companies get from VCs – money and attention. You need both. And they feed on each other. Attention begets more money if necessary. And more money is usually necessary. Everyone always underestimates how much money a startup will require to get to breakeven and how long it will take. That includes the VCs. And we should know better. But entrepreneurs are even more guilty of seeing the light at the end of the tunnel when it is actually a train coming.
Which brings me to the subject of orphaned investments. Of all the bad things that VCs do on a regular basis, and that list is long, orphaning their investments is at the top of my list of bad behavior. I have never done it. I’ve wanted to. Trust me. I dream of doing it. But I won’t.
And the reason I won’t do it is that I have lived with the costs. I have sat on boards where two or three of the seats are vacant at every meeting. I have put together rounds where two or three of the syndicate members won’t participate. I have sat with an entrepreneur and explained that life is not fair and it is what you do after you realize it that really matters.
Orphaning an investment is when a VC firm decides that it doesn’t really care about an investment any more and stops paying attention. The primary cause is when a partner leaves a firm and nobody picks up coverage of his or her investments. The VC firm says that “so and so” is covering the investment now. Yeah, if you call reading an occasional email “covering.” But it can also happen when a VC loses interest in an investment they made and causes their firm to lose interest as well. It’s easy to not care about an investment if your partner who made it doesn’t care anymore.
And this brings me back to the link between attention and money. If you aren’t getting attention from a VC, you aren’t going to get money from that VC either. When a VC writes off an investment, either emotionally or literally on their schedule of investments, they are closing their wallet to it too. This rule works in bull markets and bear markets. But it is more painful for entrepreneurs in bear markets.
So how do you avoid being orphaned? Like most things, it comes down to picking your partners carefully. Ask around. Find out how they have acted in tough situations. Find out how solid the VC’s position is in their firm. You need to reference both the partner and the firm. The person is important but if they leave you will find out a lot about the firm.
This is the kind of post that after I write it, I get a ton of inbound email saying “you are talking about this company”, “you are talking about this VC”, “you are talking about this VC firm.” So I will say right now that this post is not about anybody, any firm, or any investment. I have been thinking about writing this post for months. I have nobody in mind right now. Other than entrepreneurs and their companies out there that are orphaned, or are going to be orphaned.
You can survive being orphaned. But it will require rebuilding your investor syndicate, it will require the other VCs involved to increase their support and attention, and it will require you to forget about life being fair and get on with it. Getting orphaned is not a time for feeling sorry for yourself. It is a time for doing something about it.