The VC/Company Relationship

When I got into the VC business in the early 80s, the VC/Company relationship was pretty different than it is now.

Capital was hard to come by, VCs commanded terms that would be laughed at today, and once they had made the investment, VCs acted as if they owned the Company (they sometimes did).

The VC/Company relationship was a lot more like the current PE business than the current VC business.

Back then VCs thought their customers were their Limited Partners. They would put on lavish annual meetings, treating their investors to three day events at resorts and such.

Capital was hard to come by for VCs too and so they worked hard to earn the favor of the capital suppliers.

All of that changed, starting in the 90s, when capital became very easy to come by in the first Internet boom.

When we started Flatiron Partners in the mid 90s, I told my colleagues that our customers would be the entrepreneurs and that I wanted to treat our investors as our shareholders.

That was a novel idea at the time, but I have advocated for it ever since and I think it more properly captures the relationship that the best VCs have with their portfolio companies today.

Our portfolio companies are our customers.

At USV, we have a portfolio network of about seventy companies. This group spans 8,000+ employees across more than 10 countries and 20 cities.

We have a dedicated team that services our portfolio and as we have built it, we have been guided by several principles which reflect this “customer” orientation.

We put them up on our website yesterday, they are here.

Go read them and you will see that they reflect the fact that we are here to support our portfolio, not the other way around, we view them as our customers, and their success is our success.

I believe this is as it should be.

#VC & Technology

Comments (Archived):

  1. Joe Marchese

    Glad to see you put customers before shareholders. Shareholders benefit even more when managers of their companies practice that without fail.

    1. JLM

      .Of course, a VC has a fiduciary duty, a legal duty to his shareholders (limited partners) that legally transcends any relationship with a founder. That is simply a matter of law.Why shouldn’t he? It’s their money which is putting the VC in business in the first place.JLMwww.themusingsofthebigredca…

      1. Joe Marchese

        I’m not suggesting putting investors in a position to realize lower returns. But how you generate returns and the magnitude of those returns matter.http://www.mckeeverandsulli

        1. JLM

          .The blog post you refer to creates a false dichotomy. There does not have to be a choice between customers and shareholders. There is no competition between customers and shareholders, unless one is falsely created.It is not “either or” but rather “both and.”The key to a healthy company and an expansive share price is to generate as much revenue as one can while controlling expenses. Doesn’t get any easier than that.That is, clearly, in the interest of the shareholders — which in this instance are the limited partners of the VCs.The sand in the gears is created when VCs or CEOs decide to do things which are “fun” or “cool” and which may be of questionable value to the owners/shareholders or the share price.I lay Etsy at your feet as an example of what happens when a knowledgeable CEO strips all the nonsense clear of the company and focuses on the sole KPI that matters — growing revenue to Etsy.The new guy has made Etsy into a rocket. Fred is the Chairman, IIRC.In turn, the shareholders are appreciative of the improved share price.Perhaps, we are misusing the word “customers” when we use it to apply to LPs and should use “owners.”JLMwww.themusingsofthebigredca…Long ETSY

          1. JLM

            .Yes, indeed. I will be sending both of them a Christmas card.They got rid of the B Corp, flogged all their sacred cows, and focused on growing revenue.The rest is just accounting.JLMwww.themusingsofthebigredca…

  2. kjetil

    What happens to a company once you exit your investment? Are they still invited to network events etc?

    1. fredwilson

      They join the alumni network

      1. Frank W. Miller

        Couldn’t help it. I’d luv to see the demographics across that group. I suspect what we used to call an “old boys network” of white males…

    2. jason wright

      there is no escape.

  3. Frank W. Miller

    Given the series of posts you’ve had over the last week and over time, I have to say this sounds more like marketing than reality. Consider the example the other day where you’re asking for founder lockups. While you may be of the opinion that things are easier for and that you’re targeting the entrepreneur as a customer, to me it looks more like you (and all VCs now) are targeting them as victims. There seem to be more terms now than there were then and all of them seem to be in the VCs favor. And that would be natural given the lopsided dynamic I continually point out. VCs can get basically whatever they want in these deals because the entrepreneurs have no leverage when it happens. And (all of) you take advantage of that at every turn.

    1. sigmaalgebra

      Ah, you are being too simplistic and skeptical! :-)!!!Both parts are true, (1) the tough terms in the term sheets and (2) the cases of support and help for the companies. For (1), we’ve discussed some of those terms, I regard as tough, severe, onerous, maybe vulture capital, etc. in recent days. For (2), I’m overwhelmed, astounded, super impressed with Bethany Marz Crystal!!!! She looks like a planner, organizer, implementer, hostess, etc. of totally A+ social events, meetings, get togethers, meet and greets, birds of a feather, talks, lectures, lessons, seminars, discussion groups, wine and cheese parties, pot-luck dinners, professional networking events, on and on!!! She likely could also do alumni fund raisers, high end weddings, MOMA fund raisers, etc.!!!!!So, (1) looks like the vinegar, and (2), the sugar. So, it’s sweet and sour!! A lot in cooking is sweet-sour, and the USV version is not nearly as easy to like! So, you want to see one qualitative view — on a scale of bad to good — of both (1) and (2): Well, there really isn’t such a one view! So, it’s two dimensional, and the best you can hope for is some Pareto non-inferior optimality!!!But if you want one explanation, then, sure, Fred is trying to be successful in his business.It’s not fully but is significantly like a wealthy guy about 40 who sees a just totally drop dead gorgeous, bright, wonderful, young women of, say, 18 he wants to marry, share his life and build a family and even dynasty with. So he shows her the best of fun — his great family, dinner parties for the two of them with his family, Broadway, Tiffany’s, Lincoln Center, Upstate NY fall leafs,with a bushel of baking apples, in his Bentley, the best restaurants, a lot of fun restaurants, high end Internet shopping, e.g., struggling over a necklace of blue sapphires and diamonds set in yellow gold or red rubies and diamonds set in white gold (ah, live a little and buy both, each in three lengths, with matching earrings and a tiara!), architect’s drawings and renderings of candidate houses, with the indoor Olympic pool and the outdoor Olympic pool, each with a diving pool, next to 10,000 acres of game preserve, renderings from high end interior decorators, a party with 100 of his closest A-list friends in Long Island Sound on his family’s 200′ yacht, clothes shopping the Melania way, etc. So, that’s the sugar. Then comes the vinegar — the pre-nup!!!!! With that, she can leave anytime she wants for any reason or no reason but with only the clothes on her back and with no car, motorcycle, scooter, bicycle, skateboard, roller skates, checkbook, credit cards, cash, jewelry, deeds, securities, house, furnishings, children, or pets, and she can’t write or talk about their life or marriage.Not all such women would sign the pre-nup, but he needs only one!

      1. Lawrence Brass

        Very luxurious post Dr. Sigma. Why a Bentley instead of a Buick? Are you finally getting more open minded? Haha 🙂

        1. sigmaalgebra

          For that fall ride, of course, I was thinking of the “Drop Head” Bentley, that is, their convertible!

          1. Lawrence Brass

            Invite me to the ride, so we can play Rule Brittania while we cruise upstate NY.. to upset the natives. 🙂

          2. sigmaalgebra

            Sure: Just BYOB, bring your own blond! Gentlemen prefer blonds!

      2. LE

        The pre-nup is appropriate. People change. Anyone who has gone through divorce knows that. Additionally even if you only leave with the shirt off your back you get to enjoy a lifestyle during the marriage. Or perhaps you’d be living in Staten Island. Or the Bronx. Further once you are in the Hamptons or in Manhattan you meet the next person you will get to potentially marry. Of course this assumes the person you are marrying you are doing it for the right reason (whatever that means).I would suggest negotiating a phase out period for the pre-nup. What you get depends on the year you breakup (if ever). Romantic. But it’s a reality.Anyone who thinks that a pre-nup means you don’t love the person knows nothing about how people change (or can change) once you are married.

        1. sigmaalgebra

          Long ago from what I saw, I tried to make sense out of it. I kept asking, humans have gone through so much, so many really awful times, with the gene pool strained and filtered severely over and over, for at least 40,000 years, so how could there still be such severe problems in the gene pool?Well, in old software terms, they aren’t problems, they are features. Darwin and Mother Nature didn’t actually make mistakes, at least not for human life through, say, year 1900.So, in short, for what we see, however bad it might look, look for reproductive advantage.Then in simple, bold, blunt, not very flattering, bottom line terms, roughly, she needs a new love or new baby each three years or so or will leave, even to something clearly a disaster. The disaster is a feature because it makes her desperate and eager to get close to another man to take care of her, and then Mother Nature and Darwin are smiling and placing bets on when the next line of her babies will start. After the three years, Mother Nature and Darwin are giving up on her current situation, even if it is with the extreme high end lifestyle I outlined, and making her unhappy and eager to leave. It’s an awful theory, but too often it fits the data.In what I’ve seen, what you have observed about “changing” is just a special case. Sure, there was a movie about this, “The Seven Year Itch”, except I’d say that the “itch” is fairly severe after only three years.One observer explained to me his version of the same thing: She is like a leaky hot air balloon and, thus, needs to be pumped up nearly daily or will fall and crash.Another observer’s remark was, “She’s getting all antsy — time to knock her up again.”The “We gather together to JOIN this man and this woman with the BONDS of Holy matrimony …” and play Wagner’s wedding march from his opera Lohengrin, add on “for better or worse, for richer or poorer, in sickness and in health, forsaking all others, till death do you part” — sounds good. Wisdom from hundreds of years of the ugly results of getting off such bonds have shown that this sounds like a good life contract.But, as you observe, people “change”.Sure, the man works hard and smart and tries to provide emotional security, financial security, a nice lifestyle, food, clothing, shelter, medical care, transportation, recreation, insurance against risk, time in church and with family and the community to add social pressure to keep the vows, education for the children, retirement for the couple, but no matter how well he does and no matter what the situation seemed to be on the wedding day, after about three years she may be eager to go.As one expert said, “There are a LOT of affairs.”.Net, after three years with no new baby, to her the wedding ceremony can look like just a stage performance of a costume drama fantasy.It is now known that there are some natural chemicals, love chemicals, involved, but by three years the last dose has worn off and another dose is needed. As I explained to a guy, a friend, facing the three year disaster in his marriage, he needed the help of chemicals, strong chemicals, those natural love chemicals, and the family yacht, jewelry, a BMW 7 series, etc. are not substitutes.Sure, a man sees the marriage vows as a good start on a good life for life. That’s nice, conscious, rational planning. But she wasn’t being very rational during the wedding ceremony and, instead, was high on love chemical. And when after three years without another baby, again she is not very rational but just low on love chemical.It’s an ugly description and doesn’t always hold, but it fits the data too well to be ignored as a strong possibility. In Girls 101 for Dummies — Boys the possibility and threat need to be explained.

    2. Lawrence Brass

      I think that if you get to the table with a thing that has 100X potential and are able to project that idea, you may have the leverage.Well, 100X may be an exaggeration, but certainly makes VC’s eyes shine. :)You can do it!

      1. Frank W. Miller

        If I had something I knew and everybody else knew was a 100x, VC is the last money I would take.

        1. Lawrence Brass

          If something is so good we could get the capital right from the inflow, this is my secret wishful dream. But don’t you see any value in forming part of the VC network? I do.I think that making “everybody else know” is one of the key CEO/Founder duties.

    3. LE

      basically whatever they want in these deals because the entrepreneurs have no leverageIs that really true? VC’s have competitors. So what causes the lopsided dynamic then.Well it’s the typical dynamic that I have commented about before. That you can only ‘be as honest as your competitors’. [1] In this context it’s similar to the way attorney’s charge for time. Nothing dishonest (sure they might pad bills) but the truth is all top level attorneys (not talking about corner shops) charge high rates. Thousands per hour. And of course you can choose an attorney that charges half the price but you won’t because for your big important case where you are spending the corporations money you can’t take that chance. (Fits a bit with ‘nobody got fired for buying IBM’). And all of those attorneys have high priced offices and fancy support staff in class A locations. (That model has been impacted in the last 10 years however it does still exist from what I can tell..) By the way you are paying also (with Fred or an attorney) for expertise and knowledge. You are also paying for his ability to get the money to give to you. Just like JLM can build a building because he knows things that you don’t. Or when people pay me for what I do that they are not nearly as knowledgeable about.With VC’s they all do similar things in business practices because,well, that is what other VC’s do and they can. What exactly is their motivation to break from that mold? Why should they? And this is business. It’s not a public trust. It’s a customer trust. They need to do enough to have their customers trust them and refer them business and to end up with a good reputation.Lastly why are they ‘victims’. It’s a free market. Not a cab from the airport. Not an electric utility. What gives any person who wants to operate a business the right to think that it’s someone’s obligation to give them money on the terms that they (or you) think is fair?[1] Use of the word ‘honest’ comes from my observation years ago as to why it was difficult to find an honest car repair shop. If your competition was ripping people off it that made it hard to operate honestly. As only one example if the other shop was deceitful then they would make more money and be able to outbid you on labor and buy fancy repair equipment. So it became necessary to pad bills just to remain on the level playing field.

      1. Frank W. Miller

        Many of them are very young and naive when they are going through this, which is usually the first time. Thus, the victimization.

        1. LE

          I don’t have a great deal of sympathy on that angle. Anyone in business has been victimized by lack of experience. In the case of many of these ‘victims’ they have had the opportunity to get degrees from top shelf universities. And then they decide instead of taking a top paying job at a well known company to go for the brass ring. Either for the excitement, the jealousy or because they are interested in a quick path to success without waiting and putting in the time over many years. (Or at least that is what they think).Latest ‘stupid’ startup idea from Y Combinator is Nectome (preserving brains for terminal patients). People are actually spending time and energy and talent on this shit. Who is being victimized here?

          1. sigmaalgebra

            “Experience is the great teacher, and some will learn from no other.”When I was a B-school prof, I didn’t want to be but took the slot better to care for my wife. But had I wanted to have been a B-school prof, then I would have wanted to have had it be professional more like law or medicine instead of what it was trying to be, applied social science, but with a lot of physics envy. Being professional, there would be a role for teaching some of the lessons otherwise available only from experience.

          2. creative group

            LE:Can you please add a person doesn’t have time for a animal or child don’t acquire or produce them.The Nanny or dog carer is the real parent or owner.Captain Obvious!#UnequivocallyUnapologeticallyIndependent

    4. fredwilson

      I respect and appreciate your skepticism. But I can assure you that these principles are not marketing hype. Talk to any of our portfolio companies and you will learn that our deeds more than live up to our words

      1. Girish Mehta

        Good stuff. Btw typo – should be principles.

        1. fredwilson

          thanks. fixed.

    5. Donna Brewington White

      Are you saying that marketing is not reality?

  4. William Mougayar

    As you said here many times before, VC is a services business. VCs serve the companies they have been privileged to invest in.

  5. Nicholas Osgood

    I couldn’t agree more with this. Thank you for all of your teams support with us through our journey at DroneBase!

  6. Dan T

    Your guiding principles are awesome . . but the metaphor of the company being the customer? A VC is a vendor that supplies capital and expertise to their clients. Sounds great and I love it in general, but it sure has hell didn’t feel that way when I had VC investors. They were awesome and provided lots of support and help – we had aligned relationships, but the VC’s relationship was 100% unique compared to the others. I think this is a great mindset for a VC, but from the perspective of the “customer” – it will never really feel that way and could result in some WTF are you talking about moments.

    1. JLM

      .A VC is a guy with a closet full of OPM. He rents OPM and wants his pound of flesh, his 2% and his 20%. And, hey, that’s OK.JLMwww.themusingsofthebigredca…

      1. sigmaalgebra

        And with that OPM, he has to follow the golden rules — he with the gold makes the rules.

  7. JLM

    .Markets force behaviors. Just about nothing else does that.Back when I was soliciting $100MM financings in the 1980s, I would make up a lovely prospectus and shop it around to 40 different firms. This was straight debt. I would go to NYC, London to talk to the big boys.I would get 15 offers and lots of turn downs. Some of the turn downs were clever as Hell.”Sorry, just did a deal down the road, but call me for the next one.””Sorry, market is too small for that much money.””Portfolio too weighted in that product type. Cheerio.”Nobody ever told me my deal sucked or that I was an idiot. Fair play on either, mind you.I would compare the deals and then negotiate with the one I liked the best to beat their offer into shape with the best offer. They would always do it.Then, the market changed. I went to the people I’d done business with on my knees, my tin cup propped under my chin. They had all the power. I had none. I got two offers, if I was lucky.Then, the market changed again. The money poured over the transom and I couldn’t drink fast enough to forestall the fire hose.I learned a great lesson. It is the market which changes the money suppliers. It’s not personal. It’s the market.I did it for so long, I did business with some of the same folks during good and bad markets. The markets changed them.I learned something else: “Never get mad at the money. It will change its mind.”All this blarney about who is the customer is useful and good marketing, but it isn’t really what drives things. Only competition and markets really change things.This isn’t bean bag. It’s capitalism.BTW, who sent you a Christmas card this year?JLMwww.themusingsofthebigredca…

    1. Lawrence Brass

      That’s mean.. nobody sends Christmas cards anymore Jeff.Those rounds were for your buildings?

      1. JLM

        .I send Christmas cards, Lawrence. Send me your address and I will send you one.One year, I sent them in July. I may do that this year.Everything I have ever done in my life, I have used OPM. I probably financed more than $1.5B back when that was a lot of money. Just as many refis. I signed a lot of notes.These days, I advise my clients to do the same thing. Two hundred targets to find 20 interested parties to find 10 who have a checkbook with money in it to find the right 5 who write a check.There is a market for that stuff.Merry Christmas.JLMwww.themusingsofthebigredca…

        1. Lawrence Brass

          Don’t Merry Christmas me silly, it’s March!What a beautiful custom. I have the best memoirs of my grandmother writing the cards and opening the cards that arrived her door and placing them on a side table. The next year she would make decorations sticking the cards over a red ribbon, as a vertical banner, and hanged them around the house.You are a gentleman Jeff. Let’s see if I can earn that card, this year.200 targets sounds as a lot of work.

          1. sigmaalgebra

            Mom put the red ribbon with the cards around the arch between the dining room and the living room and on the living room side! Ah, it must be gender-linked genetics!!!! The cards were trophies of her successes with her social climbing gossip group!!!

        2. Susan Rubinsky

          I send New Years cards. But only because I found I never got the Christmas ones out in time. Turns out, New Years cards are unusual and people remember it.I also make a habit of sending out personal handwritten cards after every project has been completed.I also have been known to show up with homemade cookies. It’s astounding how many people remember you when you showed up with homemade cookies. (I believe @gothamgal was known to show up with homemade cookies when she worked at Macy’s).It’s all about the personal touch. In every age.

          1. JLM

            .Agreeing more with you than you do with yourself.JLMwww.themusingsofthebigredca…

          2. Susan Rubinsky

            Hahahahaha. I believe, at the end of the day, we all have more in common than not.

          3. sigmaalgebra

            Early in my career, I was working in a Navy lab but also on weekends playing with high end cooking. Since dessert is my favorite dinner course, I tried Black Forest Cherry Cake starting with an outrageous recipe from a Time-Life series. The chocolate cake was really a foam of eggs and sugar with some cocoa powder! Then needed to make curls out of chocolate — the curls to look something like tree bark. There was a filling of sour, red cherries. The icing was all whipped cream, and it was tough to get it whipped stiffly enough. And the cake itself was soaked with a sugar syrup with a lot of real German Kirschwasser, cherry brandy. It was good!So, after I’d done several trials, with improving results, a Sunday I stayed up late and made one and parked it in the refrigerator. Then for work, with a good cake carrier, lots of paper plates and forks, a kitchen knife, etc., off to the Navy lab. The secretaries took charge, and everyone came. The Kirschwasser was tough to miss and strongly noticed.It was so soft it looked much better before cutting and serving than afterward! But it tasted good!

    2. sigmaalgebra

      Stronger than an acre of garlic? Maybe, but as strong as a new law of motion. Read, saved, abstracted, indexed.So, it isn’t personal. It’s just business. And it’s not all about your business but more about the market, and the market changes. Okay! Lesson taught and learned.

  8. jason wright

    a glossary might add value to this blog. an alphabet soup of terms that are the impenetrable secret language of the priestly class. off-putting.

  9. Phil Hayes-St Clair

    Ridiculously good principles for customer orientation.

  10. WeakAnalysisFred

    What a bunch of inane, self-serving drivel. The internet “Go West Young Man”/Gold Rush is essentially over. The folks with money will soon be back “in the driver’s seat”… as usual. Any LPs who give their cash to Fred are…. Well. I won’t say it. But you know what I mean.

    1. creative group

      Weakhidingbehinduserid:Your opinion regarding Fred isn’t being questioned because it is your opinion. But the creating an user ID just to flame Fred is juvenile.When we disagree with a position of Fred it isn’t personal but openly a difference of application or view.We have no need to assume your identity. Who actually cares. But your intent is clear and derives from the Political spectrum that is fake, phoney and reprehensible.Captain Obvious!#UnequivocallyUnapologeticallyIndependent

  11. JMS

    As an institutional LP, I take issue with the direction this line of thinking has taken the market, but hey prolonged bull markets typically lead to perverse behavior.Today, fewer and fewer GPs treat LPs as partners. Blame the LPs as well as the GPs, as market forces cause behavior to reach its equilibrium. The glut of capital seeking high returns, and the difficulty LPs have in differentiating their capital apart from size, has forced most LPs into a sort of founder-friendly MO whereby GPs seemingly hold all the power in the relationship.The idea of a VC “working for” the entrepreneurs is romantic, but it forgets the simple fact that the VC is a fiduciary. In a world where many GPs explicitly tell potential investors they’re looking for LPs that will be “platform investors” (ie invest in each and every fund the GP raises across strategy and size), it would seem that much of the world has forgotten that managing other peoples’ money is a privileged that must be perpetually re-earned. This velvet rope behavior reeks of greed and certainly portends some sort of reckoning; just look at the current state of the hedge fund industry relative to ten or fifteen years ago. Not saying all GPs and LPs are guilty, but the market sure has moved.