Broken Syndicates

One of the most challenging situations in startup/venture capital land is the broken syndicate. It is not a topic that is talked about much, but it is fairly common, particularly for companies that succeed in building a business but falter at achieving escape velocity.

A syndicate is a group of investors that come together to support a startup financially. They tend to be built over time. Some investors get involved with a company in its seed round. Others get involved in a company in the Series A round. And some get involved in the Series B round.

By the time a startup has raised three or four rounds of venture capital, it is likely to have built a syndicate of between three and five venture capital firms and other investors (corporate, strategic, individuals, family offices, etc).

The idea is that the syndicate supports the company financially until it no longer needs capital. That can happen via a sale of the company, an IPO, or achieving profitable operations.

And that is typically what happens in the best situations, when the company executes well and finds that happy financial chart that goes up and to the right with a steepening slope. In companies like that, the syndicate almost always sticks together and more investors clamor to get into it.

And then there is the company that never really figures out how to build a business. In those situations, everyone around the table, including the founders, figure out how to wind things down, either through a sale of the business, an acquihire, or a wind down. This happens all the time and is generally not a particularly painful process.

But there is a middle ground, where the team figures out how to build a business with customers, revenue, and lots of employees. But often the business stumbles and revenues flatten and losses pile up and more capital is needed, often a lot more than the existing syndicate is prepared for. This is when there are often management changes, founders depart, and there is a lot of drama.

And holding a syndicate together during the “stumble” is very hard. Some investors are managing huge funds and need exits that will produce hundreds of millions to their fund. When they see that a company will not do that, they often move on. Some investors have small funds and don’t have the capacity to fund a company round after round. Corporate and strategic investors can lose interest when a company stumbles and they no longer believe the business is strategic to them. 

Those are the “rational” reasons that syndicates break.

But there are other reasons. There is a fair bit of churn inside venture capital firms right now. Younger partners leave to start their own firms. Or are asked to leave because they are not producing the expected returns. When a partner who leads an investment inside a venture capital firm leaves, the investment is often “orphaned” and the other partners will pretend to support it but they really don’t want to and don’t.

Or even more upsetting is when a venture capital firm finds another company in the same sector that they like more and they lose interest in your company and stop supporting it.

All of these things happen to companies who stumble and they happen way more frequently than anyone talks about. It really doesn’t benefit anyone to go public with these situations. So they are worked out quietly.

Often broken syndicates lead to early exits, when the founder(s) and remaining investors realize that they are screwed and decide to find a home for the business before they run out of gas. Many times these exits are disappointing outcomes relative to the opportunity and they can make for fantastic acquisitions.

Another thing that happens with broken syndicates is the recapitalization. This is when the remaining investors reset the valuation in order to bring in new capital, either from their funds or ideally from fresh sources of capital. The losers in this situation are the early investors, founders, and investors who walked away. 

And sometimes what happens is the business shuts down, leaving people scratching their heads. Why did that company which had lots of customers, revenues, and employees suddenly close up shop? Well the answer is often that their syndicate broke and they could not put it back together.

At USV, we have worked through these stumbles and broken syndicates many times over the years. We often find ourselves in the position of trying to put Humpty Dumpty back together again. We have managed to do that many times. But we don’t manage to do it every time. 

It is incredibly difficult work, probably the hardest work we do in the venture capital business. And we often are asked why we bother.

We have found that we can make excellent returns when we stick to our conviction around an opportunity and work to restructure the team, the operations, and the syndicate (and the valuation). We also have found that we are rewarded reputationally in the market as investors who are supportive when times get tough. And we believe that it our job to support companies and the founders who create them.

We wish everyone in venture capital land saw things the way we do, but they do not. And that is the reality of the world we operate in. 

Founders need to understand all of this when they put their syndicates together. You should ask around about the investors who want to put money in your company. Look for companies that have stumbled and get to the people who know what happened in those situations and ask about how their investors behaved. That will tell you a lot.

The bottom line is that syndicates are fragile things. They break. And putting them back together is hard. So figure how to build one that is strong and will stay strong. The best way to do that is to under promise and over deliver on the business plan. But you can also do yourself a lot of good by finding resilient investors and getting them into your cap table. So do that too.

#entrepreneurship#life lessons#VC & Technology

Comments (Archived):

  1. PhilipSugar

    This is a fucking great post.It is like Anthony Bourdain’s Kitchen Confidential.It is what people don’t like to discuss or acknowledge.You know for more than ten years I have said this is where value gets destroyed.I have bought out my syndicate. It was painful.It was profitable.But I know that I am one of the very, very few that has done it.I thought there was an opportunity for me to do a fund to do this, but I worked the numbers, and you just can’t make them work.So unless you’ve had other exits this is great advice.The only thing I will add is that the funds that aren’t doing well or the partners that know they are getting pushed out, or worst of all angels that didn’t really know that the sky was full of rainbows, will flail. And I mean flail enough to make you: Go crazy, start flailing back, or just walk away.

    1. JLM

      .I have done several turnarounds. It is a different skill.First, you have to cut away the dying stuff, purge the poison, get rid of the mortally wounded. Get rid of the death stench.You will use an axe and a chainsaw. You will work quick.Only then can you go back on the offensive, begin to grow again.Once you have picked the right azimuth, you have to retool again. Now, you have to do fine, detailed work – thin brushstrokes to paint in the future.First step was triage and life saving while the second step is fierce rehab and heavy lifting.It is not for the faint of heart and you have to have the money in hand going in.JLMwww.themusingsofthebigredca…

      1. PhilipSugar

        I will tell you the key is to keep the roots. The doers. Now that is tough because the flowers (management and people that do great powerpoint) will try and convince you otherwise.

        1. JLM

          .My personal experience is that the very best are gone quickly at the first sign of toxicity.I have passed on a lot of deals because they were hollow.JLM http://www.themusingsofthebigredca...

          1. PhilipSugar

            That is why you have to do it quick and hard. If you don’t people bail.

    2. sigmaalgebra

      ForIt is like Anthony Bourdain’s Kitchen Confidential.I got and read his book when it was popular. At times it appeared that he was saying that a key to knowing how to be a good chef was spending summers in New England seafood huts getting hands burned on 400 F deep frying fat — hmm. I preferred Escoffier, Diat, Pepin, maybe someday Myhrvold, etc. Sorry, Julia. Uh, Julia, get a thermometer and for beef stews learn where 160 F is on the thermometer.I remember the part where Bourdain is catering a wedding reception and the bride comes to the back door of the kitchen, apparently can’t wait for her wedding night, and gets fully friendly, “doggie style”, with one of the South American kitchen helpers.Yup, that is a view of some parts of reality. It’s good to know that such things are part of reality in life, especially to see the threat so that can be sure strongly to avoid it. Gee, I wonder how long that marriage lasted?Gee, some people are really slow to understand some of abstract thought and symbolism, that love making is supposed to represent love, and really fast to forget the standard “We gather together to join this man and this woman together with the bonds of Holy matrimony” and “… forsaking all others”.For such versions of reality, maybe in a startup office don’t have any closets big enough for two people ….Net, I haven’t been able to give much credibility to Bourdain. I’m sorry about his serious problems. Or someone who wants to be a winner should be reluctant to take important lessons from a loser.

  2. JLM

    .You never really know anything about anyone until the pressure appears.A lot of folks crumble under the pressure and turn to dust. The vast majority. Or, worse, never having been founders or entrepreneurs, they don’t really know how to help.Some folks blossom; the pressure turns them into diamonds.The tough assessment an entrepreneur has to make is: Is this guy a “banker” or a “backer?”Bankers will invest money to achieve a certain return, while a backer will help you when the rains come. They will hold the umbrella while you work.Here’s to backers, you few.JLMwww.themusingsofthebigredca…

    1. Lawrence Brass

      Salud! for that, señor Jeff.If entrepreneurs are required to put so much into the game, why should we settle for less on the investor side.

      1. JLM

        .The harsh reality is that for the VC, it is OPM and they expect 80% to fail.They have no real skin in the game.The founder is all-in. Body. Mind. Soul.JLMwww.themusingsofthebigredca…

        1. TeddyBeingTeddy

          Yes and no. Lot of times the founder are trust fund babies from Marin County gambling with other people’s money. Big safety net.

          1. JLM

            .Fair play.JLMwww.themusingsofthebigredca…

          2. jason wright


    2. sigmaalgebra

      Maybe I’ve been drawing a relevant lesson from Trump: He’s not just offering his ideas and work. Instead, he’s out there getting support for his ideas and work.An implication is that voters need to be LED, as if they were horses, led to water and then even TAUGHT how to drink. They need to be led over and over again, same message repeated with small variations, with some “harmless exaggerations”, at least one significant leadership effort a day, sometimes several, constantly out there, on Twitter, via interviews, announcements, events, via Air Force One, with FLOTUS, over and over, again and again. It’s harder than herding cats and takes extreme, continuing, never slowing down efforts.I’m guessing that Trump figured this out as he led people in his business projects.Then I’m guessing that to keep a VC syndicate together might need similar leadership efforts.

      1. Lawrence Brass

        Horses, cats.. now I am confused. ;-)…

    3. TeddyBeingTeddy

      I salute your comment. But realistically I’d probably fall into the banker category… Partially due to cowardice, but also fiduciary duty to the LPs…

    4. Matt A. Myers

      A thought just came to me after revisiting this thread.. What’s the opposite of a broken syndicate – on the spectrum of it being a problem? Deeply ingrained confirmation bias? And is the result bubbles?

  3. William Mougayar

    As they say, too many cooks in the kitchen…And to your point about deciding to pick-up the pieces and help the startup get back on track, it does take a certain confidence you only gain via experience that lets you see what others may not be seeing.

  4. Richard

    Does this mean that there are a significant number of positive (or potentially positive) FCF startups (with some restructuring or changes) that die on the vine because they are no longer have a growth prospects without additional fundraising ?

  5. jason wright

    A most excellent post. An A+.

  6. DerekB

    Hi Fred, thanks for this great post. Long time reader, first time commenter.I experienced the broken syndicate at one of my ventures and it was a real eye-opening experience that as a founder I learned a lot from (despite the painful process).You outline three scenarios:1) Up and to the right — life is great2) Wind Down – not great, but the playbook exists to handle3) Company isn’t breaking out, and can’t support itself – possible broken syndicateWhat about the fourth state where a company has solid revenue, is cash-flow positive (or neutral), but only growing at 20-40% per year (as opposed to 100% plus that seems to be expected of ‘breakout’ companies). It doesn’t need more capital and is considered by its customers to be a successful venture? What has been your experience with syndicates in this scenario? Do investors just lose interest and go away, or does it fracture like in scenario 3 above?

    1. PhilipSugar

      Fractures unless founders are super tough. And/or you have investors that are successful and patient enough and willing to take the single not the home run.I have lived this twice. Problem is that the investors that want that home-run will try to put in new management, put in new capital and not take what the reality is.They will say things like: “we didn’t invest in a lifestyle business, we are out to change the world.”The reality is that the business grows at 20-40% and makes money and has happy customers. Well that might just be reality. Not interesting especially to those that are trying to make their “bones” by getting a “unicorn” a 10xer.

    2. fredwilson

      It is a varaint on the middle group. But if it is cash flow positive, then it doesn’t need it’s syndicate and it not vulnerable to it

      1. PhilipSugar

        I would say strongly is determined by the term sheets that were used by the syndicate.

      2. sigmaalgebra

        ForBut if it is cash flow positive, then it doesn’t need it’s syndicate and it not vulnerable to itLesson seen, read, learned, accepted.

  7. Eric Friedman

    The other large group heavily affected by a recap and restructure are the employees. Great post and reminder that reputation is everything.

    1. fredwilson

      Yup. But they usually get re-upped. Because a business is nothing without it’s employees

  8. Pointsandfigures

    the flip side is at early stages if the business doesn’t work it’s cheaper to let it fail than re-capitalize it and restart it. Sometimes there is a novel pivot and if you have conviction around it, you can get behind it.

    1. LE

      The saying ‘don’t throw good money after bad’ applies?The post as others have said is excellent and makes great points. The problem is it’s all nuance and details, gut feeling and continuing to buy into some vision. It’s never (like with many things in business) clear cut.if investors are bailing ie ‘cheaper to let it fail’ it’s because someone isn’t buying into the vision or gut and doesn’t think it will work out. As such it makes perfect sense to bail.”Jeff” kept investors for years until becoming hugely profitable and having the world by the ______. I wonder how many investors bailed out of that investment?

  9. george

    It always gets interesting when there are financial forks in the road. Choosing the right investor(s) is invaluable over a business lifecycle. The lesson here – evaluate a investor’s reputation, track-record, business philosophy, and ideology, not just their wallet. These are the most basic distinctions that help identify where members of a syndicate may draw future boundaries, which to your point, often determine capital sustainability or substitutability. Principle differences are meaningful…

  10. Jeff

    Fred – Your best post ever!This is exactly the problem with U.S. IPO market, companies are forced to stay private too long and risk broken syndicates. Oracle, Adobe, Sun, Amazon, AOL, Nividia, Cisco, and Intel all listed at sizes that would be deemed too small by today’s standards.Imagine a world where Intel had to pivot from Memory to CPU while private. That syndicate would have busted!

  11. sigmaalgebra

    Remember the advice “never give up”? Well, that advice is important because “stumbles” are part of the game. Besides, if you never stumble, then you need to try to run faster.The stuff about up and to the right with an increasing slope is 99 44/100% out of fantasy land: That view is childishly irresponsibly simple minded. Do they also look for a yellow brick road with a gorgeous rainbow in the sky and a pot of gold at the end?The whole situation on syndicates and venture capital more generally looks like trying to carry a heavy load with a lot of “stumbles” on thin ice. The situation looks just flatly irresponsible for a company founder.If the founder needs that cash, then his response is simple: Pick another project that doesn’t need the cash, a project that he can fund from his own checkbook.One example is the Canadian romantic match making Web site Plenty of Fish, long one guy, two old Dell servers, ads just from Google, $10 million a year in revenue, and eventually sold for IIRC ~$550 million.More generally, border to border in the US, entrepreneurs start Main Street businesses, e.g., pizza carryout, grass mowing and snow plowing, auto repair, auto body repair, franchised fast food, etc., and all of those examples take some cash to start. Millions of entrepreneurs find the cash and not from VC.Then, for an information technology project, the cash needed can be much less than for any of those Main Street businesses. And, sure, if the information technology business idea is good, then can have another Plenty of Fish or much better. E.g., if just as a sole, solo founder have $10 million a year in revenue, then what’s with this unstable, very thin ice VC stuff? I.e., the $10 million is much more than a seed round and about a Series A round. If the business has more potential than Plenty of Fish had, then the $10 million in cash should be enough to fund much of the rapid growth.What I’ve seen from Sand Hill Road, from their blog posts, their speeches, their work, they look like a few grades short of some old slap stick comedy routine.IMHO, Sand Hill Road will have to give up on this childishly irresponsibly simplistic up and to the right with increasing slope stuff, get serious about technology and business, and learn how to evaluate projects or become skid row.

  12. Sid

    Venture Capital is not right for every company.

    1. LE

      Very generally if your competition is funded by VC/Angel you will probably not make it unless you have VC or some other investor.Let me bring up as one small example the lavish ‘wework lifestyle’ offices enjoyed by many startups. The only reason they can afford this overpriced office space is because they have VC funding. As such they are able to attract (what they think) is the type of talent that they need to defy gravity and at least have a chance of succeeding. All fun fun fun for the millenials who work there and want to be around other millenials in a college type environment. You know what I just read? Wework is limiting people to ‘4 12-ounce pours of beer in a single day’. It used to be unlimited. Do you know how weird and non traditional the idea of having fucking beer at a company is to begin with? During the work day? [1] In a cute twist of marketing they call it ‘craft’ beer. Because using the modifier ‘craft’ somehow makes it acceptable I guess.Look you can’t really blame people for wanting to work in a nice place with people who are young and cool. Even older people would actually prefer that type of thing. But it costs money. And enough that you aren’t going to fund that with money from your paper route or lemonade stand or bar mitzvah money.You want to know what it’s like to have to have offices in a non high tech field and attract employees? You end up in space such as I had where some people schedule an interview, see where the office is, and then bail on the interview. And having nice operational space (as well as benefits) you are not going to do on a shoestring. You will need investors of some type (VC, Angel, Family money) etc. money that is not yours that you can afford to loose and not feel pressures for a few years ie ‘runway’. Or of course you can try to grind it out with low expenses (and less labor) and work for years. But in high tech that is not fast enough and in the end unless what you are doing is super special (and it probably isn’t) you are going to lose out to someone who has the ‘funny money’.[1]

      1. Matt Zagaja

        I thought the value prop of WeWork and others is startups could rent a nice office turnkey without having to commit to the ten year lease or overbuying space. So even though it might be more expensive per sq ft they lower total overall cost.

        1. LE

          Depends on the market. Yes that is the way they have been sold on it. But the truth is all of that is negotiable anyway. But sure if you want the lazy way out that is what you buy into. You probably do only a cursory look and then give up. That is what people do. I am not saying there isn’t some truth in it. But the question is do you need Class A space for your startup? And if you do why is that? Because that is what everyone else is doing giving clean carpets and fresh paint? And honestly you are there to work. Not to have fun.I would like to ask JLM whose daughter just started a company if he would support her operating in Class A space (which he used to rent). My guess is that he would think that is (for lack of a better way to put it) ‘stupid’. Now maybe if she needs a desk only instead of operating out of the house it might make sense. But I still say there are cheaper ways to do that than using wework (or even Regus or equivalent). Go out to some local office and rent a desk from them that they are not using. Figure it out.One other thing. These wework offices are really nice. So what happens when you spoil your workforce with that and then they have to move out to something where there aren’t other cool people working. What happens to morale then?That said as I repeat ‘you can only be as honest as your competition’. So sure if the other startups are pampering employees with their type of environment you are going to have a hard time not doing that unless you are really creative in how you sell the fact that you aren’t doing to potential employees. That is what I would try to do (and have done somewhat similar things in the past).

        2. LE

          Actually if I had more time (which I don’t) this just shows that there is an opportunity to figure out a way to get space for these startups at a much lower cost than is happening with a wework or alternative by stripping out all of the nonsense. So kind of ‘no frills’. Less than even Weworks lower cost competitors. ‘Napkin’ says there is a need for this and the numbers work.Noting also that entire wework model will go bust and is unsustainable even though they seem to be saying they are getting large companies to buy into this type of rental. Wework at the core is a marketing organization that guarantees rent to landlords. Hard to believe that is a big thing for the landlords to do themselves given there is a demand for it.My other idea below ‘find a desk and rent it’ is essentially airbnb for desks. Has to be someone already doing that. I am doing it with small places that I own already as have many others. Even the people who rent from me then rent out when they are not using their small office.

          1. Adam Sher

            As a former landlord who looked into getting this space, I interviewed several coworking space owners around Philly (e.g. Benjamin’s Desk, Seed Philly, former The Hub). These models typically fail unless the landlord is involved in the ownership because over a long-term, these spaces go through stretches of substantial negative cash flow.That investors think it’s a good business model to incur long-term liabilities and earn short-term cash flow is mind boggling. Is there an example anywhere outside of a federal government that this works over a long-term?

          2. PhilipSugar

            I am looking at real estate in Philly, will be at Penn Homecoming Friday.I agree on shared space. Works in the boom blows up in the bust.People selling pick-axes win.

          3. Adam Sher

            May I buy you a drink while you’re in the city?

          4. PhilipSugar

            Yes, but I’ll buy: my name at the gmail service.

          5. Adam Sher

            Happy to put you in touch with some knowledgeable local players if you’re looking for more information for your analysis.

        3. Adam Sher

          I want to build on LE’s responses because he’s write. WeWork’s value prop is emotional and not financial for small companies. There is a risk aversion that most small business and startup owners feel and it forces them into a WeWork, which is a financially bad decision. I/we made this mistake at my last company. This trap occurs when thinking about the upfront cost of fitting out their own space, signing a lease that is 2-3 years, or finding sublease space. There is a general feeling, which WeWork et. al. prays on, that it is incredibly expensive to rent your own space and the feeling is so strong that most companies will not go through a 2-3 year forecast to understand headcount and occupancy costs. Further, most companies, again we are guilty, overestimate their headcount growth.At the end of the day, you trade off “flexibility” of m-t-m or 12 month leases at a 30%-50% premium for WeWork. I have more complaints about WeWork than other coworking spaces and have rented from several. WeWork’s fit out is particularly low-quality and harmful for productivity. I have never been in a WeWork space that paid attention to sound isolation, wifi quality, network security, and general working environment.As @le_on_avc:disqus stated, WeWork is a marketing machine and they sell a lifestyle that no one I know wants. All of my employees bought the sizzle and were ready to leave within a few months.

      2. Dan Moore

        > Very generally if your competition is funded by VC/Angel you will probably not make it unless you have VC or some other investor.A counterpoint. A startup I co-founded in the shared kitchen space is still going strong, where a VC funded competitor failed. I don’t know why they failed, but they did. always refer back to https://www.joelonsoftware…. about the type of business for which VC makes sense.

        1. PhilipSugar

          You are 100% right. I see many startups getting over-capitalized right now.Especially direct to consumer. Now some of this works if the main competitor was extracting a huge premium and had tons of middlemen getting margins. Really hard to kill your model.But how many mattress firms do you need? And frankly it’s great if you are a consumer. Get a VC to fund your next mattress.

        2. LE

          Dan – You raised seed funding though, right? Also don’t you think it would be a big boost if you had raised VC funds? (I am seeing you aren’t at that food shared space company anymore)…Pilotworks also is in a much different market with higher costs than where you are located.The idea is if you know what you are doing and don’t screw it up having more money is a benefit. Sure in the wrong hands it can be fatal but generally hard to dispute it’s nice to have.

          1. Dan Moore

            Pilotworks was in an entirely different market, that’s true. And of course more money in the bank makes some aspects of business easier.The question for me is always, what is the price you pay for the money? I’ve been scarred by some early career experiences where people took money and didn’t have a great plan for that money and the owners of that money (rightfully) took control of the company.

      3. PhilipSugar

        It depends on your timeframe, the size of the market, your bankroll, ability to get cash flow positive. Even if just a little.Most importantly can you starve your competition.I have made a business out of that.If your competition can grow at 100% a year, you won’t starve them.But if the growth slows to 20% you can bleed them out.This is nothing new. See what Walmart and Amazon did to Sears.Aldi and Lidl are doing to Kroger and Safeway.

    2. LE

      Here is yet another example of what startups (waste) spend money on that is only in VC funded land. A company called fin that takes care of things that you would typically just do yourself or have someone at the company do for you in their spare time. Look at some of the charges on this pricing page (scroll down). It’s outrageous. Only someone spending someone else’s money would possibly go this route. It’s sold as a way to save money off a full cost hire. But a full cost hire in startup land is not the same as what people in a traditional business will do with their own money and/or profits:Take a look: watch this video ‘I asked them to buy a yubikey for a new hire’:

  13. LE

    Younger partners leave to start their own firms. Or are asked to leave because they are not producing the expected returns.’Leave to start’ makes sense. What doesn’t make sense is ‘asked to leave because they are not producing the expected returns’. Because given the time horizon for a VC investment at what point can you determine that (relative to when you became a partner) they aren’t producing returns?Founders need to understand all of this when they put their syndicates together. You should ask around about the investors who want to put money in your company. Look for companies that have stumbled and get to the people who know what happened in those situations and ask about how their investors behaved. That will tell you a lot.I find it very hard to believe that anything but a very small amount of startup founders will actually take the time to not only do this but to do it to a degree that the info they obtain is of any value.

  14. JamesHRH

    Excellent post.I particularly like the part where you mention that investors will fund a competitor and you skip detailing the amoral / unethical aspects of that behaviour.For a VC, it’s a shit happens event.For a founder, it’s a death to your dreams of success event.Caveat frigging emptor for sure.

    1. LE

      that investors will fund a competitor and you skip detailing the amoral / unethical aspects of that behaviourI think this goes by the same rule as a woman dating a man that has cheated and she rationalizes it by saying ‘oh that will not happen to me’. Or vice versa. Plus in all cases the man or woman has already come up with a rational for why they cheated that sounds plausible. Also will sound as if ‘it will never happen again’. That is the way humans operate.My point also is that if you are a startup founder then in theory you should have enough confidence to think you will hit it out of the park and therefore not be susceptible to the cheating. So I could argue that the type of founder that is not turned off by ‘the cheating VC’ could in theory be a better operator. Who wants someone who upfront is already worried about not succeeding?Confidence is very important. Would you turn down being accepted to the top college because you found out that a percentage of the people can’t make it work and drop out? So that person then goes to a 2nd rate college. What does that tell you? Who (in theory by my argument) is the bigger ‘winner’. The person who is not turned off by the idea that they might flunk out. They think ‘not going to happen to me that doesn’t scare me’. Or ‘I am going to work even harder’.I actually think I made a pretty good argument here for the defense. And if I was one of those VC’s that does ‘the nasty’ I might even use that to overcome an objection. Brag about it even.

    2. sigmaalgebra

      The founder needs secret sauce, powerful, valuable, difficult to duplicate or equal, intellectual property.Where to get that? Original research, i.e.. something Sand Hill Road knows less than nichts, nil, nothing, zip, zilch, zero about. Sand Hill Road, with their Williams College history majors and marketing experience, hearing “research” trembles, soils their pants and the furniture, rushes to the rest room leaving a trail on the carpet, has no idea what/how to do anything with it.How to do that? Stand on the shoulders of giants, e.g., advanced pure math. Uh, hint, hint, information technology is about, what, surprise, imagine that, “information” which is necessarily mathematical even to define it. So, take in data, manipulate it, and report the valuable results. The manipulations are necessarily mathematically something, powerful or not, understood or not. For more powerful manipulations and more valuable results, proceed mathematically. Sorry ’bout that history majors, Sand Hill Road.How to be able to do that? Get a good ugrad pure math major and a good pure/applied math Ph.D. with some experience applying such work.Sand Hill Road needs exceptionally good new projects but is unable to evaluate new exceptional technology and is looking for the new and exceptional from ordinary and patterns of the past.Sand Hill Road has no more understanding of such new technology than the stray cat that I feed at the back door — at least that cat is cute and maybe will come inside for the winter. So, it is totally beyond the ability, as much as for that cat, to appraise or make use of such technology.So, with absurd and ignorant arrogance, Sand Hill Road believes that information technology is about software development, believes that such work is routine, and, thus, believes that no information technology company can have a significant technological advantage or barrier to entry, feels free to ignore the rest of technology, especially pure math, and believes that with just their money they can fund a superior competitor to any promising startup. Absurd.From my time in academics, I’ve obtained a good view of how few people are good at understanding advanced pure math and/or pure/applied math research and its applications. If Sand Hill Road tries to get a start on such math by going to, say, Stanford or Berkeley, then their first mistake will be to go to the wrong departments. Even if eventually they go to the right departments, they will go to the wrong people.Yup, there’s an opportunity here!!

  15. testing fork

    just testing

  16. testing fork

    Just testing. Sorry.

  17. Larry Putterman

    Due diligence by the founders is just as Important as it is for the investors. The founders need to not only look at what happens when the company is doing well, but what happens if they stumble. A good board of advisors can help in these

  18. Paul Sanwald

    It seems to me that in some cases, VCs are a bit like engineering organizations where an engineer has an idea, builds a PoC, gets something real going and eventually ships something. This looks great, and can be great, but over time, you’ve gotta increase the Bus Factor to be more than just one person (and that cannot be done only by asking other engineers for a rubber stamped approval, engagement must be deeper).It’s easy to understand how organizations fall into having low Bus Factors, because it’s often the shortest path to shipping, but it’s a long term risk and (at least in engineering), I view part of the role of a manager is to make sure there is broader adoption and support of successful features/apps/whatever (shared ownership).I wonder how much of this is an explanation of what’s happening with the problem Fred describes, e.g., how many investments in a smallish VC firm have a Bus Factor = 1?