A friend asked me over the weekend “why do VCs ask for a management rights letter when they make an investment?”
A management rights letter is a short agreement between a company and an investor to allow them certain “management rights.” These are typically the ability to attend board meetings, the ability to have access to financial reports on a regular basis, and the ability to advise and consult with the management of the company.
While it is nice to have these “rights”, the need for this letter actually has very little to do with how venture capital firms want to work with a portfolio company.
The existence of these letters has everything to do with where the venture capital firms get their funds from. If a VC firm has pension fund investors who are subject to ERISA regulations (as USV does), then they need to be a “venture capital operating company (VCOC)”. And one of the best ways to make sure you are considered a VCOC is to have management rights letters for all (or most) of your investments.
Venture funds request these rights in order to obtain an exemption from regulations under the Employee Retirement Income Security Act of 1974. Absent an exemption, if a pension plan subject to ERISA is a limited partner in a venture fund, then all of the venture fund’s assets are subject to regulations that require the venture fund assets to be held in trust, prohibit certain transactions and place fiduciary duties on fund managers. However, a “venture capital operating company” is not deemed to hold ERISA plan assets. To qualify as a VCOC, a venture fund must have at least 50% of its assets invested in venture capital investments. In order to qualify as a venture capital investment, the venture fund must receive certain management rights that give the fund the right to participate substantially in, or substantially influence the conduct of, the management of the portfolio company. In addition to obtaining management rights, the fund is also required to actually exercise its management rights with respect to one or more of its portfolio companies every year.
So as annoying as these letters are, it really doesn’t make a lot of sense to try to negotiate away these agreements as the venture capital firm that is asking for it really does need these rights in order to be in business with their limited partners.
Peak Globalization (tighter borders in the coming years)
Peak Capitalism (the emergence of “stakeholder capitalism”)
Peak Inequality (the rich getting poorer, relatively)
Peak Youth (an aging world population)
Peak Climate Change (I sure hope so)
Peak Oil (I sure hope so)
Peak Cars (I sure hope so)
Peak Central Banks (go crypto!!!)
Even if some (most?) of these predictions are wrong, the very fact that leaders at the highest levels of business and government are having this conversation is encouraging.
We are leaving the industrial age behind and moving into the knowledge age and we need to leave some things behind as we make that transition. My partner Albert’s book is a good read if you want to dig deeper on this topic.
The high-level summary is “not very differently than we have and are investing in other sectors”. At USV, we like certain businesss models, go to market approaches, and product types and that won’t change as we add climate/sustainability to our focus areas of wellness, knowledge, and capital.
Albert’s post mentions the two investments in climate/sustainability that we have made so far and they will look familiar to those who have followed USV’s investments to date.
Leap is an API for connecting smart devices to the energy markets. Kind of like Twilio, Stripe, etc for markets like demand response and more.
Wren is a community and funding platform for carbon sequestration and more, using offsets as the incentive for consumers. Kind of like Kickstarter, GoFundMe, etc for getting carbon out of our environment.
I am excited about this extension of our thesis 3.0 and have been working with the USV team to identify appropriate sectors of this market for us and interesting companies to meet and, possibly, invest in.
To me, the hardest part of scaling people is learning to lead your self.
They often come to me, their coach, because they don’t have any place else to put the feelings. They’ll sit on my couch, or pace while they talk on the phone, pausing as we grapple with issue after issue after issue. The common denominator is always people. When I first take on a client I warn that I don’t have a magic wand. Nevertheless their wish for some elixir to mend their relationships is heart-breakingly visceral.
When they start, they often think the hardest part is figuring out what to do but they’re inevitably knocked on their ass by the task of leading. And when they make mistakes–when they fail to lead–their identity, self-esteem, and ability to provide—as David Whyte notes–sometimes explode.
We all too often break ourselves in the work of becoming a CEO, a manager, a leader.
The only answer, the only balm against the inevitable existential pain of becoming the leader we were born to be is to see the lessons implicit in the practice of becoming.
“In the course of studying how geeks and geezers became leaders,” writes Warren Bennis in the introduction to his classic, On Becoming a Leader, “…I discovered that their leadership always emerged after some rite of passage, often a stressful one. We call the experience that produces leaders a crucible…the crucible is an essential element of the process of becoming a leader…Some magic takes place in the crucible of leadership…The individual brings certain attributes into the crucible and emerges with new, improved leadership skills. Whatever is thrown at them, leaders emerge from their crucibles stronger and unbroken.”
The magic, the alchemy, occurs when what we do mixes with who we are and is cooked by the heat of what we believe.
Take as an example a client I worked with intensely over the last few weeks. She and a co-founder have been killing each other (okay, I have a flair for the overstatement…still, they have both been getting sick with a host of ailments—migraines and stomach problems). The arguments had gotten so bad that neither could stand to be in the same room with the other. Even I was exasperated. During one late night call, I asked my client to forget, for a moment, whether her co-founder was right or wrong. “I don’t care who’s right,” I said with my voice rising. “The only thing we have to focus on is what are you supposed to be learning from this.”
There was a long silence. I thought, “Okay. You’ve really pushed her too far. You and your woo-woo ‘lessons in the pain’ crap.” But then: alchemy. She opened up. “This is really shameful to admit,” she began, “but I know I’m a pain in the ass because I have to be right, all the time. I know it’s wrong but I can’t stop myself.”
And with that we had something to work with. I pressed her: Given this tendency, what do you really believe? What values do you hold? What kind of company do you want to build? And what kind of adult do you want to be?
Over the next few weeks, on guard for her need to be right, we carefully went to work changing her approach to the co-founder. For her, the crucible moment came in facing her shame, acknowledging who she really has been and as a result she got to choose how she wanted to manage and who she wanted to be.
We forge our truest identity by facing our fears, our prejudices, our passions, and the source of our aggression.
The Buddhists teach that for the steadfast warrior to emerge, we’ve got to break open our hearts to what is.
Eat Me If You Wish
“One day,” begins a story re-told by Aura Glaser in the latest issue of Tricycle Magazine, “[the Buddhist saint] Milarepa left his cave to gather firewood, and when he returned he found that his cave had been taken over by demons. There were demons everywhere! His first thought upon seeing them was, ‘I have got to get rid of them!’ He lunges toward them, chasing after them, trying forcefully to get them out of his cave. But the demons are completely unfazed. In fact, the more he chases them, the more comfortable and settled-in they seem to be. Realizing that his efforts to run them out have failed miserably, Milarepa opts for a new approach and decides to teach them the dharma.
“If chasing them out won’t work, then maybe hearing the teachings will change their minds and get them to go. So he takes his seat and begins… After a while he looks around and realizes all the demons are still there…At this point Milarepa lets out a deep breath of surrender, knowing now that these demons will not be manipulated into leaving and that maybe he has something to learn from them. He looks deeply into the eyes of each demon and bows, saying, ‘It looks like we’re going to be here together. I open myself to whatever you have to teach me.’
“In that moment all the demons but one disappear. One huge and especially fierce demon, with flaring nostrils and dripping fangs, is still there. So Milarepa lets go even further. Stepping over to the largest demon, he offers himself completely, holding nothing back. ‘Eat me if you wish.’ He places his head in the demon’s mouth, and at that moment the largest demon bows low and dissolves into space.”
Surrendering to the demons that torment your organization does not mean abdicating your responsibilities to manage. You are still responsible for dealing with the reality of what is. In some cases, the demon is the wrong vision for the company. In others, it might be that you’ve hired the wrong people. In still others, it might be your own failings—like an inability to admit that you’re wrong.
But in all cases, allowing your self to be eaten by the demon that remains—acknowledging the ways you contribute to the problem without descending into pointless self-flagellation–adds to the heat beneath the crucible. Without heat, there is no alchemy.
On Becoming Your Self
When I was a young Padawan, I remember lamenting to my therapist about my own fears as a manager. After a series of infuriating questions, she got me to admit that I was trapped by my own beliefs about success. I finally admitted I would never be satisfied until I was as successful as Bill Gates.
Being myself was never good enough and, as a result, being comfortable in my own leadership was impossible.
“If you bring forth what is in you, what you bring forth will save you. If you do not bring forth what is in you, what you do not bring forth will destroy you.” Jesus, Gospel of Thomas
It was only later, after allowing myself to bring forth what is in me, that I emerged not only as a leader but a Jedi master.
Joel Spolsky, in his guest post for this series, tackled what I hear all too often in my workshops. He takes the Steve Jobs Question head on.
“And yes, you’re right, Steve Jobs…was a dictatorial, autocratic asshole who ruled by fiat and fear.” But, importantly, he points out “you are not Steve Jobs.” Just like I am not Bill Gates.
Indeed, I think what Jesus taught was a simple truth: the only choice that doesn’t destroy you is to be the leader you were born to be. The alchemy of becoming your self is the ultimate act of leadership.
Listen close enough and you’ll hear echoes of this from every conceivable source.
Phil Sugar, tells us who he is and what he believes in the simple statement that, “My biggest legacy is the network of people I’ve hired and what they’ve gone on to do.”
Matt Blumberg, having gone through his own crucible challenged conventional wisdom (and the advice of Fred), choosing instead to invest in his team. “We consistently work at improving our management skills,” he notes adding that, “We learn from the successes and failures of others whenever possible.”
“Develop a philosophy of management. Write it down. Try it out on some folks whose wisdom you admire. Put it to work…” and, my favorite, “Live it.”
I read in all these thoughts a steady, consistent wisdom: the wisdom of knowing yourself, your own beliefs, and living them.
Enduring the alchemical crucible requires developing the capacity to reflect, to turn the pain of the everyday life as a leader into lessons. Every wisdom tradition I’ve ever encountered—from Fred’s blog to the words of sages—ultimately demands the same thing: we must go inward.
That’s often the biggest obstacle to becoming your self. The frenzied, frenetic, do-it-now, answer-the-email-now-or-the-company-will-die-even-though-it’s-3 a.m. attitude is precisely the wrong process of becoming your self.
Joseph Campbell, writing in The Power of Myth, says, “You must have a room, or a certain hour or so a day, where you don’t know what was in the newspapers that morning…a place where you can simply experience and bring forth what you are and what you might be.”
Call that room, at that hour, the crucible of leadership.
Today, all of you will see a refresh of the look and feel of the daily email to match the refresh we did to the website last week.
I want to thank Phil Hollows of Feedblitz who made this happen for all of us. And Kirk Love who created the new look and feel and helped a bit with the email work too.
A few stats: There are about 29,000 email subscribers to AVC. The daily open rate hovers around 40%. So roughly 12,000 people a day read AVC via email. That compares to an average day when about 6,000 people stop by the website and several thousand more who subscribe to and read the RSS feed on a daily basis.
2019 was the year when VCs and startup founders soured on paid acquisition.
I am not sure if that is true, but if it is, it suggests a dramatic change in the startup playbook.
Back in 2011, I wrote:
He said “every company needs a marketing budget.” It seemed like a strong reply but in truth not one of our top performing companies had a marketing budget in their initial business plan.
That is certainly no longer true. The 2010s were a decade in which startups mastered marketing and channels like Facebook and Instagram emerged to satisfy their demand.
But what if that game is over? What if that well has gone dry?
Alex suggests we have to go back to virality and customer to customer marketing in his post.
I think we are more likely headed to something new and I am not entirely sure what that is.
And the Google/Facebook/Instagram well has not exactly “gone dry”. But it sure feels like steady-state to me now. It is a must-do but you can’t beat the competition there anymore because everyone is there.
So here we are. At the cusp of something new because we need it. Now we need to figure out what it is.
AVC 2.0 had a nice long run and served its purpose very well.
But for most of the last year, I have wanted to make a number of changes to AVC:
1/ I wanted to move to a new host. I have been struggling to maintain the hosting infrastructure by myself and that has resulted in a number of outages, some only visible to me, some visible to all of you.
2/ I wanted to get a professional developer team involved that I can rely on from time to time to help me with technical issues.
3/ I wanted to improve search so that we can all find those old blog posts that we know exist but are no longer on the front page.
4/ I wanted to move to a more minimalist design where the blog posts are the main thing you notice when you come here.
5/ I wanted to find a way to continue to allow discussions without having to manage/maintain/moderate a full-blown comment community.
I am happy to report that I was able to do all of that with AVC 3.0:
1/ AVC is now running on Siteground. We continue to use Cloudflare for security and caching. We now use AWS for backups of the WordPress data.
2/ AVC is now supported by Storyware who will help me manage the hosting infrastructure and will be available to make tweaks to the UI when/if necessary.
3/ AVC search now runs on Algolia which will allow me to tweak and improve search relevancy over time to make it easier to find older blog posts.
4/ AVC has a sleek new design, made by Kirk Love, which is minimalist and copy centric.
3/ We continue to show full blog posts on the front page in reverse chronological order.
4/ We continue to run the USV Team Posts widget so you can see what my colleagues at USV are blogging about.
There are two important changes that I would like to talk about a bit more.
I have typically blogged every day, including weekends. I tend to post audio or video on Saturdays and write a regular blog post on Sundays. I am going to move to optional blogging on the weekends. I will sometimes write on Sundays and I will sometimes post audio or video on Saturdays. But I will not commit to doing that every weekend. I have already started to do this and some of you may have noticed it. You will notice this change in the About page.
AVC has always had comments. Initially on Typepad’s comment system. Then powered by Disqus, a former USV portfolio company. Disqus is a fantastic product, built and maintained by a terrific group of people. It is the best commenting system in the market by a very long shot. But managing, maintaining, and moderating a comment community is something that you must actively work on. I have done that assisted voluntarily by a number of AVC regulars, most notably William Mougayar, and also Shana Carp. I very much appreciate all the work they have done on this over the years. But I have tired of the work and I imagine that they have too.
So we have moved to hosting the discussions of AVC blog posts on Twitter. You will see two buttons at the bottom of a post. The first button allows anyone to easily post a comment as a reply to the @AVC tweet announcing a new blog post. The second button will allow you to see the entire comment thread on Twitter.
Kirk initially suggested this approach of using Twitter to host discussions to me. My colleague Nick developed the functionality and it has been running on his blog for a few weeks now. He built it on top of this existing WordPress to Twitter plugin. The “Discuss On Twitter” functionality is now running on USV.com in addition to Nick’s blog and AVC.
I think Twitter is a fantastic place to host discussions and I hope that other bloggers that use WordPress will adopt Nick’s plugin. And I plan to show this plugin to Jack and others at Twitter in the hopes that they will adopt it and make this a feature of Twitter than can run on all blogging platforms.
I hope you like AVC 3.0 as much as I do. And I hope that you will continue to get as much value out of it as I do.