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Sutter Hill

Leadership

Venture Capital Is Not All Equal

Like people, VCs come in all styles, so here are 5 characteristics to consider as you interview potential investors.If you want to raise venture capital to fund your new company and your great idea, plan out your vetting process first, because all VCs are not the same. Some are really helpful, but some are horrible and damaging to your company.

  1. Pick someone who has the same Vision and Values as you. You are (hopefully) in your venture because you believe you can change the world (if you are doing it to get rich, stop now, because you don’t get rich in the startup world by trying to get rich, you get rich by building
    something) and it’s very important your investors want you to change the world too. There are many tough moments of truth when building a company, and none more so than when you get an offer for your company before you think you are ready–before you have built the strategy and value that you believe is possible. That moment is when you find out whether your investor truly shared your vision on how to change the world or was just telling you she did.
  2. Pick a partner who can do heavy lifting for you when you need it. Great venture partnerships have a rich, deep network to help you recruit, develop partnerships, find initial customers, manage sticky HR issues and even find office space. Andreessen Horowitz are changing the game with the amount of help they give their ventures. They have teams of people to help you: recruiters, sales people, marketing people and they’ll get you started with office space. Ben Horowitz’ book, “The Hard Thing About Hard Things,” is packed with advice on building a company and is a good example of the type of advice you can get from a great VC who’s built their own company in the past.
  3. Avoid the money-based VC who’s motivated by running a portfolio–often former investment bankers. Find someone who walks the talk and truly builds great companies. If you can, find a VC who has been doing it for more than 10 years and who has a great track record–and interview their CEOs–or find one who’s been a CEO, built a good company and taken it public. When you work with someone from a leading firm like Benchmark, Oak, Sutter Hill, Sequoia, Greylock or the new kids on the block, Andreessen Horowitz (and they’ve been a CEO or a VC for many years), you get access to a level of wisdom and advice that you simply won’t get from the a small firm with relatively inexperienced investors.
  4. Don’t get greedy. Yes, valuation and how much of your company you need to give away is important. But it is just as important that you get great advice and that your management team and employees make money too when you are successful. If you get greedy and aim for the highest valuation, a couple of bad things can happen. First, you can end up with investors who don’t have the experience you need (one of my friends has a Saudi Prince as an investor–very difficult to get alignment on strategy), but second, you can find yourself in a situation with such a high preference and threshold valuation on your company that unless you are the next Facebook, only your investors will make money when you sell (and maybe not even them). There are many hot startups in San Francisco today who will face this problem when they try to get to liquidity. A great VC will coach you through this and not be greedy either.
  5. Pick someone you enjoy being with. Building a company is an intense, emotional experience. Most companies take many years to mature and if you are going to meet with your board every month for 5 years, and at dinners and strategy discussions in between, it certainly makes the
    journey more fun if you enjoy interacting with them. Of course, in the end, you do need to get funded and you may need to take what you can get, but if you have the chance to be selective, the right investor is more important than the highest valuation because you’ll build a better company and change the world (and make more money for you, your team and your investors along the way).
Leadership

What makes a great venture capitalist

The venture capital world lost a master last week. Paul Wythes of Sutter Hill died at age 79 – he was a pioneer of the industry in California and a gentleman.

Reading his obituary in Business Week I was struck by two things he said
in an earlier interview that capture key characteristics of a great VC. I have little time for the celebrity VCs who court the press and like to take attention and credit for their companies. I believe the VC who is there with advice when you need him, leaves you alone when you don’t and provides unwavering support as you ride the roller coaster is what a founder or CEO really needs.

First, I love the description of Paul’s deal flow process:

Wythes
described the early days of his industry in the San Francisco Bay area. 

“What
I’d do is get in the car and drive down to Mountain View or Sunnyvale
— not so much the East Bay in those days — and look for signs,” he
said. “The sign of the company would say, ‘Technology,’ and I stopped
the car, go in and say to the lady in the lobby, ‘I’m so-and-so from
Sutter Hill, here’s my card, and I’d like to meet the CEO.’” 

The
best chief executives “always spent the time with you,” he said,
“because they were smart to realize that someday they may need venture
capital.”

He had an unassuming way about him that would be disarming to a CEO. When I did a short stint as an EIR at Sutter Hill he didn’t have to spend any time with me, but he did, just because he loved the business of building technology companies.

And even more revealingly he said:

“Venture capitalists don’t create successful companies, entrepreneurs
do,” he said, according to Gupta’s book. “Some venture capitalists and
some venture-capital firms today think it’s exactly the reverse, but
they are the ones that have it reversed. I think if you can be
supportive of a company as a venture capitalist, and be in the
background, not up front making it look to the world like the venture
capital firm made this company successful, it’s much better.”  

Amen to that.

I’ve been lucky enough to work with two old-school style firms who take the approach Paul described. Mayfield — and Gib Myers — funded Simplex and they were quietly unwavering right up to and through my IPO. Oak Investment Partners — and Bandel Carano — have funded FirstRain and again have been supportive and unwavering, this time through the challenge of the great recession.

Great VCs know the founders and entrepreneurs are doing the heavy lifting, and they put the company out front and support it completely, right up until the day the company either reaches liquidity, or the VC decides to write it off. There is no middle ground. The Sutter Hill masters know this too.

So when you’re interviewing VCs for your deal, remember All Venture Money Is Not Equal, and look for a VC like Paul.