Like many VCs, one of Alsop’s first run-ins happened soon after he entered the business-and he didn’t see it coming. Investing in an infrastructure company, he remembers that “the domain was something I knew about, my partners were very enthusiastic about the company, and another well-regarded investor with whom I’d always wanted to work had done the Series A, so I had moved quickly to get in it.”
Just as quickly, he’d regret it. Feeling increasingly frustrated and threatened over the appointment of a new CEO by the board, the founder started building barriers between the tech staff and the rest of the team. More dramatically, he began boycotting the office and refused to give anyone, including the new CEO, a schedule for delivery of the product. “We rapidly realized that he was a real piece of work,” says Alsop.
NEA and its co-investors sold their stakes shortly afterward.
Alsop’s experience is nearly universal, and for unsurprising reasons. Most venture investors are willing to tolerate some craziness in exchange for genius. Many see the two as linked, in fact. Says Dino Vendetti, a general partner at Bay Partners in Cupertino, Calif., “This business is filled with interesting personalities. The dichotomy is that some of the most wacko founders have the same characteristics that you look for in your great entrepreneurs.”
Truly bad seeds-or Toxic Entrepreneurs, if you will-may be few and far between, but in today’s climate, the danger of not identifying them is real. The stock market is rebounding; sexy deals, particularly within the consumer space, are becoming hotly contested again; and exhilarated VCs are writing checks in alarmingly short order. That’s to say nothing of Sarbanes-Oxley, which doesn’t appear to be giving the industry as much pause as it should, considering that its passage seems to be auguring an escalation in director lawsuits. (See “Epinions,” March issue).
In short, the brisker the deal making, the greater the risk. Says Managing Director Heidi Roizen of Mobius Venture Capital, who once launched an electronic clip art company: “What I never understood as an entrepreneur but now get as a VC, is the importance of letting a few months pass between the first time you meet an entrepreneur and the time you make a decision to invest.As an entrepreneur you think, Hey, I made my pitch; if you get it, invest.’ But as a VC, you want to take time to have numerous interactions with the entrepreneur, to get to know him or her and the company he or she keeps, as well as how that person deals with bumps in the road and whether they do what they say they will.I don’t know how to gather that data without the passage of time.”
Alsop says that his big regret in funding
the technical founder was that in rushing to close the deal, he relied on the due diligence of the lead investor. “I might have gone ahead with the investment,” he says, “but at least I would have known that [its founder] was a handful. These can be very long-term relationships. You need to know as much about a company and its management team when you invest as you’ll know a year or two later.”
The most destructive characters tend to fall into three camps: entrepreneurs who are arrogant, those who are greedy, or those whose ethics might otherwise be generously considered challenged. Of course, sometimes, they are all of these things.
Arrogant
Conceit appears to be the most prevalent trait among entrepreneurs and the investors who loathe them. Art Berliner, the founding partner of WaldenVC in San Francisco, readily admits that, “I’ve been accused of not funding someone who’s very arrogant.” What he tries doing, he says, is to decide whether or not a person is too much to handle based on the team that he or she puts together. “Someone can be very arrogant and over the top, but if at the same time they’re smart enough to surround themselves with people who are complements to them, then I don’t care.”
Longtime angel investor Ron Conway-who has backed many entrepreneurs, like Google’s founders, who famously play by their own rules-agrees that intellect can trump arrogance. It’s when arrogance borders on narcissism that Conway clamps on the brakes.
Conway says that he is still scratching his head after a recent meeting with one self-important founder who he had agreed to meet at a restaurant in Menlo Park. “I went at the appointed time, and not finding this guy, I called him on my cell phone. Half an hour passed before I called again, this time saying, Look, I’ve been waiting here for 30 minutes. I’m leaving.'”
As Conway briskly strode back toward his car, he says that the “guy grabs me by the arm, explaining that he’d been seated in the back, that he hadn’t seen me, that he couldn’t hear his phone.” Though some contrition about the mix-up might have saved the meeting-in part because someone in his highly prized network recommended the entrepreneur to Conway-it was soon clear that his lunch date wasn’t sorry at all. On the contrary, he says, “When we finally sat down, the guy was clearly exaggerating every single point he was making. Worse, when I questioned him about things, he would say, I’ve got this piece of the business under control.’ In other words, I don’t need your help; I just need your money.'”
Subscribers can read the rest of this month’s cover story in the Monthly Headlines section.