4 Dirty Secrets VCs Won’t Admit

Topics: Fundraising

Recently, I’ve been mentally noting a few things that I observe VCs doing regularly that many entrepreneurs may not readily understand. Below are four that come to mind, but there are probably a dozen or so that are pretty interesting. (Leave a comment below if you can think of any more. Ironically, I was speaking at an event just last week where three of these came up in the conversation.)

Because you don’t often hear these realities admitted out loud, consider these a few “dirty secrets” of VC.

Dirty Secret #1: An early-stage startup’s design actually does matter.

It probably shouldn’t be the case, but the look and feel and polish of your materials makes a big difference for early-stage investors. I find that investing time in a beautiful homepage and polished-looking materials has more impact that I would have thought.

The reason is that, for an early stage company with relatively few data points, every point of interaction gets placed on the positive or negative side of the ledger. Whether it’s rational or not, it’s really hard to convince an investor that the founders will be great at creating wonderful products if the materials and web presence they put in front of them fall flat. This can even be true when the web or mobile experience itself isn’t even core to a company’s early challenges or milestones.

Of course, nice design and glossy materials are not what gets VCs to invest (hopefully), but the opposite of this hurts more than one would think. And this obviously becomes less important as a business gets further along and there are more concrete things to assess. But at the early stages, it’s surprisingly impactful.

Ironically, one way to get around this is to do a total judo move and be extremely minimalistic — or else offer a product that kind of speaks for itself. For instance, one compelling thing about our former portfolio company Sunrise (recently acquired by Microsoft) is that the company actually never really had a website. Instead, they just used a page that pushed users to download the app. The product spoke for itself. Furthermore, when we invested in their seed round, there was no deck. We invested in the team and product. For their Series A, they did create a deck, but it was totally minimalist, conveying the right information and pretty much nothing else.

While I’m not advising every startup skip their pitch decks, these examples highlight a young company’s ability to appear polished while not over-investing in design.

Dirty Secret #2: Feedback from VCs usually sucks (despite how often founders seek it out)

Okay, so this isn’t always true. I’m sure there are some very smart investors out there who give great feedback. But I’d point to three reasons why early-stage VCs often deliver rather weak feedback:

First, in many cases, the VC just doesn’t believe in you or your team.

This can be for any number of different reasons that even they can’t explain, and it makes effective, constructive feedback very hard to deliver, especially if the founder can’t do anything about those reasons. So instead, the real feedback gets masked by other things.

Second, the investor often doesn’t know enough about the sector or type of company that they are talking about to give really deep, insightful feedback.

This is why, at times, founders find that they are getting a bunch of different messages from VCs and don’t leave with actionable things that cause them to fundamentally change their approach. Maybe in 10-20% of VC meetings, the investor is really in their power alley and can offer great insight. But the majority of the time, their feedback falls into one of two categories:

  • Generic advice that is probably pretty good but also probably the kind of thing you can read in blogs: “Focus on distribution,” or, “Find some network effects,” or, “This isn’t a defensible business,” or, “The initial market is smaller than you think; how can this be big enough to generate venture scale returns?”
  • Ignorant advice. This is super dangerous because it’s easy for us to throw out advice without really knowing what we are talking about. Rather than go down this road, my partner David Beisel likes to caveat the occasional feedback by saying, “But that’s just my perspective from the cheap seats.” He knows there are times when feedback is requested but may not be as informed as when a startup is in his power alleys. I think good investors avoid ignorant feedback at all costs, and, like David, they are pretty humble about what they know and where their expertise ends. But founders should still be careful — that’s not the case for everyone.

The third reason VC feedback is often bad is because entrepreneurs are asking the wrong question.

Usually, this happens when founders ask a question like, “What would I need to achieve to get you interested?” For early stage companies, this doesn’t really make sense. What needs to be achieved is a function of the investor’s conviction of a team, an opportunity, and various points of evidence. The greater the conviction, the lower the threshold of evidence needed. The lower the conviction, the higher the threshold needed. (In fact, with low conviction, the threshold probably moves further and further away from you and is always just out of reach. That’s why early stage fundraising is about searching for true believers, not convincing skeptics.)

In this example, the better question to ask is something like, “What is weak about this investment opportunity compared to the companies that you tend to invest in?” You’re likely to get better feedback that way.

rob go quote dirty secrets vcs wont admit

Dirty Secret #3: Most VCs Don’t Really Invest Early, But All Want to Meet Early

Almost all VCs say they like to invest really early. Even later stage VCs will push to meet founders much earlier than seems appropriate for their sweet spot. When founders close a round, for instance, it’s easy to feel the love when other investors (often junior folks) start emailing you to try to meet.

This behavior is pretty obvious: VCs have an incentive to say that they invest early so that they can see companies as early as possible. That way, they can track the company’s progress over time and won’t be blindsided when the startup goes out to raise a new financing round.

What makes this a bit more confusing is that VC investing has a lot of outlier cases. In the majority of situations, I find that many investors claiming to do early-stage rounds get most excited about companies that have lots of traction and usually lots of external interest. So, by company-building standards, these companies appear to be early — but they aren’t actually that unproven, given their product-market fit or their initial growth engine.

Again, that’s the norm. But as I said, lots of outlier examples exist. For instance, many firms will ignore that product-market fit or growth engine status and invest incredibly early (like pre-product) behind founders that they’ve backed before. This makes it easy for the investors to rattle off cases when they invested in a company “very early, when it was just an idea.” But if you look harder, unless you’re that rare entrepreneur with an established track record in general or with that investor, you’ll still need to be further along. This is particularly true as VC funds have gotten larger and have increased efforts to put more money into clear category leaders rather than take early bets on very raw companies to turn them into said leaders.

Dirty Secret #4: Information disseminates fast (and faster than you probably think)

Contrary to the concern of most entrepreneurs, VCs don’t actually share decks and other confidential information that much. Most investors I know will ask for permission to share those sorts of materials and will respect the privacy of founders when it comes to sensitive information about their businesses. This isn’t true for everyone, but I think it’s generally a pretty high-integrity business.

Instead, what happens more often and more quickly than founders might realize is that information spreads through casual conversations about companies that are out fundraising.

“Have you seen company XYZ?”

“Have you tried XYZ product?”

“I’m starting to chat with XYZ. Curious what you might know.”

Information moves really quickly, and VCs move in a tightly knit network. Even if a VC isn’t asking for feedback from an investor directly, the info still gets around super fast. Investors often lob in a couple quick and easy reference calls to people connected to a certain industry or those connected to a founder. And guess what? Many VCs wind up calling the same people, so it’s easy for a reference to say, “Oh, yeah, I was getting a bunch of calls about that company a month ago. They must be struggling to raise money.”

That’s not always their response, but if it is, it’s not good. Entrepreneurs always need to communicate heat and momentum when they’re raising capital. But just know that if you successfully do that, the speed of information flows even faster, so it pays to not overplay your hand.

And, as a result of this information stream, it also pays not to try to raise money sequentially (i.e., don’t try to convince one investor or one set first, then move to the next pending the first’s answers). Instead, as Paul Graham says, run a breadth-first, simultaneous process. Otherwise, your deal becomes perceived as “shopped,” and only investors with really high conviction and political sway in their firms will have the willingness to push an investment through.

Secrets Are No Fun

In VC, as in any industry, there exist a number of insider secrets that are neither truly “insider” nor actually confidential in nature. Instead, there are dozens of subtle or implied aspects of the process that aren’t always obvious. By sharing four with you here, my hope is that I’ve accelerated your ability to pick up on those subtleties and more effectively raise your next round of capital. Good luck.