As I have mentioned before, I co-teach a class at the UC Berkeley Haas School of Business on healthcare venture capital. One of the lectures is used to discuss how venture investment relationships start, and especially how they mature and end. As I reflected on the class after the first time I taught it, I had a sudden realization that a venture investment has many of the characteristics, both good and bad, of a romantic relationship. On this Valentine’s Day, I thought I’d share some of the highlights from this lecture (you can see all the slides from the lecture by clicking here).
My concept is encapsulated in this chart below:
Given the number of deals that the average venture capitalist sees, there is an aspect of speed dating to the whole deal selection process. With the number of potential investment candidates we meet, it is easy to see how a typical venture relationship has it all: the catching of the eye, the flirtation and, if you really like each other, the courting phase. Some people call this “competing term sheets,” but if it’s meant to be, you ultimately hold hands and leap into the engagement phase, waving the diamond ring around for all to see (“Wow, nice rock, er, I mean valuation!”). When you are particularly enamored with a deal you may even hear those little bluebirds singing, like Cinderella on her way to meet the Prince. You know what those bluebirds are saying? They are saying, “This deal is so hot….let’s get a 10x out of this baby!”
If the engagement phase, characterized by the final due diligence proceedings, goes well, the marriage and investment follows (and associated pre-nuptual agreement, aka, the Shareholder documents). Instead of having children, you hire team members, grow revenues and create products together (Isn’t it grand, dear? SKU # 3485 looks just like you!”). Instead of sleeping side-by-side, you stare deeply into each others’ eyes (and financial reports and strategic plans) at Board Meetings.
Your family grows when the next round of financing comes along: your shared bundle of joy when it’s an up round; your pain-in-the-neck teenager when it’s a down round.
As with all marriages, both parties (management and venture investor) get out of it what they put into it, and hard work it is to make the relationship prosper. When all goes according to plan, the denouement of the relationship features a Golden Anniversary. God help you if it takes 50 years to get to that point (a definite IRR killer), but at that proverbial point in time, the exit, you better believe you’re looking for gold, not tin. (definitely not the time to be getting a toaster for a lovely parting gift).
On the other side of the coin, when venture deals go south, they have some of the same familiar features as relationships gone bad. Sometimes during the courting phase someone else catches your eye and one of the parties wanders off to finance a competitor. Occasionally an engagement (or signed term sheet) ends with one of the parties being left at the altar when some deep dark secret emerges near the Closing (“you should have told me about the…sob…first round investors and what they made you do…!”).
Even worse, venture deals sometimes come unglued after the marriage, when the money has been spent and the kids have left home, leaving you emotionally exhausted and with a lot of bills to pay. No Golden Anniversary here, as the divorce comes in the form of an asset sale or worse. “Bet you’re glad you had that pre-nup!,” your friends and partners might say as you mourn the loss of $10 million and your dignity, “We always told you he was a loser.”
As with all relationships, the keys to a successful venture investment are honesty, open communication and shared goals. Venture relationships, like romantic relationships, start to go bad when the little lies start to pile up (“we promise we will never need another round!” or “we promise we’ll always be here with additional capital!”). When everyone around the table sets clear expectations, bends to meet each other in the middle and takes an interest in helping the other party get their needs met, things have a tendency to go well.
So when you are facing your next potential deal partner don’t forget that old quote: love is like a pair of socks–you gotta have two and they gotta match. Words to live by in romance and venture capital.
Indeed. And a “verbal commitment” is – ur – worth the paper on which it’s written. Due diligence has to go both ways or you’re headed for the rocks from day one. (“If only my investors hadn’t…” “If only the CEO had…”)