ICON66 – Volume 6
Where VCs Go Wrong
Jon Moulton is, without question, a legend within the venture capital industry. Here he examines the mistakes made both within business in general and the venture capital industry in particular.
What everyone does wrong
The reality is that most of us screw up repeatedly by making the same mistakes. It's the same in investing as well as in business. Avoiding mistakes is truly one of the best techniques you're going to have for doing anything. So here are a few of the following blunders and recurrent errors I've made.
Poor investing
practises
No 1 - Process
Reading full business plans. A lot of you probably write full business plans. This is very admirable but there is no requirement for anyone to read them. In most early stage technology companies or, small companies of any kind, if you haven't got the basic idea three or four pages in, you've had it! You'll never get there; most of the stuff in the back is pure speculation. How many companies have seen a five year plan met?
Failing to decline a proposal quickly. I receive endless business plans ranging from a few to a couple of hundred pages. The first thing you can do is waste your time and the entrepreneur's by simply failing to say "get lost". I've done it many times. I've strung the process out with answers like "only if " or "maybe". Now some of these guys will take any opportunity to restate their case. A few years ago, someone delivered a 3,000 page business plan for a start up. I don't know how many man years it took him to write it, but a long time! I read a couple of pages before I decided it wasn't right for us, he sent a 200 page rebuttal.
The solution to this is to be direct. I write "go away and stop bothering me" across the emails and then my secretary sends the appropriate response.
Poor investing
practises
No 2 - Legals
Getting legals done before deciding you want to do a deal. Getting into the contractual negotiations before you've worked out what the price should be might be convenient but it's very bad practice. If you haven't got the time to do the commercial due diligence, you keep the deal airborne by doing the legals. This is actually very unfair on everyone and it's a waste of time and money. Legals matter a lot in private equity. People tolerate some terrible things and it's really quite common to find managers coming in and saying: "Give us a couple of million quid to get this idea going," and then not being willing to give you a warranty that they've told you everything they know about it!
Better documents. These help as does being realistic about how long it takes to do a deal!
Poor investing
practises
No 3 - People
Gaps in CVs. The first mistake here is a failure to check background histories properly. This can be very time consuming but you'd be amazed to hear how often people lie. Gaps in CVs are lethal, they usually cover something unpleasant. I had one with a section of the CV that said, "Partner in drilling business", the guy was actually serving six years in Texas for looting a corporation. Not a great thing to have on your CV.
Fraudsters. These are a very severe problem for me. I've lost money to fraudsters about half a dozen times in the real world of private equity and half a dozen times in my personal capacity too. However, they can give rise to great moments of fun. The last one was very good:
Monday morning, the Finance Director calls: "The police are here and the Chief Executive hasn't turned up."
"Right, why don't you call his home and find out where he is?"
The guy calls 15 minutes later and says: "He left home at 5.15 this morning. His wife said he had a telephone call and went straight out."
Then the Finance Director added: "But he has been behaving strangely recently!"
"What do you mean?"
"Well he took all the filing cabinets home on Friday!"
Divorcees as good CEOs. I have been reported in the FT as evaluating business propositions on the marital history of the CEO. Is it better to back a man who has been once divorced rather than backing a man who has never been divorced? Who would be most likely to give you a successful outcome?
Statistically I can tell you. One divorce is slightly better than no divorce. When you get to two divorces, there is no question about it; the failure rate is massively increased. When you get to three divorces, which I have had five times, you lose every penny!
A lot of VCs make the mistake of asking questions about the technology and the industry at the start of a deal meeting. It's absolutely the wrong territory. Marital life is a really good start, and you can actually rationalise it terribly easily.
What kind of a brain allows you to get married three times these days? Is it the brain that is in control of this person?
Failure to make demands. Demand better information and don't be fooled into believing in ill-defined progress. "We're getting a lot of traction in the market place" normally means nobody has placed an order! Those kind of lines usually come home very poorly. One should not take a blind bit of notice of anything described as "non-definitive" progress. "The team's getting stronger" Yep!
Poor Investing
Practise
No 4 - Deals
Investing in deals which are too small. These don't actually have very much potential. There's not really much point investing in a company whose total market is say £3m or £5m. It doesn't really matter what they do, you won't make any money out of it worth measuring.
Basic Advice for CEOs
Set
good objectives:
1. For yourself
which you can
achieve
2. For your
team that they
can achieve
3. For your
business that
it can achieve
4. Hire and
keep good people
5. Rely on
motivated people
and keep them
motivated!
For more of Jon's views on What Investors Do Wrong, The Signs of a Failing CEO and The Structure of Private Equity Firms please visit our web site www.iconcorpfin.co.uk
