The perfect investor

20th March 2017  

by Vittorio Mauri, partner at U-Start

A couple of thousands of years ago, Romans used to say that “Pecunia non olet” (“money doesn’t smell”), meaning that money can be no different from other money as it is worth no more and no less than its value. Should we apply the same concept to the VC industry today, then how could an investor be better than another, if they basically all provide the same commodity?

Well, in my experience, money does not smell, but people surely do. People, and not money, are the ones that will change the future of your company. People can facilitate your work or make it a real nightmare. People can open their network and help you signing a contract. People can get you a buyer or take you to IPO. But people are also the ones not answering your emails, or rejecting your project with no or little explanations, or writing contracts and even taking legal actions against you (be careful with the latter).

So VC is the industry where people and money go hand by hand the most. As an investor, people talk to you because you have money, but your money without you does not count much. It is the combination of both human resources and financial capabilities that make the perfect investor. And even though what I’ve seen so far is not a good benchmark - in some cases not even in top tier VC funds - I like to think of investors as constant learners on a quest to a hypothetical perfection, similarly to the entrepreneurs they’re called to judge continuously.

Still, many of the investors that I’ve met so far were far from perfection, even the ones that I look at as a professional benchmark. My post is far from being a “j’accuse” to anyone, but I’d like to recall some episodes and examples that can explain why perfection in VC is often an illusion.

1. Brand is everything. Brands are heavy in VC as in many other industries. Who wouldn’t want Sequoia or Andreessen Horowitz to be their investors? However, few are the brands of this level in VC. For all the others, the stronger the reliance on brand and the higher the risk of sitting down hoping for investments to come with no or little sourcing efforts. And this is a surprisingly common mistake in VC. Investors are approached in all environments, by all types of people, and they need to be humble and hungry enough to smell business even where nobody else is looking. I’ve seen prominent VC funds shutting doors to business opportunities because they couldn’t make the intellectual effort to go beyond the appearances. If brand is your focus, get a Berkeley tattoo and shut up! ​​

2. Tricking instead of treating. When they are investing in a company, investors must decide what is the purpose of the agreements they’re signing. Do they want to build a solid long-term relation or rather take the best out of the investment no matter how it goes? I have seen investors placing bad tricks in their agreements to ensure maximum protection for their money. But it doesn’t work that way. When you are ripping off the team you’re harming the company and the consequences will soon slash you back. A strategy that I’ve seen often is: we sign a clean term sheet, I slow down negotiations, you run short of cash and start saving on marketing, I push for stricter clauses due to lower-than-budgeted performance, and the more you get scared to run out of cash the easier to accept my harsh clauses. I have seen several funds playing this game, but there’s no need to comment further - if you want to be a pirate, go to the Caribbean’s baby!

3. Playing fair and not paying fares. VC is a game for hard players. If you are scared to see your money vanish, you are in the wrong industry. It happens every day, to everybody, everywhere. Yet, what to do when a company is not meeting your expectations, this is your choice. I have seen renowned VCs trying to scam their co-investors to take advantage of the situation. “I’m the big guy here, pay my fare!” You can surely do it, but keep in mind that this is a small world and rumors go around. “Rest In Peace” the investor who screwed up his pals in a turnaround. Karma won’t forgive you!

When you start working in VC you are suddenly overwhelmed by expectations driven by unbelievable stories of success. Stories like Snapchat and many others translate in incredible multiples and astonishing IRRs for the funds behind them. And everybody who invested in them is suddenly a star, interviewed by magazines and chased by new startups as a VC guru. A perfect investor who made Whatever Inc a billion-dollar company. But all of the above look like clear wrong behaviors to me. It should be common sense to act the opposite way. so how can an industry be so cruel to accept such different behaviors from the same people?

I have thought about it over and over again, until eventually realize that success is just a small part of the game. The behaviors above belong to the dirty battleground of unmet expectations that accounts for a large part of a venture investor’s time. This is where the difference between good and bad investors really emerge. In that space values often fall before interest, at the sole risk of the investor itself. Why? Because Venture Capital is the land of the unknown. A land dominated by mythological creatures, with unicorns popping up in giant rainbows from China to US and dragons spitting fire from Germany to Spain. In such environment, you can only fall before the supremacy of myths and legend. And if you want to find such legendary creatures such as Snapchat, you have to be one yourself. The perfect investor.