VCs to Avoid (and How to Spot Them)

Tachles Series: Benzi Ronen shares insight, anecdotes, and expert hacks for Israeli entrepreneurs looking to grow their business in the US.

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Find out how to:

• What to look for in venture funds when you’re raising money

• Identify how to spot the true founder-friendly venture funds

Nu, get to the point:

I have yet to meet an early-stage venture fund that doesn't say they’re founder-friendly, but in practice, few are. When things are going well for a startup, all investors are cheerleaders — it's when things go bad (and believe me when I say that, at some point, they will) that you start to see an investor’s true colors. 

Israel’s ecosystem is small. As a result, most Israeli institutional investors appreciate that they’re playing a long-term game, and therefore treat entrepreneurs with respect — regardless of the outcome. But many American investors optimize for the short-term, even if it’s detrimental to the entrepreneur. I’ve dealt with both types: the long-term players can be incredible partners...the short-term players can make life miserable.
Either way, all early-stage funds are focused first and foremost on the upsides: they’re betting that two out of their ten investments will produce an outsized return that will make the fund. Of course, they also won’t know which investments will be the true winners until years later. 

Since there’s a good chance that your company will not be one of these “winners,” you need to find a fund that knows how to gracefully manage its non-winners, too. They should be treating their entrepreneurs with respect at all stages (since those same entrepreneurs are working their butts off to make shit happen). 

Plus, if things don't work out well for the investor, you want a venture partner who will still be supportive of the entrepreneur and keep their best interests top of mind — that’s the true founder-friendly venture capital partner...but first, you need to know how to find them.

Hacks

Reference Checking 

Talk to fellow entrepreneurs who have raised money from the fund — it’s the best way to find out exactly how an investor actually behaves in the board room.

Making a Commitment

Venture funds tend to have a lifecycle of 8 to 10 years; that timespan indicates the commitment they make to their limited partners, and when they expect to receive the full return of their investment. It’s also a reflection of how much patience (or lack thereof) the VC partner has when they make their investment in your company — the closer they are to the 10-year mark, the more pressure there will be to see a liquidation event. On that note, if the fund already has a few successful exits that have returned and produced a carry under its belt, the partners will likely be less focused on seeing a quick exit with your startup.

West Coast vs. East Coast 

I’m generalizing, and this doesn't apply to everyone, but West Coast VCs tend to adopt a more slow-and-steady outlook. Their reputations are vital to them, and they understand that their fund's success is a factor in the deal flow they’ll receive — entrepreneurs talk to one another, and they want good word-of-mouth. 

On the flipside, East Coast funds tend to have more people from the private equity sector, who can be centered on liquidity events and getting leverage in deals, wherever and whenever they can. This can turn into power struggles with a zero-sum game mentality instead of working towards an outcome that provides everyone an upside.

All of this comes to the surface when it’s time to draft deal terms during the financing round: East Coast funds focus on negotiating the downside terms, whereas West Coast funds optimize for the upside and care less about the downside.

All Money Is Green

Occasionally, when raising money, I’ve been in situations where I haven’t had any options: you need to take whatever is offered to you or face shuttering the business. So this is the exception to all of the above — in these cases, you should just take the money and do your best to manage the investors from there. 

Good luck!