Like other businesses venture capital firms cultivate their images. Looking at VC websites, my impression is that many VC firms want to send this message: we are friendly to entrepreneurs! See, for example, Kleiner, whose front page prominently displays the following image:
The not-so-subtle message is that they are not just about money. You can see a similar message from Benchmark ("The Power of Teamwork") and Redpoint ("Partners in Innovation").
My question: can we find evidence of entrepreneur friendliness in the investment contracts? In other words, do VCs attempt to promote their brand through their deal structure? (See Vic's work on branding effects.)
In the past few days, I have been looking for examples. I was excited to hear that Benchmark refused to take anti-dilution protection prior to 2000, but when I looked at their portfolio companies' charters, I couldn't verify that story. Anyway, this is part of a paper that I am writing, and I would be quite grateful for examples.
By the way, most of the VC websites are completely mundane. These firms must be looking at each others' sites because the tile motif (each tile a portfolio company) comes up time and again. Sequoia takes the theme to the extreme, but you can also find it at Draper, North Bridge, Accel, BioAdvance, etc. Also, you will see lots of men in slacks and dress shirts with no tie, like these guys from Lightspeed ...
Or these guys from Mayfield ...
Hey! How did that woman sneak into the picture! At least she got the memo about the uniform.
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1. Posted by Darian Ibrahim on December 10, 2006 @ 7:50 | Permalink
Gordon,
I think the branding effect may be more pronounced in traditional angel contracts than in VC contracts. Angels have bargaining power over entrepreneurs, but have traditionally opted for common stock, weak monitoring rights, etc. There are many explanations for this (which I plan to explore in my next paper!), but one often heard from angels is a desire to give back to the entrepreneurial communities that made them wealthy. Weak downside protection and monitoring rights signal confidence in the entrepreneur and her vision. The VC model of investing (which is now used by many of the more formal angel investment groups as well) is simply different, and I'm not sure that it allows for the entrepreneurial friendliness seen in angel investing.
Darian
2. Posted by Darian Ibrahim on December 10, 2006 @ 8:14 | Permalink
Following up on my previous post, of course you're probably just talking about instances where VCs might give up a standard protection here and there, such as Benchmark allegedly giving up anti-dilution protection. My point was that I don't think they could (or would) give a lot, which may be obvious. I wonder whether you think concessions on terms such as anti-dilution protection are important to entrepreneurs, and may be an area where we see VCs compete in tight markets?
3. Posted by MAW on December 10, 2006 @ 12:39 | Permalink
"My question: can we find evidence of entrepreneur friendliness in the investment contracts?"
Because there are so many levers that a VC can use in the investment contract, this is a difficult task. For example, which investment is more entrepreneur friendly, one with (i) a higher nominal pre-money valuation and anti-dilution protection or (ii) a lower pre-money valuation and no anti-dilution protection? What about (i) a straight or (through board composition) effective veto on any issuance of capital stock versus (ii) anti-dilution protection. My sense is that there are too many variables to answer this question with confidence.
Jono Rosen and I discuss some of these trade-offs in Effective vs. Nominal Valuations in Venture Capital Investing available at http://ssrn.com/abstract=803124
"In other words, do VCs attempt to promote their brand through their deal structure?"
Because, in general, VCs tend to be more sophisticated than entrepreneurs when it comes to investment structure, I would bet some VCs promote their brand through deal structure even though, in reality, the deal structure is no more entrepreneur favorable.
4. Posted by Gordon Smith on December 13, 2006 @ 15:05 | Permalink
Sorry for the delay in responding to these comments. I posted this, then promptly went off-radar.
Darian, there are a lot of things that might be going on here. "Branding" may be a form of "signalling," and it may be that the moves I am thinking about are merely signals of entrepreneur friendliness. Hard to tell.
On the other hand, it sounds to me like the angel model might have more to do with "identity" than "branding."
Michael, these are excellent comments, and I appreciate the link to your paper. My sense is that your last comment is dead on.
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