User Review: VC Firms

Microsoft changed the world with Windows; Apple began its march to a trillion-dollar market cap opening stores, and Facebook took off with photos. Amazon’s killer app? User reviews. Transparency, courtesy of Amazon (and Trip Advisor and Google), has put power in the hands of the consumer and created immense stakeholder value. The margin brands command, as they have been jiujitsu-like diligence for consumers, has been emasculated by, among other things, the collective body of user reviews conducting your diligence for you. Why defer to the brand, when you can defer to millions of people like you who share their collective experience with the product in question?

Any asymmetry of information benefits the party that’s on the right side of the asymmetry. Before investing, VC firms conduct hundreds of hours of diligence on the opportunity and the entrepreneur. However, the entrepreneur doesn’t have the time or resources to diligence the VC. Their reputation is mostly driven by the media’s perception of the fund’s return and how many unicorns they are invested in. The entrepreneur has little color about the firm or individual they are about to partner with. This opacity transfers power from entrepreneurs to VCs.

I’ve raised close to $1B (VC, PE, hedge funds) for firms I’ve started and other projects, and below are my user reviews of venture capitalists / angels.

Prophet Brand Strategy
What: Brand strategy consultancy I founded in 1992 (second year in grad school)
What happened: Sold in 2002

M2 — Danish VC
As the .com era hit full monty / froth / throttle, many organizations and VC firms were created that should have remained nonexistent. M2, a Danish VC firm, raised capital to acquire minority stakes in firms servicing the .com economy, and then take the holding company public. If it sounds like it makes no sense, trust your instincts. M2 was an off-off-Broadway VC firm. M2’s shares in Prophet ended up in receivership of a Danish court .

Various SF Angels
Hamid Moghadam (CEO, Prologis), Paul Stephens (Co-Founder, Robertson Stephens), Tully Friedman (Co-Founder, Friedman Fleischer & Lowe), Bob Swanson (Co-Founder, Genentech), Warren Hellman (Co-Founder, Hellman & Friedman) — invested in one or more of my startups.

By the time I was 10, my dad lived out of state, and I didn’t have a lot of adult male influences in my life. These men were great role models for someone coming of professional age. Tully is the youngest thinker I know, fascinated with new ideas. He never threw his weight around but also wasn’t afraid to get angry. Hamid is the biggest brain in real estate and had great perspective, always ready to laugh and invest in the relationship. Paul Stephens is who you want to be when you grow up, a handsome maverick who started an investment bank in his early thirties. He would drop everything when his wife or boys called.

Bob Swanson was assigned, as part of YPO, to be my mentor and would shadow me, sitting in meetings observing my leadership (or lack thereof) when I was CEO of Prophet. He would then sit me down and, thoughtfully and gently, tell me what an ass I was being. Bob was diagnosed with a glioblastoma and died later that year. Warren Hellman was the most universally respected person I’ve known. Humble, strong, direct, civic minded, and spiritual. I would meet with Warren once a quarter just to get advice, and he invested in Prophet. When I sold Prophet, I was so focused on getting liquidity for myself and the other co-founders, that I didn’t bother to ensure Warren got his investment out. I realized this, and called Warren to apologize. He told me not to worry about it. However, soon after, he stopped meeting with me. It’s haunted me that I never got to make things right, or that he thought ill of me before he passed. I really fucked up here.

Self Review: Started something unique, and sustainable — 400 employees today. Also, knew when to leave.

Red Envelope
What: Multichannel retailer founded in 1998
What happened: NASDAQ IPO in 2002, Chapter 11 in 2008

SV Angel: Ron Conway
Ron is likely the most famous angel investor in the Valley. SV Angel is more of an ETF / index fund than a VC, as Ron invests broadly across the ecosystem. In exchange for participation in an early round, the entrepreneur gets access to tier-1 VCs and a host of other firms / players in business. Ron always asked the same two questions: “Can we invest?” and “How can we help?” Ron is the uncle every firm wants: nice to be around, irrationally passionate about your success, and constantly introducing you to his successful friends. Every startup in the Valley has DNA that can be traced to Ron, and these are good genes.

Sequoia Capital: Michael Moritz (Chairman) — Sequoia was Red Envelope’s lead investor; Mike was chairman for several years

Sequoia Capital is the most successful firm in venture capital, dominating the asset class like no other firm in its respective sector. Sequoia has backed firms that have a public market value of $1.4T (GDP of Australia). Sitting alone on the iron throne of Westeros is Sequoia Chairman Michael Moritz, who has backed firms including Google, Yahoo, and PayPal. Michael has amassed a $3B+ fortune and in 2013 was appointed Knight Commander of the Order of the British Empire. Since then, he has donated tens of millions to philanthropic organizations. Once Sequoia agreed to lead the round, we had people falling over themselves to invest.

Working with Sequoia and Sir Michael was the worst experience of my professional career. Some lowlights:

— 18 months after the investment, our CEO, who had four young boys, wanted to gracefully hand the reins to someone else. Michael refused to take the dilution of additional options to get a new CEO and demanded the other shareholders pay for a new CEO, as Sequoia had “invested in a company with a CEO.”

— When the dot.bomb crisis hit, and the firm needed capital, the CEO would line up new financing, only to have Mike state he would not participate (queering the round as if your lead sits out you are toast) unless the founders forfeited equity. I believe every time Mike entered the boardroom, he would look around and think “who can I fuck (out of their equity)?” It was easy for him — he was a master of the universe, and other directors would sit in board meetings trying to figure out what Mike wanted and how to get there first.

— Mike often tried to unload Sequoia’s refuse on Red Envelope (remember Miadora?). Both my co-founder and a former CEO put in writing (something you don’t do in a digital age) their belief that Mike was conspiring with the CTO (we’d hired from Sequoia-backed WebVan) to use Red Envelope as a dumping ground for the failed products of Sequoia portfolio firms.

— After nominating an alternative slate of directors, the board, chaired by Mike, commissioned Kroll, with company funds, to dig up dirt on me. Former girlfriends and work colleagues began receiving calls from a Kroll associate who’d identify themselves (“I’m with Kroll”) and ask questions about me. If this sounds bad, it gets worse. Kroll was clearly not trying to find information (the calls lasted 15 seconds), but intimidate me. I was going through a divorce, trying to secure a position on the faculty at NYU, and had a billionaire using the funds of the company I had started to fund mob-like behavior.

A good board can’t save a bad company, but a bad board can mess up a good one. Red Envelope’s board (myself included) was awful.

Weston Presidio — Series C round, Red Envelope
Former Montgomery Securities guys from the consumer banking group who had started a fund. Weston had domain expertise (actually knew our business) and were benign but ineffective — we didn’t leverage their expertise.

Mousse Partners: Charles Heilbronn — one of the many subsequent rounds at Red Envelope
In my next life, I’m coming back as Charles. Charles is in the running for the most interesting man in the world. He’s handsome, funny, French, and had the good judgement to be born into the family that owns Chanel. Charles wasn’t terribly effective, but he was benign, which puts him in the top quartile of VCs.

Madison Dearborn — yet another round at Red Envelope
Madison threatened to block our IPO unless we bought their shares pre-IPO, holding the firm hostage, as we needed to raise money, and the window in the public markets was closing. We found out later that a woman they put on the board (can’t remember her name) used to dial into board calls with Madison partners listening in, without our knowledge.

Self Review: Took lemons, turned them into lemonade, and then cyanide. Was in over my head and contributed to an environment of burning the village to save it. Fuck…

Brand Farm
What: NY-based consumer c-com incubator, founded in 1999
What happened: Over before it started (we closed round in December 1999 and then … Shit. Got. Real.)

Maveron — VC firm founded by Howard Schultz and Dan Levitan
Dan was more my rabbi than investor. He would come to NYC, and we’d take long walks and discuss companies, relationships, and spirituality. I don’t know if Dan is a good VC (who knows what would have happened in a different year), but it was obvious he’s a good person.

Goldman Sachs — you know who Goldman is
Should not have been in the VC business. Benign / supportive.

What: Subscription business intelligence firm, founded in 2010
What happened: Sold in 2017

General Catalyst — VC firm considered to be the best VC east of Mississippi; Larry Bohn and Paul Sagan were the partners from GC

Lennon and McCartney of VC. Larry has unique insight into the intersection of capital allocation and value creation, and Paul has the management cred and insight of Jack Welch, minus all the chainsaw stuff. The first board meeting (post-investment), I / we blew the quarter (not the news you want in your first board meeting of a portfolio firm), and their reaction was “It is what it is… How can we help?” They enforced needed discipline on the firm and pushed the limits of our comfort zone around investments in growth, which paid off in spades. There was some bullshit, grabby behavior during the sales process, but they backed down. In addition, GC (and the other independent director, Todd Benson) set up a meeting to go through a list of employees and ensure everyone would win (get paid) if the deal closed. General Catalyst demonstrated behavior I’ve never seen from a VC during daylight hours — generosity.

Self Review: Started / built something unique and (hopefully) sustainable. Common and preferred did (really) well. Finally.

Closing Thoughts

— Venture capitalists are a key part of the ecosystem that makes the US unique and prosperous. Only in America is there this much cheap fuel to get small businesses off the ground and to occasionally birth a giant.

— Recognizing ROI in venture is so difficult that VCs are incented to play hardball to get as much equity for as little as possible … whenever and however. They don’t partner with entrepreneurs as much as coexist with them, until they sense weakness, and then eat you.

— A tier-1 VC’s brand can help you close a round, but there’s little enterprise value. It’s about the guy (and they are all guys) you’ll be working with. They all have staff that work on their portfolio companies and host CEO days. This is overhead and noise to justify, to limited partners, their 2/20 fees.

— VCs will disparage what I’ve said here, as persistent dearth of transparency and asymmetry of information continues to benefit them.

— I’ve struggled, my entire career, discerning the difference between being right and being effective. When raising capital, invest in establishing a rapport with your new partners to create some level of mutual goodwill so border skirmishes don’t escalate to war.

— I hope entrepreneurs, similar to the 27,144 people who have (in an open forum) reviewed the Amazon Echo Dot, will provide authentic user experiences about their VC.

— When, as an entrepreneur, you begin hearing things like “Take care of your investors,” “Focus on your long-term reputation in the Valley,” or “You need to do the right thing” — that’s code for “We (VC) are about to screw you.” Don’t be afraid to say no. Your obligation is to the common shareholders (employees and you), not the preferred. Your VC is already rich and has several chips (bets) on several numbers.

— Don’t be afraid to be “unreasonable” (term VCs use when founders defend themselves or their employees). If you are going to piss people off (make enemies), ensure they are powerful, as it’s more interesting and restores some balance to the universe. They can’t eat you, and warnings of not being able to raise money, again, are bullshit. Capital worships at the altar of perceived / potential returns, full stop.

Life is so rich,

No Mercy / No Malice in Your Inbox.

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  • K E Sharp

    Perfect. Well packaged Arrived on time FIVE STARS!

  • Daniel Springer

    I have become a huge fan of your No Mercy email. Perhaps for the transparency, perhaps because of a shared stage in life. However, you simply got Mike Moritz wrong. After multiple investment experiences (some good, some less so) he is, in my fairly experienced opinion, the best VC of this era. I have lots of VC relationships which are quite positive and I always say the same thing, I might prefer to have dinner with some of them, but I would choose Mike over anyone as an investor/Board member. He is the most insightful and he is self-actualized enuf that he only speaks when he has incredible value to offer, a perfect board member combo. Mike also introduced me to Red Envelope to see if I could be helpful (and was honest that it was way messed up) admitting that it would be an investment failure, but just trying to help salvage something for the team. In my opinion, you had a company problem, not an investor problem on that one. Tough love hurts sometimes. Keep up the great writing!



    Thanks for reaching out, and the kind words–really.

    A great post–thoughtful, direct. I hope more people follow your lead and write up their experiences with Sequoia, and other VC firms, so entrepreneurs can make more informed decisions. Congrats on your success, Scott

  • Courageous and authentic — as per usual. Awesome. Thank you.

  • mark crowther

    Great transparency. Love it. If only all business interactions had the same candor. Bravo Scott. I’m going to be tweeting and sharing this line for a while “If you are going to piss people off (make enemies), ensure they are powerful, as it’s more interesting and restores some balance to the universe.”

  • Daniel Springer

    my pleasure