Heard today at a venture ecosystem gathering:
“A VC sowing cash in a start up to see it grow is like a man & woman, married, making a baby. Statistics say 60% of men cheat on their wives and 30% of women cheat on their husbands. I believe the same goes for venture capitalists (men) and start uppers (women).” 
I can’t think of so many examples though. Hope it’s not true
- I remember a few (bad?) VCs withdrew their money when they could (diluted management) in the aftermath of the bubble burst in 2001. I can think of other. But to avoid such situations, be good and you’ll get good VCs on board.
- VCs who managed to ‘package’ well crappy start ups just to get rid of them and sell it to the big guys around (ORCL, CSCO, GOOG, MSFT, YHOO, IBM, AAPL, etc.) but then it’s not cheating with one’s wife: if the big player bought it, it means it sucks in due diligencing and assessing opportunities; or maybe the VC had the right arguments, at the right time. It’s his/her job after all. Too bad for the big ones.
- When it comes to entrepreneurs, I don’t see any reason why they would cheat on their investors. Maybe overselling your business plan a bit? Isn’t selling yourself the very rule of the game? And if the VC buys it, isn’t (s)he appropriating it at the same time?
Any interesting concrete story, anyone?
Hello Jeremy,
We could add:
1. During the investment period, the entrepreneur hides the difficulty and tells to the VC that everything is ok. The entrepreneur gives wrong financial data to hide the real statement of the company.
2. The day before the signature of the deal, the entrepreneur remembers that his company is not totally independent but is linked to others in luxembourg, switzerland,….
3. VC uses the financial technic ‘coup de l’accordéon’ to evict the small investors (2 cases were recently related in the press but we don’t know if the VC really abused of this technic which is used to save a company).
4. A VC from a big company (not from VC funds) analyses the business plan, meets the entrepeneur,…. The entrepreneur believes that everything is going very well but finally the VC won’t finance the company. It was just an intensive technological watch.
Comment by LF — May 22, 2007 @ 10:58
Hey Laurent,
Thanks for this testimony; I have to admit though that I’m not convinced that such situations occur. Here’s why:
1) Serious VCs do due diligence the financial accounts of a company, through auditors (I’ve been one).
On top of this, financial accounts have to be certified by a CPA (Chartered Public Accountant) so it doesn’t boil down to the will of the entrepreneur at all.
Last, a good deal of the success of an entrepreneur lies on the level of trust (s)he can build with a community of partners. Assume one entrepreneur manages to on purpose provide VCs with an unaccountable financial assessment of the situation, then I promise you that the perspective of damaging his/her reputation for ever will make him/her go back to the investors with the right figures in no time. Or (s)he can consider him/her dead, business wise.
When it comes to business, honesty should be a policy.
2) Nope, very unlikely because of legal due diligence + the VCs figure it out on websites like societes.com. Last but not least, in order to structure the deal, the VCs need to know about this kind of stuff. So no closing meeting without such information.
3) True for this one. Squeezing your diluted investors doing an accordeon coup is a rather common practice. But I guess if the diluted investors are called out of the shareholder structure, it means they didn’t create much value too…
4) It happens, true. And there are very few ways to prevent such things.
Comment by Jeremy Fain — May 22, 2007 @ 20:27
Of course, these are fortunately not common stories
I’ve heard these stories from:
1. a business angel. The entrepreneurs did not run the company at all and were having fun with their sport car during the working day. They did not say the truth about the development of the product and falsified the financial data. They are now facing to the justice as the BA want their money back.
2. a VC (they have been called the night before the closing meeting). If I remember well, the deal has finally not been closed (which is not a surprise).
3. Sarenza.com and et Endotis pharma are the two last stories I’ve heard about. The problem is for business angel and small investors that gave the money for the seeding. In some cases, they can’t give money after an accordeon coup. But I really think this technic is usefull to save a company and is not used in a wrong way, but can be considered like it by the small investors ou founders.
4. another VC.
I completely agree with you that the basis of a good deal between an entrepreneur and a VC lies on trust. Unfortunately, in period of high stress or difficulties, people can have a very strange behaviour. But good (experienced) VC are able to detect the entrepreneur they can work with.
Comment by LF — May 22, 2007 @ 21:34
Great clarifications Laurent. Wish to see you soon. ++
Comment by Jeremy Fain — May 22, 2007 @ 21:41