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VC – ENTREPRENEURALIGNMENTWhy Is It So Elusive?<br />Jeff Bussgang<br />General Partner<br />Flybridge Capital Partners<br...
Key Questions<br />Can VCs and Entrepreneurs always be aligned or is misalignment inevitable?<br />When is an “entrepreneu...
Context For My Perspective<br />General Partner at Flybridge Capital Partners, early-stage VC firm based in Boston<br /><u...
Bottom-Line:Misalignment Inevitable<br />Entrepreneurs are human and care about:<br /><ul><li>Change the world
Ego
Pride
Become famous
Make money for shareholders
Make themselves money
Don’t screw up</li></ul>VCs are human and care about:<br /><ul><li>Make money for their LPs
Make themselves money
Ego and Pride
Make partner (“tenure”)
Build a successful firm
Raise the next fund
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Entrepreneur - Venture Capital Alignment

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Entrepreneur - Venture Capital alignment - a presentation to the Kauffman Foundation graduates.

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  • I thought this was interesting, especially to me as I am about to embark on the VC - Entrepreneur relationship { hopefully ! }

    Thank you.

    CCarter
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Transcript of "Entrepreneur - Venture Capital Alignment"

  1. 1. VC – ENTREPRENEURALIGNMENTWhy Is It So Elusive?<br />Jeff Bussgang<br />General Partner<br />Flybridge Capital Partners<br />Kaufman Foundation<br />July 15, 2010<br />
  2. 2. Key Questions<br />Can VCs and Entrepreneurs always be aligned or is misalignment inevitable?<br />When is an “entrepreneur-friendly” stance the right approach?<br />When is an “entrepreneur-unfriendly” stance the right approach?<br />How to make sure there’s clarity and trust in the relationship, even with misalignment?<br />
  3. 3. Context For My Perspective<br />General Partner at Flybridge Capital Partners, early-stage VC firm based in Boston<br /><ul><li>40+ active portfolio companies, Fund III (2008): $280M, 5 GPs</li></ul>Former entrepreneur<br /><ul><li>Cofounder Upromise (acq’d by SallieMae), VP at Open Market (IPO ‘96)</li></ul>Entrepreneur-in-Residence at HBS<br />Author: Mastering the VC Game<br />
  4. 4. Bottom-Line:Misalignment Inevitable<br />Entrepreneurs are human and care about:<br /><ul><li>Change the world
  5. 5. Ego
  6. 6. Pride
  7. 7. Become famous
  8. 8. Make money for shareholders
  9. 9. Make themselves money
  10. 10. Don’t screw up</li></ul>VCs are human and care about:<br /><ul><li>Make money for their LPs
  11. 11. Make themselves money
  12. 12. Ego and Pride
  13. 13. Make partner (“tenure”)
  14. 14. Build a successful firm
  15. 15. Raise the next fund
  16. 16. Peer recognition
  17. 17. Control if things go wrong</li></li></ul><li>Misalignment InevitableThe Key Is How You Manage It<br />“Don’t be a victim. It’s not the VC’s fault. Don’t look at [the drama and conflicts] personally, look at them structurally.”<br />- Mark Pincus, Zynga CEO/founder<br />Mastering the VC Game<br />
  18. 18. Examples of Sources for Potential Misalignment<br />Term sheet – economics, control, “clean terms”<br />Follow-on Financing – Inside-Outside Dance<br />Feedback – Paula Abdul vs. Simon Colwell; the trick behind good board management practices<br />Transparency – respecting chain of command vs. direct contact with management team<br />Exit – portfolio approach (VC) vs. portfolio of one (entrepreneur)<br />
  19. 19. Case Study #1: Term Sheet<br />What’s more aligned – straight preferred or participating preferred?<br />Conventional Wisdom:<br /><ul><li> Straight preferred = “entrepreneur-friendly”, “better alignment”
  20. 20. Participating preferred = “bells and whistles” “double dip”</li></li></ul><li>Case Study #1: Term Sheet<br />Yet…<br />Assume: $10m investment on $30m pre in straight preferred, let’s say founder retains 20% after pool, angels and other execs<br />Founder gets offer to sell for $10m <br />VCs get money back, founder nets $0<br />Founder gets offer to sell for $40m<br />VCs get money back, founder nets $8m<br /><ul><li>Are founders and VCs really aligned here?
  21. 21. In a range of outcomes ($10-40m), they’re not</li></li></ul><li>Case Study #2: Follow-On Financing<br />Two Series A investors invest $3m each on $9m pre to own 20% each<br />Company starts scaling fast, doing well<br />Series A investors offer inside round at $25m pre, a 50% step up taking into account option pool increase, getting their ownership to 30%<br />CEO thinks they can do better and put forward and outside-led deal at 100% step up but new investor instists SerA investors must cut back to 15% each<br /><ul><li>Are founders and VCs really aligned here?</li></li></ul><li>Case Study #2: Follow-On Financing<br />Two Series A investors invest $3m each on $9m pre to own 20% each<br />Company starts scaling fast, doing well<br />Series A investors offer inside round at $25m pre, a 50% step up taking into account option pool increase, getting their ownership to 30%<br />CEO thinks they can do better and put forward and outside-led deal at 100% step up but new investor instists SerA investors must cut back to 15% each<br /><ul><li>How does the picture change if SerA VCs offer CEO 5% points of incremental ownership from the option pool if she accepts their offer?</li></li></ul><li>Case Study #3: Down Round<br />A company struggles to raise follow-on financing, but finally succeeds in getting a term sheet for $5 million that requires a 50% reduction in preference by the insiders<br />There are two insiders, each with different motivations, price points, and securities, and one is in the middle of raising a new fund <br /><ul><li>How does the board decide whether to take the inside round or do a bridge?
  22. 22. What’s the entrepreneur’s incentive?</li></li></ul><li>Case Study #4<br />What’s yours?<br />
  23. 23. Why Is This So Hard?<br />Human Nature: Fight or Flight?<br /><ul><li>Humans are skilled at avoiding conflict
  24. 24. In the face of a tough conversation, VCs and Entrepreneurs often shy away
  25. 25. Everyone wants to be liked and respected, no one likes being a “bad guy”</li></li></ul><li>Conclusion<br />VC-entrepreneur misalignment is common, inevitable, natural (“no conflict, no interest”)<br />The more informed the entrepreneur, the better – don’t abuse information asymmetry<br />When you are in a misalignment situation, identify it, analyze it, don’t shy away from it<br />Open, direct conversations and open, direct feedback will lead to trust and respect<br />Trust and respect are the necessary groundwork for strong VC-entrepreneur relationship and success<br />Recommended additional reading:<br />Stephen Covey, The Speed of Trust<br />Patrick Lencioni, Five Dysfunctions of a Team<br />
  26. 26. THANK YOU!<br />Jeff Bussgang<br />General Partner<br />Flybridge Capital Partners<br />Kaufman Foundation<br />July 15, 2010<br />
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