Avoiding Rock Fetches and Other Bad VC Behavior

Raising money for a start-up is never easy. But it’s often made unnecessarily hard by the behavior of prospective investors.  A common piece of bad behavior is giving founders endless and often pointless “homework assignments”– essentially making you do their research while they buy themselves time. Great, huh?  We call these assignments “rock fetches,” and we’ve seen more than a few of them. 

Mike Stonebraker says:

In my opinion, VCs are generally lazy.  Hence, as I noted in my last post, they will try to get you to do their homework for them.  Here are some strategies for avoiding such rock fetches.

Deal with a VC who isn’t lazy.  By and large, the reputation of VCs is pretty well known in local areas.  Hence, ask your friends about any prospective VC you might be interested in.  Avoid VCs who have a reputation for rock fetches, as they will endlessly jerk you around requesting more information.  Also, VC behavior at this stage of the process will be indicative of behavior later.  In other words, the willingness of a VC to work hard to make your company successful after the consummation of a deal can usually be predicted by behavior before deal consummation. 

The best VC is one who will start adding value to your company during this pre-deal “beauty contest.”  Putting you in front of potential customers or potential executives is very helpful, as it “moves the ball downfield.” 

If you find yourself being jerked around by rock fetches, my advice is to just say no: terminate the process, and go engage with a less lazy potential investor.

Some other VC characteristics to avoid:

Bottom fishermen. Avoid VC firms and individual VCs who have a reputation for low-balling you on valuation.  Life is too short to walk around feeling like a VC has screwed you. Again, asking around will usually identify the bottom fishermen. 

No operating experience.  Believe it or not, many VCs have never actually been an executive in an operating company.  You really want somebody who has been in your shoes before. 

Bad Rolodex.  Ask any VC you might be considering for leads to important customers or potential executives.  Any VC worth his salt will be able to supply you with a bunch.  If he comes up empty-handed, this indicates he does not have a good Rolodex.  A very important feature of VCs is help in this area.  Make sure that any VC you are considering has many many many contacts.

Excessive spread.  The ideal VC partner is an investor in 10 or fewer other companies.  Avoid VCs who are spread much thinner.  They simply won’t have the bandwidth to pay attention to you.

Conflict of interest. Make sure the VC firm you are considering does not have a previous investment in the same space as you.  There is nothing worse than getting advice for a VC that he is also sharing with a competitor.  In general, VCs will try to convince you that there is not a conflict, when, in fact, there is one.  In this case, run, don’t walk, away.

Slow pokes.  Some VC firms move at the speed of paint drying.  If it takes six months to get a deal done, then you will probably starve in the meantime.

"Humility is a characteristic that I admire in VCs, and one that is rarely found." - Mike Stonebraker

Arrogance.  Many VCs, especially older ones who have made a lot of money, believe they have all the answers.  You want a VC who is a partner, not one who is going to be your boss.  Humility is a characteristic that I admire in VCs, and one that is rarely found.  This was especially true around 2000, right before the dotcom crash, when many VCs thought they were God’s gift to investing.  One VC at the time was arrogant enough to say that he was only interested in obvious home runs – his time was too valuable to waste on working hard to build value.

Gunslingers.  Avoid VCs with a gunslinger reputation.  In other words, you want carefully reasoned advice and counsel from VCs.  Any VC who comes to a Board of Directors meeting and starts shooting from the hip is usually not a helpful VC.  Again, ask your friends about any potential VC.  Moreover, ask a VC for references of CEOs they are working with.  Call the references and ask the hard questions.

About this time, you are probably figuring out that the set of “good” VCs is empty. It will be a challenge to find one who is fair, fast, humble, with experience and a good Rolodex; who is not over-committed; and who wants to work with you as a partner. The general adage of “you have to kiss a lot of toads to find a prince" certainly applies here.

So, figure on spending a lot of time sorting this out.

Andy Palmer says:

The process of raising money is fundamentally an information exchange and trust exercise. The earlier stage the company, the more trust is required and the less information matters. Here’s why.

Before investing, an investor conducts due diligence.  His goal is to minimize his risk by knowing as much as conceivably possible about a company at a given stage of its founding and development. 

One way that investors attempt to mitigate risk is by asking a bunch of questions.  Some early-stage investors are self-aware enough to know that the companies that will provide the best returns are those that have the biggest risks – and that often this risk manifests itself as fundamental ambiguity in the companies’ earliest days.  

For really early-stage investors, functional behavior is marked by a willingness and ability to stop asking questions and make a yes/no decision within a reasonable period of time.  Dysfunctional behavior is marked by continuing to ask questions of an early-stage opportunity, knowing that the “right” answers just may not be available. My partner Mike appropriately refers to these as “rock fetches.”

The worst investors will ask you to do these rock fetches regardless of their intent to actually invest.  From their selfish perspective, they’re just learning from the process.  But this learning is costing you time and may or may not result in any equivalent  learning for the company.   And imagine how you’ll feel if you do a bunch of rock fetches and then find that the requesting investor funded another company that is doing something similar to your idea. (This  happens more frequently than anyone will  ever admit, but you’ll never hear much about it because of the embarrassment factor.)

"Ask investors these four simple questions to help ensure appropriate expectations." - Andy Palmer

To minimize rock fetches, I suggest that when you first meet with a potential investor, you ask these four simple questions to help ensure appropriate expectations:

“Do you have the money to invest in our company today without approval of your limited partners?”   This question will help you figure out where the investors are in their fundraising cycles – and what is required to get cash in the bank.  Some venture funds have to get approval from their limited partners before they can make an investment.

“Can you share the investment thesis of the fund that you would be using to invest in our company?”  This will help you judge directly if the limited partners of the fund are expecting to invest in companies like yours.

“What is a reasonable period of time required for you to make a decision about investing in our company?” This will help you judge whether the investor is truly serious or not.  The right answer is not “it depends.” The answer should be definitive and measured in days or a small number of weeks. If it’s longer, just walk away.

“What is your standard due diligence checklist for a company at our stage?” I’ve seen  some investors (either consciously or subconsciously) use a due diligence checklist that is inappropriate for the stage company. Some will even use this as a strategy to help retain an option on investing in your company – giving you more and more rock fetches to buy themselves more research time or just retain their option without making a decision.

As an entrepreneur, you have a portfolio of ONE: Unlike investors, you are not hedging your risks: you are relentlessly pursuing your mission. You can’t afford to spend your time on the rock fetches required to educate an intelligent but overconfident young junior partner or a senior partner so distracted with later-stage investments that he will never get enough answers to justify spending time on your new, highly ambiguous deal.  It’s good discipline for investors to get to a quick yes/no and move on without spinning up never-ending rock fetches.

By asking the right questions and pushing for answers, you can head off rock fetches and minimize your risk:  wasted time.