VC Asshat Move #1

Occasionally, I see VCs doing unethical and infuriating things. I have to call out those things when I see them, and my goal is to arm you (startups) with ways to combat these “VC asshat moves”.

Note: Not all VCs are Asshats, I’m not saying that. But I want to help you detect the few that are.

VC Asshat Move #1 is when a VC meetings with a startup that competes directly with another startup that they are planning to fund. In this asshat move, the VC reaches out (usually through an associate or principal) and says they heard about your awesome business. They’re interested in the space and wondering if you can come in for a meeting. You go in so the asshat (or possibly unwitting) associate can see if you’re a complete idiot or not. If not, you then meet with the actual asshat partner VC so they can assess you against the company they’re about to fund.

To you, the startup, this all feels as if they’re just interested in your obviously cool startup. They have brains. It feels good.

Then they say no. Then 30 days later, they fund a competitor. You may never suspect anything because after all, they were interested in the space. You’re bummed they picked them over you.

However, maybe it’s more devious than that. Maybe they already picked them, before they even met with you! They got you to come in and tell them all your secrets, and now they’re invested in the other company. It happens, I’ve seen it.

Many people will say “hey David, call out the VCs who do this.”  I want to.  Really, I do. But it’s not my place in the cases I’ve seen. Doing so will harm the startups who have already been wronged. So they have to do it, not me. If you had this happen to you, and it’s not sour grapes (we should all recognize that this happens too), then you should talk about it. But I can’t out specific VCs, because I want to help startups and not hurt them. So instead I’m talking about the issue generally because I believe it’s a problem.

Now back to why I’m writing this. I want you to be aware this happens, and I want to tell you how to stop it. First, ask the direct question in the first meeting “Are you talking with any of my competitors?”  Most people have a hard time lying when asked a direct question. If they are already talking with your competitors, they’re likely to say yes. If they don’t then they’re very unethical and methodical in their ability to be asshats. If they say yes, ask directly “Are you close to investing in any of them?” and “Are we the leading candidate?”  Watch for squirming and avoidance. If you see it, be really careful.

It goes without saying, but I’ll say it anyway. Always do your diligence on specific VCs that you’re dealing with (the partners, not the whole firm). Then ask the hard questions to be sure you’re on the same page. The VC, if they’re good, will respect you for asking and won’t view it as an accusation.

 

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About David Cohen

Geek. Hacker. Investor. Founder and CEO of TechStars.

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  • http://learntoduck.net/ Micah Baldwin

    As a startup, you can also use this to your advantage. Attend the meeting with the associate/partner and drag out all the questions and learning they have around the space. Understand that if they are asking certain questions, then other VCs will ask similar questions. Try out a new pitch. Doesn’t matter, they aren’t going to fund you. Ask them a ton of questions about the other company (if you know what it is), let them crow about it. Learn what matters to them and what scares the other company.

    Thank them for their time. Smile, and walk out.

    • http://twitter.com/bcrimmins Bob Crimmins

      This would be great… if you have foreknowledge about what they’re up to. In my experience, that is a very rare case indeed.

    • http://www.leanlearnin.com/ Brent Weber

      I agree with this. I was approached by a VC for my startup and the associate I talked to pretty much told me what they were doing. Not on purpose, but it isn’t too hard to tell where the questions are headed. They ended up giving me more information than I gave them. I got to practice my pitch and got some valuable information and insight, they got some good advice and confirmed the market. win/win in my mind.

  • http://twitter.com/bcrimmins Bob Crimmins

    Thanks for calling this out, David. The insidious part is that you often (usually) can’t know for sure. I have very strong suspicions that this has happened to me several times in my career, one as recently as last year. “Infuriating” is the right word. Hope to see more in the Asshat series coming soon!

  • http://twitter.com/sravishsridhar Sravish Sridhar

    This totally happened to me in our Seed round. I didn’t know any better back then. Now I do.

    • http://twitter.com/jtangoVC Jo Tango

      That is insane. So disappointed. Hope it isn’t a VC I know?

      • http://twitter.com/sravishsridhar Sravish Sridhar

        You do know him (not her) :-)

  • http://twitter.com/jtangoVC Jo Tango

    Amazing people think they can get away with this. Doesn’t the bad rep. catch up to them?

  • http://twitter.com/benjamindblack benjamindblack

    Feel free to ask point blank if the VC already is in a process with another startup. Watch his reaction. Funny thing is I just had an endowment LP reach out to me out of the blue. I finally dragged it out of him that he was doing diligence on another manager. I said, happy to help and then kept my confidential info confidential. So it happens to investors too.

    • http://www.pointsandfigures.com/ pointsnfigures

      startups should know who their competitors are; in all the markets, funding and the one they are attacking!

  • Brian Eustace

    The Kozmo/Urban Fetch debacle was a glaring example back in NYC dotcom boom.
    The Silicon Alley Reporter even ran a cover story about it. Ruthless stuff.

  • http://www.about.me/stevepalmer Steve Palmer

    I recently had an investor tell me straight off the top that he would not consider our startup because it would be in conflict with a potential investment. I suppose this message could be read as 1) beat it dude, we aren’t interested or 2) I don’t want to cross that line or waste anyone’s time or 3) combination of 1 and 2.

    In any case, I appreciate a direct response like this. Even though I would like to pick the investors brain a bit, I would rather know up front. It also validates our startup to some degree, I suppose, since investment was pending for the competitor. If you are fortunate enough to get meetings, the VC shine wears off a bit then I think you can tackle this potential issue as @micah:disqus states in his subsequent comment. But for the first time founder its HARD not to get amped up for the opportunity and check your emotions at the door. Thus the reason some VC choose to employ this unethical practice.

    Thanks for the heads up…I hadn’t thought about this to be honest.

  • http://fiveyearstoolate.com ewiesen

    David, I think there’s a nuance to this observation that’s missing from the discussion thus far.

    There’s no question that an investor should be condemned if s/he spends time with a company after having *already committed* to funding a competitor, and is just trying to strip-mine the company for information to supply the in-process investment.

    Where I might disagree (or perhaps not) is the condemnation of an investor in the scenario where the investor is mapping out a sector by spending time with a number of different companies chasing the same opportunity or related opportunities PRIOR to making an investment decision about any of them.

    Candidly, that’s part of our job as investors, and most of the founders I know want investor Board members who are deep enough in their sector to have a detailed view of the competitive set. This usually means looking at every company we can and trying to form a defined point of view about what’s happening and likely to happen over time. If I meet with one company, fall in love with it and just ignore anyone else doing something competitive, I’m not doing my job for my Limited Parters or for the company in whom I ultimately invest.

  • meredith collins

    This is empowering. Thank you for speaking out and giving us actionable advice.

  • Aaron Bird

    This happened to a fellow TechStars company last year. Exact same scenario, they met with the VC and a month later read about them funding a competitor. Lame. You definitely want to ask the questions David highlighted above. The company in this case didn’t.

  • Brian Grega

    This has happened to me, in the midst of our “B” round, we had a significant corporate partner who had indicated not only interest, but intent, to participate in this round. Within one week of “closing the round, this partner called us and informed us that they were not only not going to participate in our round, but that they were going to invest a larger amount in our competitor.

    Three years later, that competitor was “out of business” and we were still growing, ultimately getting acquired by another semiconductor company.

    • http://techstars.com/ DavidCohen

      karma.

      • http://www.facebook.com/bgrega Brian Grega

        Agreed!

  • http://twitter.com/jonaslamis Jonas Lamis

    Kudos to Mike Maples at Floodgate. The day after he met my company, he had a scheduled pitch from another startup in our space. Once he heard their elevator pitch, he told them he was working with us and it wouldn’t be fair to hear any more of their strategy.

  • http://twitter.com/isaacgarcia Isaac Garcia

    This happens *all* of the time. I absolutely know when one of my competitors is about to get funded because my phone rings off the hook from inbound VC inquiries. It is so obvious.

    As Cohen writes…..its very common place, though, difficult to assess when it is devious or just plain stupidity.

  • http://www.pointsandfigures.com/ pointsnfigures

    Hey, I know a fund that did that. No ethics.