March 21, 2012

Very simple thought and advice for today. Always discount a VC’s enthusiasm.

This is from personal experience within a VC firm. When I was an associate in VC, I practiced “reading the room” to try to get the sense for the enthusiasm for a company that presents to the partnership.

Some companies are obviously not a fit, and it’s fairly obvious.

But the majority of companies that get that far are pretty credible. And it’s amazing how hard it is to distinguish whether a partner is “ok, this is kind of interesting” or “I am very supportive of making this investment”.

The same is even true for individual interactions between VC’s and founders. It almost never benefits a VC to be direct about their lack of interest in a company, as long as it clears a minimal bar of credibility. It’s totally in an investor’s interest to “hang around the hoop”. So, feedback directly to the entrepreneur is usually one or two shades more positive than is the reality. Even for what might be a competitive deal, a VC’s incentives is to do what they can to “get the option to invest” and then pass later if they decide it’s not interesting. You can imagine what kinds of positive signals an investor would give to make sure he or she secures a spot in the running.

It’s pretty simple and obvious advice, but always discount an investor’s enthusiasm based on how excited they are about a meeting. I also never consider an investor as more than 50% likely to close until the term sheet is signed.

Side note: there is the rare investor that is very direct and blunt and passes in a fast, straightforward manner. It might sting, but I think entrepreneurs should totally appreciate that behavior (even if they disagree with the rationale). It’s the harder path and in the long run, is much more founder friendly.

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