News

Look Backward, Angels

As Washington’s technology entrepreneurs
launch their second, third or even fourth
companies, something new has entered the mix.

The founders have reputations.

By Shannon Henry Washtech.com

It’s more than whether their earlier companies
failed or succeeded, outcomes that could have
had to do with the market, the moment or the
financiers as much as the management team.

But now, since the region has a longer history of
venture-backed new companies, it’s also known
how the entrepreneur handled the experience,
whether with grace and intelligence, or with a
stab in the back.

Few start-up executives are still blank slates,
without experience or contacts. And a person’s
true nature often will reveal itself in the toughest
of times.

As venture capitalists scan new deals now, they
are also checking with all the entrepreneurs’
previous funders, those people who most
intimately know the companies’ stories.

"It’s the background check," says Mike
Lincoln, a lawyer with Cooley Godward who
works primarily with new technology companies.
"Everybody’s doing it now."

VCs have always done company investigations
as part of their due diligence, but now there’s
much information out there that didn’t exist a few
years ago. And a lot of that history occurred
during a period of great friction between
entrepreneurs and money people. People in the
community have grown to know one another quite well since the tech bust of 2000, for better or worse.
Venture capitalists are talking to a founder’s former investors, lawyers, board members — the whole
network. Their homework is easier.

"Entrepreneurs should know those are the first people we call," says Suzanne King of venture capital firm
New Enterprise Associates, referring to the previous investors. "If they significantly burned bridges, then
that’s a problem."

If the company went bust, she wants to know how the managers handled the failure. King won’t name
names, but she says one of the worst situations was when a company had to be shut down and the chief
executive simply handed "the keys" to NEA and walked away rather than deal with the situation.

Some entrepreneurs actually leave a venture capital firm or two off their company descriptions as they look
for new funding, the way a job seeker might omit that one employment nightmare he’d like to forget.

King says everyone knows who all the funders were, and a missing name makes her much more likely to
check out that particular one.

She says it’s also a "big red flag" if funders of an entrepreneur’s first company aren’t interested in his
second enterprise. At NEA, she says, if they like an entrepreneur, they’ll try to keep him in the family,
even before there’s a new idea. Favorites often become "entrepreneurs in residence" who hang out at the
venture firm until the next company or concept comes along.

Perhaps most of all, the funders want to know whether the executives listen to advice.

In VC-speak that’s referred to by the term "coachable," meaning the founders aren’t so set in their ways
that they won’t pay any attention to input from the money people, which often includes a suggestion that
the chief executive be replaced. It would be easier, of course, if the funders didn’t have to go through the
unpalatable task of kicking out the founder and bringing in a hired gun. That will be unavoidable in many
cases, but why not cut down on the churn? Some founders definitely step aside more smoothly than
others.

As this heightened intelligence gathering continues, some entrepreneurs will be helped by their past, just
like those job seekers with good references on their résumés. Their previous funders will say good things
about them and open their wallets once more.

But then there will be others who won’t get money again, at least not this time around. It’s hard to tell how
long this phase will last. Lincoln asks: "Do people move on or do you get banished from the club, the
community?"

King says entrepreneurs shouldn’t be terrified that one bad relationship will doom them.

"There are some VCs that are hard to deal with, too," she says.

In flush times, those relationships were easier. But when things get tough, founders are often surprised
that the venture capitalist pinpoints them as the problem, fairly or not. Many feel beat up, stripped of their
creations and misunderstood.

Right now, VCs have the buyer’s advantage in that it’s tough to get funding. But there are also executives
from several new start-ups who say they’ll never again go the venture capital route.

Elie Ashery, co-founder of Newsletters.com, which was absorbed into another company in 2000, says
venture capitalists strung the Newsletters team along, changed some of the terms of the investment on a
whim and canceled deals at the last moment.

Ashery is now at another start-up and plans to launch another company of his own. But this time, things
will be different.

"I’m positioning myself to not have to take VC," he says. "For me to take money from a VC there would
have to be some serious camaraderie involved." He says he’d be sure to do background checking of his
own.

Many companies, after all, shouldn’t be venture-backed, even if they are fine businesses. They would do
better to grow through old-fashioned customer revenue and bank loans. Ashery says that his old company,
for one, should have never received institutional funding but that people were throwing money at it in that
crazy time.

"Was my experience good? No," says Ashery. "But I’m still back in the game." And that experience
amounted to "a multimillion-dollar MBA."

Shannon Henry’s e-mail address is [email protected].

http://www.washingtonpost.com/wp-dyn/articles/A14377-2002Feb27.html

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