Why VCs in CPG Bully and Micro-manage and How to Prevent It
It’s no secret, I hope, that venture capitalists in any sector already know that most investments in their fund won’t generate a return. It’s the 10% or so that will that they count on. But which ones?
Well, that’s a mystery worthy of a psychic. They sure as hell have no clear idea. VCs tend to get very worried, though, when the fund clock is ticking down and sh*t is underperforming.
Now, if they are good pickers AND well networked, they should be able to wrangle appropriate advice to assist founders in a proper, measured way. But, I can’t even count the stories I hear from folks who find themselves suddenly getting 20 text messages a day, consultants imposed on them, etc., when, in the beginning, the investor seemed oh-so-chill.
Well, that’s because the fund was new, and everything still looked shiny. And they weren’t nervous yet. This behavior is not at all limited to ‘control’ investors either. Most VCs will only have a minority stake in your business anyways. This does not guarantee they will behave in front of a team new to the industry. Hardly.
The irony is that if you’re secretly one of the VCs’ darlings, they may very suddenly become the bullying micromanager who distracts you with consultants, agencies, etc. They believe can work wonders on a product line they have so much heart for. Some of this micro-managing may be polite, but it is still obnoxious. It’s the primary reason I don’t take investor referrals. I have NO desire to be part of this brow-beating process.
You have to find ways to know early on if you’re one of the ‘chosen’ because when the clock starts running down on the fund, they’re going to come to you to save their ass. Don’t say you weren’t warned.
One sign you are one of the chosen is the amount of time they spend right after signing term sheets. If you are simply a guess in their portfolio, they will not be very involved between Board meetings. In other words, there are usually early signals of the craziness to come basically right away.
Another sign is that they simply have overly confident opinions about your strategy that aren’t based on first answering questions appropriate to your stage of development. In other words, they have no idea how to evaluate or formulate a CPG growth strategy. They have a financial model with topline assumptions. Usually, hockey stick assumptions. Snore. Note: a hockey stick does NOT look like a Skate Ramp.
The primary reason that VCs in CPG are particularly prone to bullying or micromanaging (bullying without the yelling?) is that CPG brands’ failure rate is incredibly high, AND many of the VCs are now in the space simply don’t know what they are doing. They are rich. And they like mission-driven brands. Whatever those are. They generate ‘advice’ from reading and networking, not a disciplined study of the early-stage universe (an activity they have no ‘time’ for).
The reality is that you may indeed be making blunders, but it doesn’t mean that the VC is seeing those vs. simply having an attack of ADD-while-rich. The ability to write your team a check in the millions introduces a power asymmetry that can only be countered if you are similarly wealthy or if you have learned how to deal with rich assholes. The latter is one benefit of an Ivy-league education; I have to say. The one they don’t advertise.
You must be ready to deal with Mr. Hyde if you take on VC money.
It can be done, though.
Essentially, I feel, it is simply not worth it when less demanding angels and crowdfunding exist.
The key is to demonstrate, upfront and before you even sign term sheets, that they know you won’t be bullied into following advice from them. If you consistently send this tone AND give them regular updates on the business, you should not be targeted by them.
They will move to another company to manage their fund anxiety. It’s not that different from the playground. Don’t act submissive because they will remember and circle back when it’s time to find an investment they can control.