Venture Capital Is A Product Founders Don’t Have to Buy

Phineas Barnes, partner at First Round Capital, spoke at the Northside Festival about how VCs could make life less painful for entrepreneurs.

When you are a startup founder looking for investors, it feels like you have a product that you are trying to sell. The weird thing about this relationship, according to Phineas Barnes, a partner at First Round Capital, is that it switches. First Round Capital is a seed-stage fund based in Philadelphia. Founded in 2004, it has had many successful investments in prominent companies, including Uber, Square and Warby Parker.

The switch comes at the moment when VC wants to invest, and the startup is no longer selling the VC on investing. The VC is selling the startup on letting the fund invest. Venture money isn’t just about money. It’s a product, Barnes argues, one that should come with partnership, support, connections and other added value. And once a startup gets one offer, its likely to get several. That’s what makes the entrepreneur a buyer, once the deal is on the table, according to Barnes.

Barnes wants to do something about that long, grinding wait to an offer where most founders live, however. Barnes said that he has been there, too. As one of the earliest employees at AND 1 and then a cofounder at ResponDesign, Barnes has had a lot of experience seeking investors, boiling years of work into a 30 minute presentation and waiting for a reply.

“One thing really bothered me about the experience of raising money, and it comes down to the user experience for founders,” Barnes said. He made his remarks at The Northside Innovation Festival in Williamsburg, Brooklyn, during a talk called “The UX of VC & Angel Investing.” In fact, Barnes got involved in investment because he believes he could have been a better entrepreneur if he had advice from an investor.

Phin Barnes at Northside Festival 2014.JPG

Once a founder manages to get a meeting with a VC, he or she usually has to sit back and wait for a long time to get any kind of answer. For a founder, Barnes said, time is wealth. The best outcome is a quick yes, but a close second is a quick no. Nevertheless, VCs often drag their feet, waiting for the market to show them something, waiting for the founder to prove something or waiting for some demonstrable proof of value. For the founder, this means time spent “keeping in touch.” Emails updating the fund, check-in calls, maybe even additional meetings. That all adds up for founders who never have enough time to do everything on their list.

Barnes wants every entrepreneur to have a better experience, even the startups he doesn’t fund. He explained that venture capital is a product, not a service. “As a product person, it really eats at you when you see a product is broken,” he said. He wants to find ways to make seeking venture capital less fraught, quicker and more helpful for founders. At this point, he’s still looking for ideas.

Photo credit: Brady Dale
Photo credit: Brady Dale

The chief lessons he has to offer those seeking funding now pertain to the moment when a founder gets an offer from a VC. Here are some of his big takeaways:

    • Founders as drivers. When a VC is ready to invest, their firm is telling a company that its equity is worth more than their money. In other words, the VC is on the sell side of the table. If a startup’s equity is worth more to them, it will be to other VCs as well. What that means is that each VC in it needs to bring more value to a deal than just an open checkbook.

 

    • Transparency. It’s easy to find out what a venture firm offers besides money. In fact, as Barnes points out, each time a firm innovates in improving its experience for firms (such as First Round’s journal and its dorm room fund), other VCs see it too and follow suit.

 

  • Demand better partners. As founders are on the sell side of the table, it is incumbent on Founders to expect more. For example, he pointed out that in a survey of founders, the top virtues sought in an investment partner were all soft skills, like friendliness and trustworthiness. Those ought to be table stakes, Barnes said. The fifth and sixth characteristics on the list were “Experienced” and “Influential.” Those should be at the top of the list because being supportive and collaborative are just assumed.

Barnes didn’t shy away from the tensions on his side of the table that reinforce the difficult experience of seeking money. He led off his talk by pointing out that, typically, of every 150 companies that pitch a VC, only one gets funding. From his perspective, he’s likely to only lead about two investments per year for First Round. At best, he’s looking at maybe 100 investments in his whole career. That’s not a lot of chances to secure the sort of wild success an investor hopes for.

However, he wanted to advise investors that as much as securing an investor might feel like winning the lottery, it’s important to remember that founders don’t have to put up with investors who expect too much without committing. Entrepreneurs always have the option to walk away.

Check out Barnes’s slides from his talk here:

Follow Barnes on his blog, Sneakerhead VC.

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