It’s Just Better If Your VCs All Trust Each Other

I’ve been investing just long enough — since 2013 — to see some higher-level patterns emerge.  In the end, the best founders with even a hint of traction end up winning.  I’ve seen that now across 5 unicorns.  They find a way.

But … it sure helps if you make it easier on yourself.  If you make fewer unforced errors, in particular.

And one potential unforced error founders tend not to see is picking VCs that don’t trust each other … when they don’t have to.

What happens when you have multiple VCs that don’t trust each other?

Let’s make a list:

• Murky, non-aligned position on the next round.  When your VCs know and trust each other, they come to alignment on the next round, and what it takes to support it, and what it takes to bridge you if you need a bridge.  When your VCs don’t trust each other, you never see alignment unless you are a rocketship.  This just makes it harder to close the next round.  You want everyone on your cap table to be your champions.  It’s just harder when trust isn’t there.
• Murky, conflicting positions on burn rate strategy.  This one can be subtly dangerous, when one large VCs pushes you to burn a lot, while others are wary of that strategy until you truly have an engine.
• Much harder to get a bridge round done.  Bridge rounds take trust all around.  If your VCs don’t trust each other, it’s hard to really get a bridge done.  And if it does get done, it’s a lot harder and takes longer.  More here.
• Lots of cap table games. When VCs don’t trust each other, they become much more just out for themselves.  They go and try to buy shares from ex-employees without telling anyone.  They offer to buy others out at very low prices, again, without telling anyone.  This stuff isn’t always the end of the world.  But it’s distracting and further divides trust.  And I’ve seen it lead to lawsuits.  Trust me, any lawsuit is a distraction.
• Misalignment on the CEO.  When VCs don’t trust each other, I often see a blame game vis-a-vis the CEO in tougher times.  Bigger funds often talk more about replacing the CEO when they aren’t aligned with earlier investors.  When they are aligned, and the earlier investors are supportive of the CEO, there’s rarely a discussion of replacing the CEO in tougher times.
• Misalignment on any board and investor-level drama in general.  When your board and investors don’t trust each other, they don’t talk.  They don’t talk between board meetings — or otherwise.  That means whatever issues come up are never socialized and de-escalated amount your investors.  By contrast, when the investors trust each other, issues just don’t seem as big of a deal when you talk them through.  After all, most of them you’ve seen before.

The bottom line is if your VCs don’t talk and don’t trust each other, so many strategic things around the team and fundraising are just harder than they have to be.

So what can you do to improve trust?  A few ideas:

• At least meet with later-stage VCs that your earlier-stage VCs recommend.  You don’t have to take their money.  But at least meet with VCs that your earlier stage VCs recommend.  VCs tend to mainly recommend later-stage VCs they trust.  If they also end up being your top choice, that’s a win-win.
• Just be wary of “sharp elbow” rounds that are done completely excluding existing investors.  There are times this is OK, but it immediately starts you off with broken trust among your syndicate.  Making room for pro-rata and existing investors in a full round is a complex topic.  But rounds that 100% exclude all existing investors start everything off on the wrong foot.  There’s never a reason to 100% exclude existing investors.  At least understand that as a trade-off if you take a term sheet that does so.  Your investors will never be friends after that.  Ever.
• Be wary of VCs that never even talked to the last round investor pre-term sheet.  This is a subtle but important sign I’ve found of conflict to come.  VCs that want to be part of a team almost always reach out to the earlier stage investors before they invest, at least as a courtesy, and sometimes, to help win a win, and sometimes, to do further diligence.  VCs that aren’t team players often don’t bother.  I’ve always seen things go worse when a VC invests in a later round without talking to the earlier key investors.  Always.  It’s a flag.
• Have more, or even all, your investors come to your board meetings.  It can be tempting to just have your #1 largest investor come to your board meetings.  But that doesn’t really help you.  Invite more of your investors, not fewer to your board meetings in the early days.  It’s fine if they aren’t on the board.  Just call them “investor meetings” instead.

At the end of the day, pick the best investor you can at each stage.  Your VCs don’t have to be friends for you to win.

But trust me.  It’s far easier if the family all gets along.  And they’ll get along best when they trust each other.  Start off without that trust, and you never really get it later.  And your life is just … harder as a CEO than it might have to be.