With Brion Shimamoto, Dynamic Silicon
I first encountered venture capitalists (VCs) in 1987. Despite a bad start, I caught the start-up bug. In the years since, I have worked with more than 30 start-ups as founder, advisor, engineer, executive, and board member. It's a lot more than that if you count all the times I've tried to help "nerd" friends (engineers) connect with the "rich guys" (VCs). Naturally, I've formed opinions along the way. Many books and articles eulogize VCs. But here I want to present an engineer's view of VCs. It may sound like I'm maligning VCs. That's not my intent. And I'm not trying to change human nature. VCs know how to deal with engineers, but engineers don't know how to deal with VCs. VCs take advantage of this situation to maximize the return for the venture fund's investors. Engineers are getting short-changed.
Fortunately, engineers are trained problem-solvers--I want to harness that power. Engineers, armed with better information about how VCs operate, can work for more equitable solutions. I'm not offering detailed solutions--that would be a book. Rather, this is a wake-up call for engineers.
My first experience with VCs was as an engineer starting a microprocessor-design company; VCs were the gods of money. The other founders and I told the VCs what we thought we could do and how long it would take. We believed it; they believed it; we were all naive. I had designed two microprocessors, had written a textbook on the topic, and had taught at a well-known university. They thought I knew what I was talking about. We landed money from premiere firms on Sand Hill Road in Palo Alto, Calif. We told them a year; it took something like seven years and it took major changes in strategy to get there.
I wasn't the CEO; I hired and managed the engineering teams that eventually reached the goal. I wasn't there for the finish. I had a run-in with the other founders, including the CEO, over how to manage engineers. It was micromanagement versus laissez faire. (Their attitude: "Turn your back on them and they'll sit on their hands." My attitude: "Turn these particular engineers loose and they'll work themselves to physical ruin.") We were in danger of losing good engineers to morale problems. I suggested to the board that firing all of the founders, including me, might solve the problem. A new team might manage more consistently.
The board member from our largest VC firm invited me to his house in Woodside for a chat about the morale problems. Acres, opulence, wealth. We sat in leather chairs on a black marble floor. Behind him, through the glass wall, I saw major excavation and construction work going on up the hillside. "It's too bad someone is building a resort hotel so close to your house," I said. "That's my new house," he said. "This one will be torn down when that one's finished."
We talked about the situation at the start-up. I outlined my concerns. I handed him a list of names. "Here's contact information for some of the project engineers. The first four will tell you what I have told you. The fifth will say the following things...." To his credit, he interviewed the engineers. Also to his credit, he called to tell me the result. "Everything you said is as you said it was." I felt relief. I had struggled with a deteriorating situation for a year and a half.
We agreed on the problem; we agreed on the circumstances--a solution was on the way. They told me: "We think you should resign." I left; the problems didn't.
Guide to venture capitalists
The VC connects wealthy investors to nerds. There are few alternatives. You can self-fund by consulting and by setting aside money for your venture. That doesn't work. You could go to friends and family, but that risks friendships. You could find "angel" investors, but that only delays going to VCs.
The VC community is a closed one. It caters to a restricted audience. In fact, you don't get to meet a VC unless you have a personal introduction. Don't send them your business plan unless the VC has personally requested it.
VCs don't sign nondisclosure agreements.
That affords them protection if they like your ideas, but they want to fund someone else to do them. At least two of my friends have had their ideas stolen and funded separately. One case was blatant theft--sections of the original business plan were crudely copied and taped into the VC-sponsored plan. My friend sued and won a moral victory and a little money. The start-up based on the stolen idea went public and made lots of money for that start-up's VCs. Most entrepreneurs don't have the time, the means, or the proof to sue. In the second case, venture firm D sent its expert several times for additional "due diligence" regarding the possible investment. My friend got funding elsewhere, but D funded its expert with the same ideas.