One of the biggest mistakes entrepreneurs make is not understanding the relationship they have with their investors. At times they confuse VCs with their friends.
Let’s Go to Lunch
At Rocket Science our video game company was struggling. Hubris, bad CEO decisions (mine) and a fundamental lack of understanding that we were in a “hits-based” entertainment business not in a Silicon Valley technology company were slowly killing us.
One day I got a call from my two investors, “Hey Steve, we’re both going to be up in San Francisco, lets grab lunch.” I liked my two investors. I’d known them for years, they were smart, trying to figure out the video game market with me, (in hindsight a business that none of us knew anything about and shouldn’t have been in,) coached me when needed, etc. Our board meetings were collegial and often fun.
We were just about to have a board meeting in another week to talk about raising another round of financing to keep our struggling disaster afloat. I had assumed that my VCs were behind me. Thinking we were having a social call, I was completely unprepared for the discussion. (Lesson – never take a VC meeting without knowing the agenda.)
“Steve, we thought we’d tell you this before the board meeting, but both our firms are going to pass on leading your next round.” I was speechless. I felt like I had just been kicked in the gut and stabbed in the back These were my lead investors. It was the ultimate vote of no confidence. If they passed the odds of anyone in the entire country funding us was zero.
I knew they had been questioning our ability to stay afloat as a company in the board meetings so this wasn’t a complete surprise but I would have expected some offer a bridge loan or some sign of support. (I finally got them to agree if I could find someone else to lead the round they would put in a token amount to say they were still supportive.)
“Is this about me as the CEO?” I asked. “I’ll resign if you guys think you can hire someone else you want to back.” They looked a bit sheepish and replied, “No it’s not you. You should stay and run the company. However, we realized that we’ve backed a business we don’t know much about, the company is a money sink and both our firms have no stomach for this industry.”
“But I thought you guys were my friends?!” You’re supposed to support me!! I said out of utter frustration.
VCs Are Not Your Friends
I had just gotten a very expensive reminder. I liked my board members. They liked me. But while I was just seeing a single board member, I was just one of twenty companies in
Author: Steve Blank
A prolific educator, thought leader and writer on Customer Development for Startups, Steve Blank is a retired serial entrepreneur who teaches, refines, writes and blogs on “Customer Development,” a rigorous methodology he developed to bring the “scientific method” to the typically chaotic, seemingly disorganized startup process. Now teaching entrepreneurship at three major universities, Blank co-founded his first of eight startups after several years repairing fighter plane electronics in Thailand during the Vietnam War, followed by several years of defense electronics work for U.S. intelligence agencies in “undisclosed locations.” Four Steps to the Epiphany, Blank’s fast-selling book, details the Customer Development process and is increasingly a “must read” among entrepreneurs, investors, and established companies alike, when the focus is optimizing a startup’s chances for scalability and success.
After 21 years driving 8 high technology startups, today Steve teaches entrepreneurship to both undergraduate and graduate students at U.C. Berkeley’s Haas School of Business, Stanford University’s School of Engineering and the Columbia/Berkeley Joint Executive MBA program. His “Customer Development” teaching and writing coalesce and codify his experiences and observations of entrepreneurs in action, including his own and those he advises. “Once removed from the day-to-day intensity of founding a startup, I was able to observe a pattern that distinguishes successful startups from failures,” Blank says. In 2009, he earned the Stanford University Undergraduate Teaching Award in Management Science and Engineering. The San Jose Mercury News listed him as one of the 10 Influencers in Silicon Valley. In 2010, he was earned the Earl F. Cheit Outstanding Teaching Award at U.C. Berkeley Haas School of Business. Despite these accolades, Steve says he might well have been voted “least likely to succeed” in his New York City high school class.
Steve Blank arrived in Silicon Valley in 1978, as boom times began. His early startups include two semiconductor companies, Zilog and MIPS Computers; Convergent Technologies; a consulting stint for Pixar; a supercomputer firm, Ardent; peripheral supplier, SuperMac; a military intelligence systems supplier, ESL; Rocket Science Games. Steve co-founded startup number eight, E.piphany, in his living room in 1996. In sum: two significant implosions, one massive “dot-com bubble” home run, several “base hits,” and immense learning leading to The Four Steps.
An avid reader in history, technology, and entrepreneurship who seldom cracks a novel, Steve has followed his curiosity about why entrepreneurship blossomed in Silicon Valley while stillborn elsewhere. It has made him an unofficial expert and frequent speaker on “The Secret History of Silicon Valley.”
Steve’s interest in combining conservation with best business practices had Governor Arnold Schwarzenegger appoint him a Commissioner of the California Coastal Commission, the public body which regulates land use and public access on the California coast. He also serves on the Expert Advisory Panel for the California Ocean Protection Council. Steve serves on the board of Audubon California, was its past chair, and spent several years on the Audubon National Board. A board member of Peninsula Open Space Land Trust (POST), Blank recently became a trustee of U.C. Santa Cruz and a Director of the California League of Conservation Voters (CLCV). Steve’s proudest startups are daughters Katie and Sara, co-developed with wife Alison Elliott. The Blanks live in Silicon Valley.
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