{"id":1699,"date":"2013-01-10T01:00:09","date_gmt":"2013-01-10T09:00:09","guid":{"rendered":"https:\/\/masonmyers.com\/?p=1699"},"modified":"2015-01-28T12:58:42","modified_gmt":"2015-01-28T20:58:42","slug":"founder-vc-misalignment-conflict","status":"publish","type":"post","link":"https:\/\/masonmyers.com\/founder-vc-misalignment-conflict\/","title":{"rendered":"Founder & VC Misalignment More Often Than Thought"},"content":{"rendered":"

The misalignment between vc’s and founders is painfully obvious from the\u00a0quotes below from the IPO\u00a0S-1 filing of Applied Medical Corp. (Dan Primack of Fortune<\/em> did the reporting and should get the credit).\u00a0 First is the company stating why they are going public (bold emphasis mine).\u00a0 Second is the venture capital firm’s response.\"Founders<\/a><\/p>\n

“Institutional Venture Partners IV, L.P. is compelling us to register the shares<\/strong> of Class A common stock offered hereby by exercising demand registration rights. While we intend to comply with our obligations under the Master Rights Agreement, our board of directors and executive officers believe that filing the registration statement of which this prospectus is a part and effecting an initial public offering of our Class A common stock are not in the best interests of Applied<\/strong>.”<\/em><\/p>\n

Response from vc Institutional Venture Partners (a very good venture capital firm):\u00a0 “We invested in Applied Medical Corporation twenty-four years ago, when it was a start-up enterprise, and we led the follow-on financing twenty years ago.\u00a0. . . . . . <\/em>The problem we have is that IVP IV was supposed to be a ten-year fund, which is standard in the venture capital industry, so twenty-four years is a long time to try to keep maintaining a fund that was supposed to last for ten years.”<\/em><\/p>\n

This example perfectly states one potential misalignment between venture capitalists and founders — the time scale of their involvement in the company.\u00a0 By definition, most professional investment funds\u00a0 have 10-year funds (my investment fund Greybull Stewardship <\/a>is a clear exception) and this drives all their thinking about when to invest, how fast to grow, and when to exit.\u00a0 This is perfect for\u00a0certain types of high-growth companies that require relatively little capital and have their strategy tuned up.\u00a0 However, most companies do not fit the formula and\u00a0would be much better off trying to not fit into the box.\u00a0\u00a0This can actually be harmful to the company if the successful strategy of the company pre-investment did not have perfect 20% per year growth rates, expanding EBITDA margins, and clocklike predictability. \u00a0If that does not describe your company, you should consider different options.<\/p>\n

Other Dimensions of Potential Founder VC Misalignment<\/h3>\n

There are some other dimensions where venture capitalists and traditional private equity are not necessarily aligned with most companies in America.\u00a0 Some other dimensions are:<\/p>\n