Crypto Law Insider is the leading legal authority for entrepreneurs and investors in the cryptocurrency and blockchain ecosystem.
Your crypto startup has made some moves in the industry but you’re running out of runway. Fast.
It’s that dreaded moment: Time to seek out venture capital.
Well, here’s a hilariously accurate example to prepare you for the experience…
Sometimes you pitch a great idea to VCs and they just don’t understand anything you’re saying.
Don’t worry. It’s not you. It’s them.
Don’t get me wrong. I really like VCs. Really. And not just the ones I’m related to!
VCs are almost always smart, well educated and have incredible pedigrees. Some even work hard to understand what you’re selling and genuinely want to see you succeed. And let’s be honest, VCs are essentially the lifeline for start-ups.
But some VCs are like sharks. They smell blood in the water (i.e., your need for money) and they attack.
However, thanks to fifteen plus years in the business (you stop counting at a certain age) and having witnessed hundreds of VC pitches, it’s easy for me to spot a VC shark a mile away. As an Insider it’s likely you’ll want to be prepared to know what you’re dealing with.
Read on to learn the five signs you’re dealing with a VC shark.
1. Ridiculously below-FMV valuations
If a VC insists your business is worth $X, when others in the business have told you it’s worth significantly more, you’re dealing with an obvious VC shark.
They’re trying to maximize their ownership in your company for the least amount of money possible. That’s the game, isn’t it?
Considering that, don’t automatically trust VCs when they tell you what the ‘fair market value’ for your company is. Remember, VCs have a strong financial incentive to undervalue your project. Expect this. But avoid a debate on the topic since it’s one you’ll likely lose. They’re the valuation experts, not you, and if you let them they’ll spend all day talking about your bad CAC ratios. Instead, just tell them you’re going to let the market decide valuation. Nothing irks a VC shark like the thought of competition.
2. They justify their below-FMV valuation because they bring ‘so much to the table’
VC pitches always end the same way.
The last 10 minutes are reserved for the VC to feed you their lines about how they’re the “experts” in your industry, about their “methodology”, their fund, their “incredible managing directors,” their previous success in your industry, their rolodex of contacts and why they add so much value above and beyond the money they contribute.
Okay, that’s fair. I’d want to know that stuff too. But if the VC has the audacity to justify its below-FMV valuation based on its “value add” then don’t just walk away, run.
In my experience, besides contributing funds, VCs don’t add nearly as much value as they’d like you to think. Some VCs can be helpful, but most fall well below that threshold.
Yes, they have contacts. Yes, the VC managing director had incredible prior business success. But their contacts and industry experience usually don’t translate into anything more than a few introductions here and there. Don’t overvalue the “value add” promises of VCs.
3. They disrupt founder cohesion
VC sharks are savvy and can tell which of the co-founders is easy prey. It’s not uncommon for a VC shark to pull one of the co-founders aside as say:
“You get it. But your co-founders clearly don’t.”
If the VC disrupts founder cohesion by pulling one co-founder to the side and suggesting that the others don’t add value, that’s a big red flag.
Sure, there are times when the founding team doesn’t make sense. Certain founders can be so married to their vision that they might not be able to see the big picture and it prevents the company from scaling up.
These things happen.
But usually, the VC shark pulls the co-founder it thinks it can control to the side. If you get pulled aside and are told you’re “special”…run! Disrupting founder cohesion can cause a profound ripple effect. It disrupts the entire vision, operations and trajectory for the company.
4. They talk smack about other VCs
If the VC you’re talking to tries to sully the names of other VCs you’re talking to, it’s a guaranteed sign you’re dealing with a VC shark.
I recently had a VC tell me to “be careful” about adding another extremely prestigious VC fund to a client’s cap table because of dubious tales about partners leaving a “sinking ship.”
It reminded me of an immature high schooler bad mouthing the competition in hopes of landing a date to prom. Just imagine accepting capital from a VC with that kind of mentality and then attempting to establish a trustworthy, healthy, working relationship with them?
Reputable VCs don’t need to bad mouth their competition. If you start to hear this nonsense run the other way.
5. They say you have to move to the Valley
If a VC tells you the only place to establish your headquarters is in their city, think twice. Yes SF and NY are good locations, but they’re also prohibitively expensive.
These days there are a number of metro areas with skilled workforces and the established infrastructure to support your company’s growth. Think Austin, Miami, Las Vegas, Denver and LA.
Each one of these cities can give you access to nearly the same talent at a fraction of the cost. In today’s world, having distributed teams is commonplace. And strategic. Any VC who says you ‘need’ to be anywhere is out of touch and wants you nearby so they can keep tabs on what you’re doing.
What does this mean for Crypto Law Insiders?
There’s a lot of positive information to learn from VCs. That’s why their value-add proposition is so convincing. When you meet a VC they will understand your industry and they’ll know all of the right people to help your company grow.
But Insiders need to be aware that VCs are trained to be sharks. They see themselves as the apex predators in the start-up ecosystem, so don’t be surprised when they try to act according to their best interests. So work with VCs, but watch for these signs to know when their treating you like a baby seal.
It’s their nature to use their professional knowledge of the market to dominate. It’s your job to swim with caution and spot the self-motivated BS.
Dean Steinbeck is the Managing Director of Crypto Law Insider, the leading legal authority for entrepreneurs and investors in the cryptocurrency and blockchain ecosystem.
Dean is a US corporate lawyer with a focus on data privacy and technology. With over 15 years of experience representing VC-backed software development companies, Dean has found himself at the center of multiple blockchain projects and is currently recognized as one of the top attorneys in the cryptocurrency space.
Dean currently serves as General Counsel for Horizen (formerly ZenCash), a privacy-oriented cryptocurrency and cutting-edge blockchain platform. Prior to Horizen, Dean was General Counsel at TigerConnect, the leading communication platform in the US healthcare market. His experience gives him an in-depth knowledge of the legal intricacies within blockchain technology, data privacy, intellectual property, venture capital funding and regulatory compliance. Click here to learn more about Crypto Law Insider.