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Building trust to bridge gaps in venture capital

It has been something like tradition in the startup community that entrepreneurs should see the interests of venture capital as being at odds with their own. Rightly or wrongly, tradition is hard to overcome, and the perspective largely prevails. It is undoubtedly for this reason that VCs have been as attentive as they have been to public relations – to blogs, commentaries, and conferences – in which coziness and warmth are recurring themes. Cutting to the essence of favored subjects – the virtues of small rounds, long-term commitment to the founder, strategic value added over time, flexibility, all these and many others – the topic is always fundamentally the same: the entrepreneur’s happiness with a financial partner who is ideal. But as laudable as such demonstrations of love may be, the discourse evades a more important point to which entrepreneurs should be highly tuned in, and which will ultimately prove much more meaningful than romance. We should be mindful of the fact that the exit environment has changed, perhaps permanently, and venture returns have plummeted. The venture business, as a result, will probably need to change, and it is important for entrepreneurs to understand this and reset their expectations… and maybe also their business models.

A recent Wall Street Journal profile piece on venture capital drives this point home. The sensational headline notwithstanding, the article presents a sobering and realistic overview of a sector that is severely ailing. This is an unfortunate and dangerous condition, more so perhaps than many realize, because an economy in which jobs are lost is an economy in which entrepreneurship rises to greater prominence. Entrepreneurship is important in any economy, leading as it does to invention and the creation of small businesses, but especially so when starting a new platform is not only an inspired moment but a necessity. In order to blossom, entrepreneurship requires venture capital to blossom with it… and the traditional adversity won’t do at all. In this, the PR-minded VCs are absolutely right.

But the mode of operation – the communiqué - to my mind, is off. To bridge the gap between entrepreneurs and venture capitalists, to bridge any gap between disparate sides that don’t quite trust one another, what is most essential is to build trust. The best way to do so is with honesty and frankness. A good start along this path would be more in-depth discussion of venture realities and challenges. Much of the commentary I’ve noticed is focused instead on the VC’s appreciation for those of the entrepreneur. (That’s nice, but a little condescending, no? Coming from a segment that according to the Wall Street Journal is on the verge of extinction?) Sifting through standard venture capital commentary, one could easily believe that the only change in circumstance since late 2008 (i.e., the time of the “Sequoia Slides“) is that start-up costs have diminished… which, of course, is true. But there have been other changes to be sure, such as the virtually evaporated IPO alternative, the diminishing price tag of M&A, the continuing maturation of tech opportunities, the shrinking venture capital universe itself… to name the top few.

All this, however, is at best glossed over, giving rise to at least two undesirable outcomes. One is that some of the savvier entrepreneurs will wonder about the incomplete picture as the credibility gap remains unbridged. The other is an entrepreneurial segment that, unaware of (or choosing to disbelieve) venture capital’s constraints from the outset, feels slighted when outcomes don’t happen the expected way. And thus the tradition of adversity continues. Thus it could continue forever. 

Disclosure: No positions.