Nuno Gonçalves Pedro

Introduction

Welcome to episode 81 of Tech DECIPHERED. In this episode, we’re going to provide you with the VC to English Dictionary, the things that VCs do and say, and what they actually mean to you if you’re a founder when you’re talking to these different venture capitalists. You may hear, “You’re too early for us.” “We have doubts on your market.” What does that actually mean? What is real, what is bullshit, and everything in between.

Today, we’ll go through not only the dictionary, but also the machinery of how VCs process these deals. We will take a little bit of a stab on what actual founders say as well, because it’s good to be equitable in this sense. Then we’ll talk about the courtship. We’ll talk about war stories when actual translation fails miserably post-investment, the narrative economy.

Finally, we’ll provide you with a little bit of a decoder ring or a confession booth, so to speak, that we can actually share, myself and Bertrand, on what we see in the market or things that we’ve done, things that we’ve seen being done, and all of the above. Bertrand, oh my God. If you got $5 for every pass you ever got, you’d be rich. Actually, you maybe not because you didn’t probably have as many passes as most entrepreneurs in general.

Bertrand Schmitt

I will argue on top of it, it’s not just that it’s always difficult to understand how VCs speak and to translate that into normal English. But on top of it, if you are a European or Asian entrepreneur, it may be even more difficult because you have truly a language barrier. On top of it, you will have to get a sense from euphemisms used in the US.

As you said, definitely a lot of rejections. It happens to all of us. I think personally, I don’t mind the rejections. What I probably like less is when you get ghosted. As an entrepreneur, you have no news. Some have the belief maybe that it’s better to ghost us than to reject. I would probably say I don’t think so as an entrepreneur. I prefer a rejection, even if it feels a bit bullshit. I prefer clearly a why.

One thing I’ve learned is that actually sometimes it can be real in the sense that if you correct, if you come back at a later stage, some investors are actually changing their mind. As they say they might do. I’m coming from a relatively positive perspective on some of this.

Nuno Gonçalves Pedro

The Dictionary

Maybe this is a good time to start the dictionary section and start with ghosting. Ghosting is probably the most used non-word in venture capital, which is VCs stop answering your emails. You thought you were talking to them. You’ve gone maybe even to a partner meeting at some point, and they don’t say anything back.

We don’t do that. If we do, you guys should call us out, whoever ghosts Chamaeleon, and then you don’t actually get an answer, be it to pass or something else. That’s one of the things we’re proud of trying to sustain over time, and we process a lot of deals, so it has a bit of a cost for us.

But the way to understand a ghosting piece is basically saying, “Hey, we’re not really sure,” or, “We’re actually sure we don’t want to invest, but we don’t want to create a bad relationship with you.” Normally, it falls into one of those two sides.

It’s either, “We’re not sure right now, we want to wait and see how your round goes, and maybe we’re not a lead investor, so we don’t want to necessarily build high conviction until we see other players coming on board,” or, “We are negative about it, and we just don’t want to tell you because we want to make friends.”

This is one thing that we will get through the entire episode is this notion that VCs are in a sales business as well. Obviously, definitely in a sales business with their investors, with their limited partners that give them capital to manage funds on their behalf. But more importantly, they’re also a little bit in the sales business with entrepreneurs, in the sense that it’s a repeat business.

An entrepreneur might do a stupid company today, but might be doing a great company tomorrow. I don’t want to have pissed off that entrepreneur that did the stupid company in the past. I want to actually invest in this great company today. There’s a little bit of this notion of optional value that will go throughout this whole episode.

That’s, I think, what leads to this language that creates this necessity for translation, which is almost like a sales process in general. It’s like the entrepreneur trying to sell the VC on something, and then the VC at some point may be trying to sell the entrepreneur on something.

Bertrand Schmitt

I would say it’s not just repeat entrepreneurs. What I’ve seen also in the past, and I guess what many VCs have seen, is that once in a while, they make a pretty grave mistake on the business, on their evaluation, and suddenly something they could have said no becomes a rocket ship, and you would look like an idiot.

The rocket ship might be simply because the business was much stronger than they thought, because there is a change in the market environment. Let’s not forget COVID or the rise of AI. Then suddenly you’re in that situation where you give some strong deep explanation about why, and everything falls flat on its face, and the business is suddenly a rocket. I guess you also want to be careful in that situation as an investor, not to have been too strong in your opinion. I guess this is also a situation where the entrepreneur is really strong.

Nuno Gonçalves Pedro

We’ll talk in the second section about the machinery of venture capital, the funnel management of venture capital, and we’ll talk a little bit more about false positives, false negatives. The industry, that’s the key thing that the industry lives on, false positives and false negatives. We’ll go into a little bit more detail. Maybe going into the next category. Ghosting is one.

The second category is more around what people would consider stage or price passing, which is to say the classic ones are, “You’re too early for us,” or, “You’re too late for us.” I think the too early for us is generally one, for example, a lot of people come to us, we’re a Series Seed, Series A investor, and they come to us when they have an idea, and they’re starting to develop some stuff, but they have nothing.

We’re not a pre-seed investor, so too early for us actually is something we use quite a bit, which is warranted. Stage mandates are real. Our focus showing that we don’t have style drift as an investor, that we are really always investing in seed and A is meaningful to us. We can’t just say, “Hey, we’re just going to write pre-seed checks left and right.” We can write pre-seed checks, but it’s the exception, not the rule.

When we say it’s too early for us, it’s normally too early for us. It might be too early for us for that opportunity, for that market, for that kind of team. It might be BS. It might be basically the VC firm saying, “Hey, we’re not convinced, but we’d like the free option to see how you progress on your fundraising, or how you progress as a company. Come and talk to us later.”

If you fail miserably, and you don’t do very well, great. We were right. This would have been a false positive for you, if you decided to invest. Otherwise, if you become a rocket ship, we’d still have the right to talk to you because we haven’t really aggressively passed. These stage passes, that too early or too late, are never super aggressive. They’re never perceived very personally by the founders.

It’s never about their baby or themselves. It’s more about the stage and the thesis of the VC firm. It’s a little bit of a cop-out for certain VCs on saying, “Hey, we’re just not stage aligned with this.” “Too late,” it’s a little bit like, or, “Your price is too high.” “It’s too late for us,” meaning you’re raising too much capital, therefore your valuation is too high.

Again, it could be very true. It could be that, again, from a stage perspective, if you’re a Series Seed, Series A-focused VC, which the classic VCs are in many cases focused on seed and A, and this looks a bit like a Series B or a Series C, you’re raising 50 million or something like that at 250, 300 million valuation. It just doesn’t make sense.

Again, the cop-out, the translation element of this when it’s a bit of BS is, “At this price, you would have needed to attain more product-market fit,” is the other way to translate. “It’s too late for us,” if you are meeting a firm that you think could actually invest at that valuation. They’re probably telling you, “We don’t think you’ve achieved enough to justify your valuation at this moment in time.”

Bertrand Schmitt

I would say as an entrepreneur, something I’ve been always careful reaching out to investors is making sure these investors are doing the type of deals that I’m looking for. You can check pretty easily on their website and stuff, what’s their mission, what’s their goals, the type of partners they have, the type of portfolio they have, the stage they announced, or they invested at.

You should be able to get a good sense if you are going to talk to a Series A, Series B, Series C, pre-seed type of VC. Sometimes some VCs are able to do different stage of growth. They might even have separate teams for different stage of growth. I think you should do your analysis because if you go out and there is a clear mismatch, you are just wasting everybody’s time.

I think it’s fine if a VC might be a small stretch in the sense that it might indeed be too early. One thing that I found that works very well is to reach out a second time at the next round so that you have built a personal relationship, you are able to show proof of delivery per plan, so they were able to check how much you bullshitted in the previous plan. That can build a lot of trust, actually.

My advice would be going there when it’s too late. I’m not sure it makes sense, but even if it’s a bit too early, it could make sense. If it’s clearly too early, there is no sense. Say, C, D type of fund, and you are clearly at Series A, there is no point.

A fund that does Series B, and sometimes Series A, I think can make a lot of sense if you are looking for a Series A because your time won’t be wasted. You build a relationship, you build some proof points that when you have a plan, you intend to deliver on that plan, and that can be great for the next round.

Nuno Gonçalves Pedro

Funnily enough, and this is a little bit of a tidbit on us, I think I’ve mentioned in previous recordings, but we at Chamaeleon have a platform called Mantis, and we share it with our portfolio companies. After we invest, we share it with our portfolio companies. The single most loved feature on Mantis by our portfolio companies is the ability to search through investors and who has been the most active in my space for this size of check, lead or no lead.

They have that tool available to them, which obviously saves them weeks of work, even with AI. They can just do it in a couple of seconds. The results are always surprising, even to us. That’s why we developed the tool in the first place, just to figure out who could be a next lead for this specific company, etc. It’s not who you think it is. Sometimes the most active funds are not obvious, and the most active investors are not obvious, which is quite interesting.

Maybe moving to a next category of dictionary translation. There are so-called conviction passes. “We have significant questions around your product-market fit, doubts on market sizing, market growth. We need to see more on any function.” It could be go-to-market, sales, marketing, whatever. “We need to see more traction,” which is, by the way, similar to the product-market fit point before.

It depends. It depends on what people are telling you and why, and you will have a little bit of background around it. It could be actually true. In our case, when we give feedback on market, on product-market fit, on go-to-market, like we don’t see enough traction or something like that. It’s normally rooted on that. It’s just the area that we’re having the most difficulty believing in.

What’s the cop-out? What’s the other side of the translation here? It could be something like, “We think this is a decent business, but it’s actually not a venture-fundable business or a fund returner. We just think it’s a nice chug-along business. It’s not going to be a 10X return for us, so we’re not going to put money in it.” That might link to the market discussion we were saying earlier.

We don’t believe that TAM and SAM maybe are as big as you think it is or that your SOM is really… your share of market is going to be that huge. On the product-market fit, it could be a cop-out saying, “Hey, we don’t really think this is really interesting.”

It’s an easy cop-out because most businesses won’t have attained product-market fit, certainly in early stages of development, pre-seed and seed. It’s an easy way to get out of the discussion. As I said, we don’t like doing that. Normally, if we point product-market fit, it’s because we can see some numbers. Generally, we don’t believe there’s anything on product-market fit yet.

On the other functions, I would say, for example, the go-to-market, sales marketing might be actual underneath the cover, “We don’t believe in your team on those functions,” or, “We don’t believe on the people that are doing that.” It might actually not be that we haven’t seen enough progress on go-to-market. It might be, “Actually, your team is probably the wrong team for that,” and we’re saying it in a nice way.

In a lot of cases, it might be founder-led sales, and we’re saying, “You as a founder are not the right person to sell,” because we don’t think you have the skills to be that person, but we’re not going to tell you outright on a pass. There’s a little bit of that discussion around, we need to see more. It’s the conviction passes that I just mentioned a little bit. Either, “We need to see more,” or, “We can’t get conviction out of what you’ve just shown us,” or, “We have doubts around the team,” again, in some of the functions that you’re deploying on.

Bertrand Schmitt

I think in this category, as an entrepreneur, you should probably be all ears because it must mean there is something wrong with your business. If you are not having the proper traction, and it’s real anime. Who would tell you don’t have proper traction if you have proper traction? It’s pretty rare.

In terms of market size, this one can raise questions about not something wrong about your business, but something wrong how you present your business, how you evaluate its TAM. Basically, you might be thinking too narrow while your product could actually work for a much bigger market, and you have not made it clear enough.

I think that for me, receiving some of this feedback should raise some serious questions on how you present your business, how you run your business, how you build your team. I think you should be careful not to dismiss. Of course, there is a lot of BS, as we just said, but I will certainly think harder about it and maybe raise questions about, maybe I should wait one or two quarters, so I’m able to demonstrate that my strategy was right, that our team is right, that we can deliver the growth, that we can do change in the business that is either planned or are now on the roadmap so that we reach the right milestone.

I think for me, when you raise money, it’s not just raising money. You have to think about what is expected in terms of milestones. If you are raising while you have not reached critical milestones for this type of round in terms of valuation or in terms of funding needs, then there is something wrong. You missed it, and you should move quickly to try to correct it. Or maybe it means it’s time for a bridge, which is never great and never guaranteed.

I think you need to very carefully think in terms of milestones. Missing some milestones, going after a new round of fundraising when you don’t understand the milestones needed for this stage can be a grave error because it means you drove the business to potentially a cliff.

I think the first thing you do when you have closed a round of funding is really anticipate very clearly what are the milestones needed for the next round of financing you need. Or put yourself in a situation that you don’t need an additional round of financing. But if you need the next one because you don’t generate enough cash, then you need to be very careful about planning for that.

Nuno Gonçalves Pedro

We’ve had a couple of in-depth episodes on exactly that, that Bertrand has mentioned. Are you at the right stage to raise money? What should you be thinking about when you’re raising Series A or Series B? The amount you’re raising, what’s the impact of valuation, et cetera? You guys should check it out. If you haven’t done so yet, decipheredshow.com, just check it out.

Moving maybe to the next category, Structural Passes. This is where you will hear the, “I’m not sure this is venture investible,” “doesn’t fit our thesis, our stage, and our model.” I think that’s one of the ones that actually can be justified. A lot of entrepreneurs don’t know this, but sometimes there are guardrails on the LP agreement, so the agreement that VC funds have with their LPs for a specific fund that says, “You can only invest in this thing, in this geo-regions, this geography, this play, this stage.”

Some firms have very little in terms of strings attached in their limited partnership agreement. Some firms have a lot of strings attached. It might be actually part of the limited partnership agreement. It might be part of the thesis as the general partnership has come to some conclusion. This can be even dynamic.

“At this point in time, we don’t want to invest in this space, so we decided we’re going to stay out of it.” “Thesis-wise, we don’t want to invest in AI infrastructure or AI platforms,” whatever might be that partnership going through at that point in time.

These are normally, I think, relatively accurate. They can be a cop-out because what can you push back on? It’s like, if you’re an entrepreneur, if I say it’s not in our thesis, well, it’s not in your thesis. I’ve seen some entrepreneurs do the pushback and say, “Hey, can you then tell us more what’s in your thesis and why this doesn’t fit?”

Don’t do that, guys, because you won’t get another email from the VC. For obvious reasons, because there’s nothing to be gained for me to send you an email back. I’m just going to lose time crafting an email. Two, I’m sharing stuff that I don’t need to share with you. I passed on you. I don’t need to explain to you my thesis.

This is actually one of the pushback questions that I think most entrepreneurs should not do because there’s nothing to be gained, and it’s just wasting time from the VC side. The VC is not going to do it because it’s like, “Why am I telling you all this information?”

Again, if it’s a cop-out, it’s a cop-out. Tough luck. But if it’s not a cop-out, if it’s real, again, the VC doesn’t want to explain it to you. They don’t want to go and explain to you that they have an LPA where they can only invest in a specific region of the country that you’re in, for example, which might happen in some cases. For example, we were just talking about Europe earlier, Bertrand and myself.

There’s other elements that could be in the structural side. “We’re exposed to the space,” or, “We have a potential portfolio conflict.” On a first call, normally, if immediately before jumping on a call, I realized there’s a potential portfolio conflict, I’ll raise it on the call, potentially even raise it with my portfolio company first asking, “Do you think this is a company that is in competition with you?” and not take the call in the first place.

But if you’ve gone into that first call and if it arises while you’re having the discussion, the VC would normally raise it to you. This cop-out of portfolio, if it comes much later in the discussion, it’s a little bit weird, because then people are like, “Why did I share all of this stuff with you?”

Bertrand Schmitt

On this one, I would say it’s also the entrepreneur’s fault. If I’m reaching out to VCs, I have checked their portfolio and I made sure that there is not a competitor. Actually, I truly made that a strategy when I was fundraising. I would eliminate talking with VCs that I feel have competitive portfolio companies in their business, and I did that proactively.

Actually, in some ways, I went so much overboard that I had a VC calling me out of the blue, hearing that we were not talking to him for this round, being very surprised. Then I explained that they have these portfolio companies, and I don’t like it. I won’t say who it was, but then immediately I was, “Oh, no, no, no. You don’t understand. This is a separate partnership running things their way in their region of the world. It’s not connected. There is a big firewall.”

Nuno Gonçalves Pedro

Did you still talk to them or no?

Bertrand Schmitt

It was really true that the partnership was truly separate. They shared the name, but they were truly separate. Yes, I ended up working with them. They were a big name.

Nuno Gonçalves Pedro

I think I know who it was, but anyway.

Bertrand Schmitt

That was interesting because in a way, I created FOMO by not reaching out to them. It was not a strategy for me to create FOMO. It was just like, “Hey, you invest in these guys. I’m not going to work with you.” It was very simple for me.

I think, again, you’re right as a VC to be careful, but I think the entrepreneur, it should be part of his job to check out. Honestly, these days, we say, “Hi,” and how much you can look out for some of this stuff automatically, you are really not doing your job as an entrepreneur if there is a portfolio company that is competitive. Or maybe what you should do is just taking still the meeting. Do you still take the meeting? Reach out, “Hey, maybe there is a blocker. Can you tell me more about this portfolio company?” If there is any issue, then it’s fine. Everybody’s a big boy and you just stop talking.

Nuno Gonçalves Pedro

I do think this is an area where the responsibility is on you entrepreneurs to check out portfolio, as Bertrand was just saying, if in doubt, to clarify at the beginning of that first call et cetera, or even via email before you jump on the first call. I think the onus is on you guys. And the reason for that is one, even if you’re meeting a good actor, for example, I’d say, I think I’m a good actor. I’m very thoughtful about it. I might not know if the company is in potential competition when our portfolio company is ready. I might have lost part of the plot when I reached out to have that first call and I didn’t realize that you guys were actually activating an area where you might be in direct competition with one of our portfolio companies. Otherwise, I would have said, “Hey, are you sure we can talk?” And again, I would have checked with one of my portfolio companies.

The one thing is the VC is actually honorable and thoughtful. There are also VCs that are not always honorable and thoughtful, and they might be jumping on that call to be getting competitive intelligence from you because they have a portfolio company, and they’re like, “Oh, these guys seem interesting, and they’re competing against one of my portfolio. Let me see what they’re doing.” Then you’re going to share that with your portfolio company so you get some brownie points and whatever.

Bertrand Schmitt

I’ve seen some do that for sure.

Nuno Gonçalves Pedro

Yeah, and it’s not unheard of. I do think the industry in general behaves very well for an industry, in particular in the US, that doesn’t really have NDAs at the beginning of the process. You don’t have NDAs at the beginning of the processes in the US. For that industry, it’s very well-behaved because it’s still a trust equation. These things do come out. We see them coming out all the time on someone on X that goes and tells it out or some blog that’s written saying, “Oh, these guys went and put that information.” Sometimes it’s true, sometimes it’s not. Sometimes it’s the impression of the entrepreneur, and actually it wasn’t true. But honestly, that stuff will come out, I think is my point.

And so the trust equation is very much embedded in this gentleman’s or gentle lady’s agreement in the industry. But again, just be thoughtful about it. Even if you’re talking to an honorable investor, they might not be aware exactly of all the spaces you’re activating. Again, as Bertrand is saying, very correctly with the AI tooling, et cetera, that you have today, it’s very easy to check, or relatively easy to check, at least at a high level, if that’s the case or not.

There’s a couple of other structural stuff. “We invested money in a company years ago, and it was a very difficult market.” I think actually that just means the fund manager or fund managers have scar tissue that they don’t want to necessarily invest again in that space. It could be true. It could be that the category actually will not activate because the market is too complex. Now, having gone through the bad experience, the specific VC would say, “Hey, we don’t want to be in that market anymore.” That said, markets do move and do change, and so it is possible. We have done that. We’ve invested in companies and markets that were crap and then decided to invest many, many years later. Normally, I would say probably a decade later, I’ve decided to invest in a similar space because the space had changed, and because the way to attack that space has changed.

Bertrand Schmitt

I was going to say, yeah, I don’t see it’s a grand sign when a VC gives me that type of answer. I got this answer once in a while from some VC, and I think it was just pure pattern matching.

Why do I care that you invested poorly in a business five or 10 years ago because it was way too early? That could have been a clear mistake at that time. There should be little to no impact on the market today because there have been so many changes in 5, 10, 15 years. We have seen so many stories, and we look back in previous episodes of businesses that were clearly too early for their time. At the same time, 5 or 10 years after, the value proposition proved itself and the market completely changed, and it was a rocket ship story. *VCs who do too much of that, I think I would be careful because they might not be the one catching the next rocket ship.

Nuno Gonçalves Pedro

It’s still a structural pass. So we, VCs, are animals of pattern matching as well. Not only data-driven analysis and all that stuff, we’re also looking for pattern matching. It might be that for that specific VC, really, the VC is telling you, “You’re a gaming company. I invested in a gaming company years ago. It was a miserable failure. I’m not investing in gaming again.” It is structural. They’re not bullshitting you. It doesn’t need to be translated. They’re just not going to invest in you.

Bertrand Schmitt

I never fight this one because for me, actually, if this is truly the case that they have too much scar tissue, they cannot readjust to that, why would I waste my time? I want someone who gets excited and at the very least understands the industry change.

Nuno Gonçalves Pedro

Now, it could be that the VC has realized that the market has changed. They just don’t like you. They’re using a past failure investment for that. That’s where translation is needed. Anyway, those are very difficult to know.

Bertrand Schmitt

But then, yeah, let’s not waste time. If you don’t like me, let’s not waste time.

Nuno Gonçalves Pedro

Yeah, he probably would have given you some other… He or she would probably have given you some other reason for the pass. Another reason is the, “Let me run it by my partnership.” That could mean a variety of things. It could mean that you’re talking to a junior person on the organization that looks like a partner. There’s a lot of firms nowadays. We’ve called out a16z a couple of times on this, that everyone’s called a partner. Then now, apparently, they have partners for investment as well, et cetera. But then they have actual general partners.

It might be that you’re talking to someone who’s very junior, so therefore, they can’t push a deal. They’re not even on the investment committee. It could be that you’re talking to someone who’s on the investment committee, but they generally need it to run by the investment committee and talk to the other partners and see what they think. All VC firms, in my experience, have different kinds of decision-making processes. Some are by majority, some are by unanimity, some are by one person can carry it. It varies. You need to figure out in the VC firm you’re talking to, who are you talking to at level of seniority, and how are the decisions made?

Obviously, you shouldn’t ask this on a first or second call. Nobody is going to tell you that. But you should ask once you’ve gone past partner meeting, you’re at the end, “How is this going to make this going to happen?” It could be warranted. It could be that, generally, that has to be run by the partnership. In my case, for example, when I mention it, I’m the managing partner of the firm. I have two other general partners, but I’m the managing partner. It does mean that I will want to have the opinion of the other partners. That’s why I believe in the value of partnerships.

Me personally, it is about complementarity and experiences, vision, and how we look at specific problems. I actually might want just the opinion of that partnership.

Now, if this is used as a pass reason, it’s basically a cop-out. It’s like people are saying, “Hey, I don’t want to say yes to you, so I’m just going to use someone else in my partnership, either more senior or same level of seniority to pass on you.” If this is used as just a part of the process, as for example, I do, it’s just part of the process.

Again, depends on people are passing on you, or they’re not passing on you. That you have to assess. Is this a, “Let me run it by the partnership,” and I never hear back from you, so that’s a pass. Or, “Let me run it by the partnership,” and 2 weeks later, you have feedback, there’s next steps, and something like that.

Bertrand Schmitt

I wanted to go back to one of the structural passes that VCs use. If they have doubts on you being venture investible, because that’s one I actually use often, because I’ve seen a lot of entrepreneurs who are building a good business, potentially a great business, but they don’t need VC money, and they probably should not get VC money. For that, I have usually an analogy. Do you want gas for your car or do you want rocket fuel for your rocket? If you want gas for your car, don’t talk to VCs. I think it’s a mistake. You should talk to VCs because you are building a rocket ship, and you need rocket fuel.

You know that everyone knows the rocket might explode, but I’m not saying you shouldn’t target for that. Everyone should do their best. It doesn’t explode, but you know the risk, but you also know the target. You are shooting for the stars or at least for the moon. But if you are just shooting to go to another city, if I keep the analogy, just drive the car, it will be safer for everyone. But at the same time, it means you are not VC investible.

I think as an entrepreneur, be careful, listen to that type of feedback because it might mean either your business is just not going to scale, not going to have a big enough market, you are not growing fast enough. But I think it’s the time to reflect. Are you doing the right thing or are you trying to copy what others around you have been doing, which is to keep raising more money because it looks fancy or maybe because it looks like a way to get money, but not to build a business? I would say be very careful and take time to reflect because it could be genuinely good feedback that at this stage in time, you are not VC investible, and you should change your approach to running the business.

Nuno Gonçalves Pedro

I remember meeting an entrepreneur that was doing an event-based business and telling him in that moment in time, first-time entrepreneur, very young, clearly a hustler mindset, which there’s nothing wrong with that. It’s like, “No, this is going to be whatever.” I said, “This is not venture investible. I don’t believe this, whatever.” Then he brought me back some chart how the company could be worth $100 billion. I was like, “Okay.” I think that person then used that chart for a bunch of pitches. They took my feedback. I was like, “Oh, this guy had a problem with market sizing. From now on, I’m going to apply that.”

Guys, there’s been never an event-based business in history that’s worth $100 billion that I know of. Don’t “bullshit the bullshitter” thing, because we’ve seen all kinds of bullshits. Just stick to it. It might be that also the threshold of investment for a specific fund is different than for another fund. It might be that the person you’re talking to, their threshold is a 10X return at the valuation they come in. It might be for someone else, that threshold of return is 3X. I’m on the boards of directors where I have other VCs around the table, and we all have different thresholds of return.

That creates then other issues that we’ll talk about later once you’ve invested. But basically, it might be that there’s nothing behind it. It’s like, “I’m just saying I don’t think it’s venture investible, and I don’t need to be right. It doesn’t match our threshold as of now with our analysis.”

Maybe next one is that, “We’re doing work in the space.” The one I normally talk about is, “We’ve looked heavily at the space.” I normally say it just so that you know that this is a space that I have knowledge on. It’s not really that I’m thinking of investing in one of your competitors or whatever. But again, if you’re talking to a VC that tells you that, you take this with a grain of salt. It might be this is more of a competitive intelligence conversation, and they’re zeroing in on one specific potential portfolio company, and you’re not going to be it.

You have to be thoughtful at that moment in time because this company on the other side still is not a portfolio company either, so they’re still evaluating. That’s a part of this sentence that you need to be thoughtful about, that you’re not really giving too much information away.

At the same time, it might mean that the person just knows the space really well, and therefore, they’re just asking you to actually go, “My N minus 3.” I’d say this is one of those comments where it’s very difficult to figure out. You need to really assess the intention of the VC in front of you, if you can trust that VC or not, try to understand whether there is a notion of real understanding around the industry. They will show it to you if they will make comments specifically on it.

Normally, these sessions, for me, end up being a lot more interactive where the entrepreneur is asking me questions as well. “What do you think is the market sizing? Who do you think would be our competitors? What do you think about this strategy that we have for go-to-market, et cetera?” Becomes a little bit more interactive. That’s one way that entrepreneurs can do it, maybe on a second or third call, maybe not on your first call. Then this normally is not a pass sentence. It’s more of a “we’re in the middle of the process” sentence, so you can take it for whatever it is. But again, it’s either an in-depth discussion or it’s the opposite. It’s more of a competitive intelligence discussion. I guess, entrepreneur, be aware.

Bertrand Schmitt

Yeah, it makes sense. Another one I’ve heard often, actually, which actually is quite probably right, it’s when a VC tells you, “We would love to participate once you have a lead.” Actually, from my experience, the results were not bad, meaning once I got a lead and come back to investors who told me, “We’d love to participate once you have a lead,” there is a good 50% chance they are going to do the deal, at least from my own experience as an entrepreneur. So the drop-off was not that bad at all. As long as the lead is good enough, you have probably proven the thesis.

Nuno Gonçalves Pedro

A couple of scenarios here. I think there’s one scenario which is the one you just said, which is generally the fund is interested in investing in you, but they’re not going to lead. You’re raising a 20 million round, they do 2-3 million dollar checks, they’re not going to lead. A lot of our Series A, we don’t lead. If we tell you, “We’d love to participate once you have a lead,” it might mean exactly that. It might mean you need to frame the round and then come and tell us what the round is, because if I’m not going to lead, I’m not going to set the terms either. I need to know which terms someone else is setting, not just their name, but what are the terms that I’m coming into. That’s valid. It’s absolutely valid. It means that they’re at a stage plus one of where they normally invest or at the top end of the stage they invest. Then they’re not lead investors, so they’re asking you for that information.

There’s a second scenario where they can’t buy, build conviction on your investment. They’re just waiting for someone to come on board and see if that someone is a well-known VC or not. If it’s a well-known VC, they could say, “Hey, then they’re underwriting the risk partly, and we’re coming below,” right? Okay. The danger with that is I think that’s lazy work. You as a VC should do the work and really figure out if you have some conviction on the space or not, et cetera. Just investing because Sequoia is leading, et cetera, is not a great idea. Then the second issue is if Sequoia is leading, they might take the whole round and there might be not a lot of space for you.

Bertrand Schmitt

I was going to say that. From my experience, sometimes that’s what happened. When you have some of the best investors, they don’t like to leave space. You’re already lucky if you managed to keep your existing investors happy and getting their pro rata.

Nuno Gonçalves Pedro

We found other larger Tier 1 investors have been very amenable to us, but that comes from, again, trust, 16 years of being in the market and all that stuff. It doesn’t happen to all VC firms. So it might be, you an entrepreneur, that that VC firm is like, “Hey, I just lack conviction. I’m not willing to do the DD properly, and I’ll just go with whatever comes to the table.”

Then last but not the least, it might be literally a cop-out. It might be saying, “Hey, we have no conviction right now on the deal. If for some reason, magically, you can frame a round, come and tell us, and we’ll then look at it more in-depth. Then at that point in time, we’re willing to do some homework and do some DD. Right now, we’re not.” That’s a little bit more falling under the field of what I would call a monitor. “I’m willing to monitor you for a bit for this round of fundraising, and then come and tell me.”

I do think that, by the way, the whole, “We’d like to stay close, keep us posted, keep us in the loop for this round or for the next round,” falls a similar pattern to all the things that Bertrand and I have just said for this same kind of play. I’ve heard some VCs saying, “We’re putting you on passive review.” I’ve never used that sentence. If it’s passive review, it means we’re not really interested or unless something magical happens with you, we’re not coming on board.

Bertrand Schmitt

It’s how they are. I will not take it well as an entrepreneur.

Nuno Gonçalves Pedro

If I want to stay in touch, I want to stay in touch, right? If not, then passive review, I don’t know what the hell that is. Narrative passes or trend-based passes, they vary from time to time. Right now, the trend is AI. “There’s no AI in your story. Your AI use is not differentiated enough.” The two extremes. “We don’t think the problem you’re solving is a general problem. We think it’s more of a trend or a fad or whatever.” Those are more the narrative passes and the trend-by passes. It used to be blockchain and crypto and all that stuff in the past. The translation varies a little bit. When people are bullshitting you, it’s maybe because they’re like, “Dude, I don’t have a clue if you have anything that’s worthwhile or not, but I’m just not going to want to come in.” I think for the trend-based stuff, that might be an easy pass in that sense.

When it’s real, it’s real. It might be actually true. It might be that, “I can’t really figure out AI in your story,” or, “We don’t think that what you have is actually differentiated enough.” When we do say this, we normally mean it. It’s because we have done some product and technology analysis. By the way, not all players need to have AI in them. Again, to be clear, it might be that the feedback we’re giving is that “there’s no AI in your story” means there should be AI in your story, but there isn’t. Because in some cases, maybe there shouldn’t be much AI in your story in the first place.

Bertrand Schmitt

Yeah, in some cases, there should not be. But then we go back to the question, are you really a rocket ship or not? But at the same time, what I’ve seen also is companies who add AI because they know they have to have AI in the story, but actually it’s fake AI. It’s like, “I colored a bit more the deck. Instead of blue, it’s now green.” Yes, but no, that’s not enough if it’s very light, if it’s not truly changing the business model, if it’s not truly AI native. I think people have to be careful. Investors are usually not that dumb, and they will see between the lines, between the screenshots.

If the focus of the investor is AI, is it really AI or is it just like you added AI because you know you have to add AI to the story? In a way, I prefer someone who is more clean, potentially. But at the same time, you have to be careful these days. If you are a business buying products, for instance, and there is no AI in the story, it’s also a problem to buy internally because there will be some mandates, there will be some questions around why do you buy this? It’s a tough one these days, I would say, in general.

Nuno Gonçalves Pedro

Maybe just to put a bookend on this, we’ve talked a little bit about dictionary, what people say to you either in the middle of the process or at the end, if they’re passing on you. All the stated pass reasons that we mentioned normally come into three forms at the same time. They’re non-falsifiable. They’re truth in some way. They’re not offensive. We don’t want to offend you as VCs. They’re option-preserving, which is what we discussed before. It keeps us in the option of talking later to you, having a good relationship, either in this company or in a future company that you do, et cetera. That’s how I would frame it.

There’s some research from a bunch of professors, Ilya Strebulaev, who is my professor at Stanford, Gompers, Gornall, and Kaplan, on VC decision-making that consistently find that management team is one of the most important, often the most important criteria for a VC to invest or not invest into a company, but it’s also the one that you won’t hear about.

Bertrand Schmitt

There will be very few VCs in the world. We have a case with Khosla that I think we’ll talk about later in the episode, but there’ll be very few VCs in the world that will tell you, “I’m passing on you because of your team or because of you.” I don’t know many because there’s nothing to be gained there. At that point in time, it’s straight up personal. Unless you believe that there’s something magical you can do around your team, which is the case with Khosla, where he thought there were people on the team that were not the right people, that the CEO was the right CEO, but then the rest of the team was not. There’s nothing to be gained. You won’t hear normally feedback on team.

You will probably only do that if you truly believe you want to invest, but you really have a blocker. That’s when you have, in a way, to tell the truth because you don’t want to pass, and you will have to pass.

Nuno Gonçalves Pedro

“You have a great business. You have great skills already in the team, but you’re missing dramatically this, and you have the wrong person in that position.” That, I think, is to your point, would justify anyone telling you there’s a problem with your team or there’s a problem with you.

Bertrand Schmitt

To be frank, it’s cleaner to say so before investing than after having invested.

Nuno Gonçalves Pedro

Yes. Then trying to kick you out as the CEO of the company. We’ll talk about that later as well.

Bertrand Schmitt

Yeah. After 3 months, there are some war stories where a CEO get pushed out a few months after the investment, which is kind of insane.

Nuno Gonçalves Pedro

The Machinery

Maybe moving to the next act or section of the podcast, the machinery of venture capital. We are funnel managers, and so we are really evaluating companies top of funnel. In many cases, hundreds of companies top of funnel per year, in our case, tens of thousands of companies per fund every year. We’re deciding to invest in very few, maybe 6-8 a year, maybe 10 a year. The nos are the defining characteristic. There was, again, analysis by Strebulaev et al. on a survey of 885 VCs that I actually think I participated on as well. Per closed investment, there were roughly 101 opportunities considered, 28 management meetings, 10 partner reviews, five diligence processes, 1.7 term sheets, and one deal.

Interesting funnel. Our funnel looks very different from this. We see a lot more stuff top of funnel. We have a lot more calls top of funnel, and we engage a lot more in due diligence along the way. But anyway, it is what it is. It is actually a business model that is built on saying “no” to most and identifying a few where you build an extreme conviction. As I mentioned before, this is all about false positives and false negatives.

False negatives are companies that either we saw or we didn’t even see, but ideally that we somehow saw through our pipeline, that for some reason we passed on, that go on to be extremely successful companies. That’s the nightmare scenario. It’s what we call an anti-portfolio. Bessemer came up with an anti-portfolio. Still go to their website and see the reasons why they passed on the companies that did very, very well.

I have a few on my portfolio as well, or my anti-portfolio, so companies I should have invested in that I didn’t. Snapchat, Grab, Stripe are part of that. Cerebral along the way as well. There’s a few on my false negative anti-portfolio. Then there’s false positives, and false positives are also very damaging because there are companies that you say, “Hey, I love this company. I’m going to invest in a company.” You actually invest in a company, and then they end up being failures.

That’s what we’re trying to manage our funnel for, to avoid missing on false negatives and to avoid spending too much cycles on false positives. Really eliminate them as soon as you can out of your funnel and really not come to the point where you actually invest in them. That’s the business of venture capital. The machinery that’s being built is around this funnel. There’s then other parts of the funnel once you invest, the support to portfolio companies. When should you liquidate? How should you liquidate? How should you do it? But that’s the biggest part of the funnel is that part until the investment decision, because that’s where most of the value effectively gets created in venture capital.

Bertrand Schmitt

Yes, it’s always interesting to see some of the stories about why some VC invested or decided not to invest, actually. I think that’s why it’s great to have a market of VCs because everyone is fighting with their own perspective, on process. You as an entrepreneur, as long as you have a big enough market in front of you with different opinions or strategies, approach to the market, understanding of your vertical, I would say you should not hesitate to meet quite a few investors, more than a few, to meet dozens.

Because you need to get that sense of where the market is concerning your type of business if you are trying to raise funds. Because at the end of the day, you are in a market economy and your valuation, how much you can raise is based on what this market is thinking about you. If you just meet with a few investors, that’s a very dangerous approach because they might simply be all wrong. If you are relatively early, that’s totally possible. But if you don’t meet enough investors, you are really at risk that they make a mistake analyzing your business. There is actually decent probability they are going to make a mistake and make a pass.

You need to see enough so that you have some perspective. I think that if we take some of these official receipts of VCs having said no it’s pretty interesting. How big were the mistakes? If you say no to invest in Apple at a $60 million valuation, that looks ridiculous today, but it happened. Some passed on eBay relatively early on. “Oh, why should I invest in a company selling coins, comic books or stamps?” FedEx was passed multiple times. Facebook was passed multiple times. Airbnb was passed multiple times. These rejections are real, and they happen even to the best of the best.

Nuno Gonçalves Pedro

Just to be clear, I mentioned one of my antis was Snapchat. Snapchat had extreme difficulties, from what I know, raising their Series Seed, which they ended up raising from Lightspeed, $485,000, if I’m not mistaken. It doesn’t mean the hot deal is a great deal. It means that it is what it is. At that point in time, there was nobody interested. It might be that Evan became much better at pitching. It might be that the business became better. It might be in something else.

Again, there’s no necessarily correlation, even if you’re a VC on the other side, “Oh, these guys have nobody interested in them, so why am I interested? Am I missing something?” Actually, yeah, it might be that you are missing something, that you should invest in this company. They’re great, and they’re going to go through the roof. But for you as entrepreneurs, the key lesson from this piece is because we’re managing this funnel and the cost is really up to the moment of investment. Once you’re in the company, you’re in the company. Your portfolio is being constructed. A lot of funds have 25, 30, 40, 50 companies max. They don’t have more than that.

Every company is a big deal in the portfolio construction part. If you’re talking to a VC, you have to realize that the VC, the likelihood they’re going to tell you “no” is extremely high. It’s 99.9999% chance that they’re going to say “no” to you. Actually, if they engage with you, they take you to a second call, to a third call, they do evaluation, you’re already in the middle of their funnel, which is incredible. Then, if you go to a partners meeting, oh my God, you’re close to the end.

Actually, it is a big deal that you’ve made it all the way through several steps on that funnel. It means that you are an interesting company to that specific venture capital firm and fund, and you guys have gotten to know each other. Maybe you’ll do business in the future. Now, on the other hand, the likelihood I’ll pass you is very high. If you are, again, an entrepreneur, don’t take it personally because honestly, we pass on almost everything. Most VCs pass on almost everything. It’s part of the industry. We don’t have time. Most of us don’t even have time to write passes for everyone.

We try, as I said, Chamaeleon, hopefully we’re doing a good job. Again, you guys will tell me otherwise. At the end of the day, we don’t have time to go back and forth on discussions with you guys. We pass, we pass. Then you come back to us and then you want to have a conversation. It’s like, “Dude, I’m not going to have a conversation with you.” Then it’s not considered ghosting anymore in my book. It’s like, “Dude, I’m not going to engage. I’ve already passed on you. I was clean. I told you.” Even if at a high level, why I passed on you, I give you a response. It’s no, sadly, but it is no.

Again, if you’re an entrepreneur, don’t take it personally. Keep it clean. Don’t reengage. Don’t try and be a smart ass. Don’t push back. You’re not going to convince us magically at the investment committee level because of your great oratory that somehow we should have invested in you in that same phase. Maybe later on, but not in that same phase.

Bertrand Schmitt

I don’t think you should come back if you don’t have a very significant milestone that could change the game for people you are talking to. Even like a customer deal and stuff, even if it’s big, it will probably not make a difference.

Nuno Gonçalves Pedro

Interlude – “Things Founders Say”

Maybe we do a quick interlude on what founders say. Maybe I’ll start and you’ll go. Bertrand, maybe the first one that’s very funny is, “We’re not actively raising.” You are raising, otherwise we wouldn’t be talking. You’re always raising. That’s the whole point. Obviously, you could say, “I’m not actively raising,” as in, “I’m not hardcore process of raising, going through a bunch of meetings.” Meaning, “We don’t have a full deck ready.” But it’s like you are raising. That’s why you’re talking to me. You’re entertaining raising.

Bertrand Schmitt

I would say, actually, I’ve said that quite a few times where I was truly not actively raising. Usually, personally, I like to raise at my own specific timing because I know the milestones will be right. I know I will be in a better position. I would be a bit worried to raise before I truly need, before I have truly the right story and the right milestones, and forcing me basically to raise before I want to raise and not doing a proper competitive situation for the fundraising. But I think many are not like that. Many are not as transparent. Many are probably bullshitting when they say, “We are not actively raising.”

Nuno Gonçalves Pedro

The second one maybe is, “The round is coming together quickly,” which I always laugh. Because that’s when I say, “Hey, tell me when it’s come around. Tell me how much space you still have left, or if you’re about to get oversubscribed, then we can talk more actively.” I’d say this is the sentence that’s the most used by entrepreneurs, one of the sentences that’s the most used by entrepreneurs, that is BS, full on, and it rarely materializes.

Because if the round is coming together quickly, you tell me, “Hey, I have a lead. Can’t tell you the name of the lead potentially.” If there’s a term sheet already signed. If there isn’t a term sheet already signed, you should be able to tell me who’s the potentially likely lead. Again, there’s all these questions we can ask as VCs that we can figure out very quickly if you’re bullshitting us or not. Who’s your lead?

Bertrand Schmitt

Yeah, if you have signed a lead, you should have negotiated to talk with others to complete the round.

Nuno Gonçalves Pedro

If you can’t tell me shit, and if you’re just actively bullshitting, you’ll lose immediately credibility. It’s like you’re just trying to up your round. A lot of these, “The round is coming together quickly,” rounds never come together. I’ve seen a bunch of these that months later, the firm still hasn’t raised any money, the company hasn’t raised any money. Magically enough.

“We have a lot of inbound,” can mean any sorts of things, could be a couple of associates liked the LinkedIn post that the person put in or whatever, or you got a call with someone. But “a lot of inbound,” normally for me means you had one interaction with a fund. Again, specify. If you’ve had a lot of inbounds, “We’ve had already seven partner meetings, so we’re really at the end of our funnel.” That’s what it actually means to us. “We’re being selective about the cap table,” means nobody’s interested. No, Bertrand?

Bertrand Schmitt

That’s what you want as an entrepreneur, to be selective about the funds that are bringing value, at least funds that are not bringing negative value. Personally, it makes sense to say it, but yes, many people might say it, but might not believe it. But then from my perspective, you go back to, do you have the right approach to fundraising? Or have you missed all your milestones? If you have missed your milestones, you should really think otherwise about your round. Maybe it’s just about running your business well versus trying to fundraise when you cannot fundraise.

Nuno Gonçalves Pedro

Absolutely. Honestly, there’s better ways of you showing that you’re selective on your cap table. Your questions to the VC, “What value do you bring to us? What things can you do for me? What do you think about my business?” et cetera. There’s other ways of you showing it that are actually more valuable to you. That is not this sentence. Because it’s like, “We’re being very selective about the cap table,” should come at the end.

I’ve literally come into 200, $300 million rounds in my career where we put in a very tiny check below 1 million. That’s when the founder was being very selective about the cap table. That’s valid for the founder at some point to say, “Hey, I’m being very selective about the cap table. I’m raising 200 million, and either I don’t have space for you, or in this case, I’ll make space for you because you’ll bring extra value that I can’t quantify just by the check that you’re putting into the company.” That’s when you know for sure that that’s the case.

Bertrand Schmitt

Yeah, I agree. In a way, your existing cap table will show pretty quickly if it’s true or not. Are you being selective or are you not?

Nuno Gonçalves Pedro

Yeah, show me the previous investors. If you’re a pre-seed, friends and family.

Bertrand Schmitt

Yeah, exactly. I think this is one sentence you probably should not have to say because your actions should have proven that in the first place. Versus saying it without being able to prove it, which would be the worst situation.

Nuno Gonçalves Pedro

Then last but not the least, “We’re oversubscribed,” which means either you’re not oversubscribed, maybe in your mind, you’re oversubscribed. Maybe the people you talk to could represent an oversubscription of your round, something like that, or you cut your round, and now you’re oversubscribed. You were raising five, now you’re raising two, and you’re oversubscribed on two rather than the five.

It might be that you’re oversubscribed. On the oversubscribed, I will listen to it. But again, it’s one of those I need to see where you’re oversubscribed. For example, I just met actually someone today. They’re raising a round, and they said they were oversubscribed. That guy, the next call we have, we’re going to check. What do you mean, you’re oversubscribed? How much money do you have in? Do you have a lead? Who’s the lead? In this case, actually, the guy has already told me who’s the lead. The lead does exist, apparently, because I can check who they are, and I can go and talk to them. Unless he’s just hardcore bullshitting. But you’ll still need to know, hey, how are you oversubscribed? How are you going to the next level? We’ll double-click on that stuff.

Bertrand Schmitt

If you are truly oversubscribed, and me, I faced this situation quite a few times, that’s not a moment where I will start discussion with new investors. If I’m truly oversubscribed, I’m dealing with the new investors that are truly willing to invest, my existing investors. Usually, they are fighting for how much they can keep investing through their pro rata or more than their pro rata. I already have a problem to manage. I’m not going to talk to additional investors, except if I have a very specific reason like I absolutely want to talk to this guy because of his reputation, his ability, whatever. But there will need to be a real reason for me to both keep running the process if I’m oversubscribed.

Nuno Gonçalves Pedro

Funny story. I don’t know, Bertrand, when I was running Strive Capital, my first firm, invested in App Annie, Bertrand did make space for us in that round. He was oversubscribed in that round, made space. Now, he only made space for us, to be clear, because back to the previous discussion, we didn’t tell them, “Come and tell us when you have a lead.” We told them, “We have high conviction in what you’re saying. We’re in. This is the check size. It’s not going to be a lead’s check size, but this is the check size.” That’s how a high conviction VC gets into rounds. Now, obviously, Bertrand was kind and figured out a way to get us in. But at that point in time, we’d been in for a while. I think we were maybe even the first US VC firm to commit to that round at that point in time.

Bertrand Schmitt

There is also sometimes just a personal connection. You like the people, you realize that their background, their experience could be useful. Even if it’s smaller check size, you see real value there. Also, personally, there is also the question of, do you want to have only one fund taking all over the round versus a few funds? You create a bit more diversity in the round. I think there are a lot of reasons to do that for a very good reason.

Nuno Gonçalves Pedro

The Courtship

Maybe moving to the courtship. Euphemisms VCs use at some point in time on the other side of the fence when they’re selling themselves to the founders and to the company, trying to get the allocation, trying to be the lead in that round, et cetera. The first one is, “We’re founder friendly.” I don’t know. I always attach it to, “We’re founder friendly,” means you’re not. You’ll be founder friendly as long as the company is doing incredibly well, when the company stops doing incredibly well, I’ll kick you out. There is a very famous VC firm in the market that their whole thing is, “We’re founder friendly.” I think they’ve now moved away a little bit from that language. I won’t say their name, but you guys can check it out.

I interacted with an organization that was a growth capital investor that shared board seats with that specific investor, that specific VC firm. In the two cases that they were sharing board seats with that VC firm, the board seat demanded that the CEO was changed. The founder CEO was changed. Two out of two. Now, you could say it’s anecdotal, but it’s two out of two. Out of a random sample.

Bertrand Schmitt

Something that’s tough.

Nuno Gonçalves Pedro

In one, they actually vacated their board seat because the founder CEO didn’t agree to be replaced. They said, “We’re out.” Because they were a large VC, that’s a big deal. Why did they vacate their board seat? They have the right to a board seat and they vacated it. Why? Again, “We’re founder friendly.” If a VC tells you that, and you’re an entrepreneur, ask them, “How is this?” I never mention it. I think I’m incredibly founder friendly. Does that mean I’ve replaced some of my founder CEOs at some point in time? Yeah, a few.

But I’m very founder friendly, but I never mention it. Why? Because I think it means shit. Again, you should check. “Are you founder friendly or not? Give me a few examples. When push comes to shove on this, what did you do? Give me an example of that.” Obviously, this is not going to be on a first few calls with a VC, but once you’re at the end, you have a term sheet maybe in your hands, you want to do business. But I find this one is the one that would irritate me the most if I’m an entrepreneur.

Bertrand Schmitt

As an entrepreneur, at that point, when you are close to a potential deal with a new investor, you should run some diligence. What is the market saying about these investors? Can you talk to other founders or portfolio companies from these investors? Some funds actually maintain database of investor behavior that they share internally so that entrepreneurs can truly assess the next new investor based on real stories about what happened. Obviously, it’s pretty confidential. But some funds do that. As usual, talk is cheap. Just run your diligence before accepting that at face value.

Nuno Gonçalves Pedro

There is an extreme example of founder friendliness that we’ve seen in some cases where even governance goes awry. But I don’t think that’s actual founder friendliness. It’s like, “I don’t care.” It’s what I call more cheerleading governance. It’s, “Once I’ve invested, I’ll let you do whatever you want.” We’ve had a couple of cases where it took a while to unwind what was happening. Obviously, some fraud, like FTX, others like maybe earlier in WeWork’s tenure. The governance was a little bit looser, and maybe that had some effects on how the company was managed earlier on.

It varies quite a bit, but there are cases where the founder friendliness at some point just is not founder friendliness, but maybe it’s just like, “I’m a board member and I don’t give a shit. I’ll just show up and say, ‘Hey, I’m here,’ and I’ll let the founder do whatever they want.” That’s also obviously not very good. It’s not very good not only for the limited partners of the fund that invest in it because it means that there isn’t actual active fund management going on.

But it’s even worse for the founder because the founder is not getting the critical checks and balances that they should get from their board members, and they are getting disengagement. They are not getting any real engagement from their investors, which is also a problem. It will come back to bite them at some point in time as well. If you’re too much in control, it rarely works out. I could point out very few cases where it has worked out in this cheerleading mode of governance.

Bertrand Schmitt

Yes, some companies were just smelling so bad from far away. There is something wrong with them. As you say, probably too much cheerleading. That’s pretty sad. You could argue there’s even a question of fiduciary duty if you have a true board seat on that company. It’s an issue I think we are a bit more far away from. It was probably like this 5, 7, 8 years ago. I think it has changed. I guess it’s like a pendulum. It moved from one side to the other. As an entrepreneur, I would be careful. Yes-man, yes-woman, it’s a bad idea on the board, but also in your team.

Nuno Gonçalves Pedro

A couple of other things that VCs will tell you to get the deal. “We add a lot of value.” “We’re a tremendous value-add play.” I think most entrepreneurs are now getting very smart about this. Even on a second, third call, I’m getting the question. If you ask me on a first call, I’m like, “Dude cool, I can answer the high-level thing,” but it’s like, again, we’re just having a first date, and you’re already asking me, “How would it be if we were married?” It’s not a good question.

Again, if it’s a second, third, fourth call, maybe it warrants you asking, and I see a lot of entrepreneurs now doing that, “How can you specifically add value to me?” You will hear all sorts of BS from VCs. “We’re very hands-on.” What does that mean, very hands-on? “We’ll supply you with whatever,” supply with what? How do you supply me with knowledge, with tooling, with people et cetera, that helps me scale? How will you help me raise the next round? How will you help me scale my business in between now and the next round? Even if you’re not on my board, how will you contribute to my success over whatever.

Give me examples. Ask for examples. Again, you shouldn’t do this on a first call. You look like an idiot, maybe on a third or fourth. But it’s a good question to ask. The VC should have good answers. If they’ve been doing it for, I’ve done for 16 years, I have plenty of examples. I can articulate what my institutional value is as Chamaeleon. I can articulate what our value is as a partnership, and I can articulate my values to you as an individual.

If people can’t do that to you, a partner of a specific VC firm, then they should go and do their homework and come back. If they absolutely can’t do it, it’s because they don’t. They don’t create value for their portfolio companies. To be very honest, as I said before, 95% of the market is cheerleaders. Nothing wrong about cheerleading, but it doesn’t create necessarily value to your business if you’re an entrepreneur trying to take it to the next level.

Bertrand Schmitt

For sure. At the same time, you could argue that no value is better than negative value. Yes, the best investors bring value. I will say the average, I don’t know if it’s average, but the second-best investor brings no value, but there are many who are going to bring negative value. I think you have examples, and I have quite a few examples being now on the other side of the table where some investors definitely add extremely negative value. I think it happens in not every business I’ve seen that you have at least one who is adding tremendous negative value. It requires work from the founder, the CEO, the exec team, the other investor on the table to correct for that, if you can. It’s pretty shocking, I must say. It’s pretty shocking.

Nuno Gonçalves Pedro

Yes. Maybe rapid fire, track record of successes, if it’s a super known VC firm, that may be warranted. If not, maybe they don’t have a track record of successes. Actually, you as an entrepreneur need to figure out is, are these guys running really well-performing funds? Now, most ones won’t tell you what their returns are, but do they seem to have portfolio companies in there that I know that are doing well, et cetera. Because that does matter as an entrepreneur, that you’re being backed by well-known VC firms that are doing really well, not only towards you, but also towards their own limited partners in terms of returns.

High conviction investors, everyone will tell you that. I stopped saying it because I realized it was glazed, and most entrepreneurs, they hear it a lot. We are conviction investors. We will say no to things that maybe top firms will put money into, the same way that we’ll say yes to things that maybe you’ve been passed on by top-tier, larger VC firms than ourselves. Definitely something to take into account. Then there’s the LP side of the fence where we get a lot of stuff. Raising money from limited partners is very different than raising money from VCs.

When we, VCs, raise money from limited partners, and we’ve discussed that a variety of times, our cycles are much longer. We might get the, “We’re being disciplined this quarter,” which means we don’t want to talk to you right now. We might get, “We’re doing a bunch of reups,” which means they’re putting more money into other funds and making the decisions on getting those capital commitments to those funds, basically moving to a variety of things like dry powder. “We want to keep some dry powder for our existing funds,” et cetera.

All of this sometimes is real with limited partners. Sometimes we feel it’s just the equivalent of some of the reasons we gave for VCs to pass on entrepreneurs. They don’t want to create a bad relationship with a fund manager. There are less fund managers than entrepreneurs. There are less successful VCs than successful startups. Honestly, you wouldn’t blame them for saying this.

When Translation Fails: The War Stories

Next section is on when the translation fully fails, and for some reason, the fund actually invested in you. These are the war stories. After they’re in, after the VCs are in, they’ve invested in you, they have a bunch of rights. We already mentioned one, which is the whole Uber situation with Travis Kalanick and Benchmark, Bill Gurley, probably the most visible part of that as seen on the TV series, which is, I think, Super Pumped or something. I’ve never watched it, but it’s interesting, the whole thing.

Honestly, Travis has come recently out as well and talk about some of the trauma he had from that interaction with Bill and with Benchmark and how they effectively pushed him out. That he ended up actually resigning under investor pressure in June 2017. Benchmark, I think, sued him after that. I mean, that suit was later dropped. I think they did sue them, and then the suit was dropped once, I think, SoftBank bought a percentage of Benchmark’s ownership of Uber in a secondary transaction. That was the condition. I think that was the deal. I think Benchmark returned their fund several times over just with that secondary. They didn’t sell, I think, all of their stake. I think they sold maybe a third or something of their stake. It was a nasty play.

Bertrand Schmitt

It’s crazy because it’s so nasty. Some entrepreneurs might think it gets nasty only when things go bad, but it can get very nasty when things do very well as well.

Nuno Gonçalves Pedro

Travis recently said that Bill Gurley was a catastrophist, so he was always looking, “Oh, you can’t raise money, you can’t IPO, you whatever.” He also mentioned that they were already preparing the IPO, but they didn’t tell Bill that. I was like, “Well,”

Bertrand Schmitt

That’s pretty odd.

Nuno Gonçalves Pedro

“Dude, Travis, that’s odd because he’s a board member. How can you say you’re preparing an IPO and you didn’t tell your board members?” If I was Gurley, he’s like, “Well, yeah, see what I meant? This guy was running loose, and he wasn’t informing the board and whatever.” Bill, obviously, would probably defend it by saying he had created a relatively toxic culture, very men-driven culture at Uber that had several issues along the way, like God Mode, et cetera. There’s two sides to every story. We’ll never know the absolute truth. The reality is that Travis was forced to resign, he did. Then Uber ended up IPOing, making a bunch of money for a bunch of people, including Benchmark, even before the IPO because of the SoftBank deal, et cetera. Great, they IPOed because of the SoftBank deal, et cetera. Great. They all made money, but it was a catastrophic one.

Bertrand Schmitt

But contrary to the Benchmark story, the returns were not so great since Travis departed. The whole game, the whole story publicly of Benchmark was, “Hey, you will see we’re going to triple in that amount of time and this and that, once this guy leaves, once we do IPO.” That’s not what happened. You could argue that that whole judgment was pretty significantly wrong. That part, personally, I don’t forget that mistake.

Nuno Gonçalves Pedro

They kicked the CEO that probably could have taken the company public out. We will never know how much of the culture was truly toxic or not. I’ve heard a lot of mixed feelings and mixed things from people that were there very early on, so I’m not really sure it was as bad as it was portrayed. The reality in the end was in some ways, because of the whole SoftBank movement and the secondary that was played, everyone became quiet and became happy.

In some ways, the whole SoftBank move precipitated Benchmark calming down because then they get their money. It stabilized the company, and it took it to IPO. In some cases, we rarely say good things about SoftBank. We’ve said some bad things about them in the past, in early stage in particular. But in this case, they maybe helped save the company and take it to the next level into the IPO stage.

Bertrand Schmitt

Yeah, they might have helped pacify.

Nuno Gonçalves Pedro

Yeah, pacify the investors, give it capital to take it to an IPO, which is interesting.

The second case is Pincus. Mark Pincus, obviously, he’s best known for Zynga. Obviously, Mark was the founder CEO of Zynga for many years. But he was mentioning, I think, Axel trying to go on a jihad, I think that’s the word he used, to replace him as CEO over age and inexperience when he was at Support.com. His logic was there was a junior partner from Axel involved that needed to prove that he could change out the CEO or something like that. I don’t know. I don’t know if that’s true or not.

Axel is normally a relatively clean investor, from what I know, but maybe it happened. He kept coming back. I like Mark a lot, by the way. We’ve co-invested in a couple of companies. I don’t know him very well, but we’ve co-invested in a bunch of companies. I think he’s an articulate guy. What he did with Zynga was incredible and phenomenal.

Bertrand Schmitt

Yeah, I talked to him a few times. I would trust his statements.

Nuno Gonçalves Pedro

Yeah, I’d say maybe there’s a little bit of a hyperbole in the case. Maybe it’s true, I don’t know. But his notion is, “I want to keep control at all costs as a founder CEO.” “I prefer to take passive investors like Yuri Milner, DST, did with Facebook and other things, right? Instead of taking VC builders.” I understand his point. I don’t think it’s always true, certainly not in early stage, certainly not with less experienced entrepreneurs or less capable entrepreneurs as well, maybe as well. Anyway, point taken, apparently that happened. He did control Zynga throughout and stuff. Then he said, “Oh, well, I get vindicated because this is how I did Zynga, and then we did well.”

Bertrand Schmitt

Yes. Zynga was not an easy story because they did initially very, very well thanks to the Facebook approach to partners. But then suddenly, there was a dramatic change, the rise of mobile. It was not an easy transition.

Nuno Gonçalves Pedro

Yeah. One quick thing, Bill Gurley has come out since also talking about how Silicon Valley is made of cheerleader board members, which I totally agree with. If the company is doing really well, nobody says anything. The ability to actually take your fiduciary duty seriously and have difficult conversations, not only with the founder, but at some point with the rest of the board when things need to be discussed is important. Again, some of these things are warranted, and they’re probably more nuanced than spats on X would portray, right? But certainly that would warrant that?

Bertrand Schmitt

I will say that some things that I find totally unacceptable is VCs board members will say one thing in front of the board and the CEO, how great they are, how well they are doing, how they support them, while in the back, once the CEO leaves the room, have a very different story. That is for me totally unacceptable in terms of behavior. If you have a message, it has to be clear, it has to be transparent, it has to be the same for every party. Not a complete 180 degrees the minute the CEO steps out of the room. This is not doing your fiduciary duty. It’s just very bad behavior from my perspective, and some are doing that.

Nuno Gonçalves Pedro

Maybe one that didn’t happen after investment, pre-investment, we already mentioned it a little bit, which was the Cloudflare incident with Vinod Khosla from Khosla Ventures, which created this spat on X where Matthew, the founder CEO of Cloudflare, was talking about in a thread of several founders complaining about bad behaviors from VCs, about Vinod having some dinner with him somewhere, maybe Village Pub or something, I’m not sure while the other founders went to the restroom, apparently at the same time. It was, I think, a woman and a man. I think it was Michelle, I believe, as well, was the COO.

Bertrand Schmitt

I think so.

Nuno Gonçalves Pedro

There was another CTO, I believe. That Vinod was like, “I bet on you, but those two guys need to go. I can help you replace them.” Then there was a back and forth where Vinod said, “No such thing.” Matthew’s like, “Oh, you did, and here’s some further proof.” Again, sometimes we say things that we later regret, sometimes we don’t. It doesn’t matter if Vinod is very successful in his own right. Just bought the Seahawks, right? His family. That’s a big deal. I guess portfolio management, right? When you have a certain level of wealth, you need to have a certain type of assets.

Bertrand Schmitt

What’s the joke? When you are a billionaire, and you want to become a millionaire, that’s when you buy a franchise.

Nuno Gonçalves Pedro

Buy a franchise, yeah. I think franchises are doing okay. Anyway, I’m not sure that was a bad deal. Anyway, long story short, I feel that’s the gist of this.

Bertrand Schmitt

Maybe to close Nuno, it’s time that we talk about some more general things. We have not talked yet about how you should decode them. I guess you want to look for signals, you want to ignore. What’s your take?

Nuno Gonçalves Pedro

The Decoder Ring + Confession Booth

Yeah, there’s milestones you should be looking at. Are you meeting more parts of the partnership? Are you getting closer to the full partner meeting, which most firms end up doing anyway? Are people really engaging with you in terms of due diligence at the VC firm? They’re really deep diving. Are they asking for more things? Maybe user feedback and customer feedback, interviews. For example, we only do reference checks at the very end because we know that’s a pain in the neck. Customer feedback just before the very end. We are very respectful to the entrepreneurs. But there’s movements that you go to that you will notice through the process that the VC is engaging with you, that they’re moving. They’re not stopped. The more time they’re taking from you, the more stuff they’re taking from them, probably the more engaged and more interested they are in you.

That gives you actual signal. The second thing is if there’s specific quick feedback like, “Hey, we’re not really interested right now. We’d like to see more.” It probably means that this is not the right time to talk. Speed normally means let’s stay in touch. If you’re still excited about this VC firm, reengage if there’s big news, like a new lead or the round’s becoming oversubscribed or something else, or something happened to your product that’s gone through the roof, et cetera, et cetera. Don’t hesitate to reengage at that point, but don’t have the fight. There’s no point in having a fight.

Force feedback if you haven’t gotten it. Again, this is something I get my Chamaeleon team pissed off at because I do appreciate when founders come back to us and say, “Hey, we haven’t heard from you in 4 weeks or 3 weeks. What happened?” What might have happened is one of our general partners forgot to send you a pass email.

We have the rule that the person that last saw you or in particular, the general partner that was in charge with you, should send you a last email just saying, “Hey, we’re passing,” or, “We’re not interested right now,” or whatever. We’re busy, so sometimes we don’t. It’s not on purpose. So force it. Just say, “Hey, are you passing on us? Is this a pass?” You could get something less clear. You could say, “Hey, it’s not a pass, it’s more of a monitor. We just like to see how you guys do. We are excited about a bunch of things, but just not excited enough to make the call right now.”

Then you can ask other questions. If someone tells you, “We’re spending a lot of time on this space,” or, “I’ve seen a lot of companies in this space,” ask questions about the space. Either allow you to understand if the person has depth in the space or if the person is still looking at the space, if they’re looking at other companies in that space, potential competitors to you, et cetera. At the end of the process, you can ask for references as well.

Again, this should be at the very end. “I’ve given you a term sheet, now you can do references on me,” kind of thing. Don’t ask for me if we’re mid-process, unless you’re a very hot company and that’s the only way I’ll get allocation. It’s very unlikely I’ll give you references halfway through a process where we’re still DDing the company. Again, the likelihood we’ll still pass on you is not zero, so there’s no point in you talking to our references if we’re not willing to sign a term sheet or sign or give you a term or sign an agreement or something like that. I would save it to the very last.

We also need to raise from limited partners on our side as venture capitalists. There’s always these stories, there’s ghosting, there’s whatever. It’s actually very analogous to the VC world with startups. Unfortunately, with limited partners, to be very honest. I would say the quality of feedback on passes or monitors is even worse than in venture capital, if that were to be possible. If you’re an entrepreneur listening to this, don’t be too sad. It could get worse. It could be cycles of two or 3 years for fundraising. It could be that the feedback you receive, if it’s not ghosting, is like nothing. Says nothing. Anyway, that’s where we’re at.

Bertrand Schmitt

Yeah, that’s all good points.

Conclusion

Again, me, with an entrepreneur hat, what I would say is that first, if you’re at this stage getting feedback from VCs, it’s because you are fundraising. If you are fundraising, you should know the firms you are talking to. You should select them, you should filter them, you should understand their industries, their stage, who you should be talking to. You should do your diligence first. I think it will remove certainly a lot of the potential for negative, for passing from VCs. It should provide for a better discussion.

I will say on both sides, try to be clear, try to be relatively transparent. I know you have to be in a selling mode, you have to, maybe a bit overdo it, but let’s be careful. There is a point where there are diminishing returns when you play that game. As Nuno explained, there’s certainly some situations where VCs have seen the movie so many times that whatever you come up with might not be so original, so be careful.

Definitely understand also the business of VC, how they work, because that will help you understand the different stages of the process, what to expect. Again, if you come from Europe, from Asia, be even more careful because especially in the US, the way people talk, the way people say no, can be very different, less direct. You have to be ready for that. Thank you so much Nuno for your perspective as well on this.

Nuno Gonçalves Pedro

Thank you.

Bertrand Schmitt

Bye-bye.