The New War Between VCs and Entrepreneurs

Two of the most interesting post-pandemic issues for the entrepreneurs running venture-backed businesses — which have basically been on an involuntary hold for the last year or two — are pace and story, and the conflicting attitudes toward each in the board room. Both are already topics of painful and somewhat heated discussions in meetings everywhere, pitting the impatient VCs against management teams. The VCs are all about IRR. Every investment they make is “on the clock” and their investors are always watching, waiting and wondering about how quickly and how much a given fund will return. They’re all in for pushing the pace of everything forward as quickly as possible. Meanwhile, the far more conservative and cautious management teams are still somewhat traumatized and only now starting to recover from the shock of seeing their businesses abruptly shut down. These managers are also realizing that their years of pain, sacrifice and stress were almost lost forever.

In a curious but completely understandable role reversal, even the careful and diligent venture investors are pushing to go all out and bet the farm in order to make up for the two calculation years that their funds lost while the world stood still, while the “crazy” aggressive entrepreneurs are all about rebuilding slowly and sensibly. They’re trying mightily to hire back enough people to get the job done because – having come so close to the edge – they don’t really care to risk the ranch and end up with nothing when they’ve spent years to build a perfectly solid business.

Doing it right is a lot more appealing right now to most entrepreneurs than doing it fast. As Hunter Thompson said long ago, “there’s no honest way to describe the edge because the only people who really know where it is are the ones who have gone over.” For the VC investors (with one eye always on their exit), it’s ultimately just about the bucks and usually it’s someone else’s money at risk anyway. But for the entrepreneurs who are planning to be in the business for the long haul, it’s much more a matter of life and death. They’ve got families to feed, teams to employ, and customers to properly serve and support as well. For many of them, having gotten a glimpse of what success could look like and a glimpse of some light at the end of a long, dark tunnel, the last thing that comes to mind is doubling down and jumping back into the deep end so they can start swimming for their lives and livelihoods again.

And, as if the constant pressure to pick up the pace and grow to the sky isn’t enough, the problem the investors have with the company’s “story” is the ugly second shoe that’s also waiting to drop. Consistent and improving execution on the tried-and-true business that got the business here in the first place simply isn’t exciting enough for impatient investors looking to jump on the newest, hottest stories and chase the next shiny object.

Because they’ve rarely been on the front lines themselves getting their hands dirty with the day-to-day operations, they just don’t appreciate what every successful entrepreneur knows. After spending years breaking down barriers and walking through concrete layers of naysayers, entrepreneurs finally get the in-place inertia and the accumulated institutional momentum to finally start to work for them. Familiarity in these cases doesn’t breed contempt; it breeds important levels of comfort and continuity. Being the incumbent provider is a great place to be. The entrepreneurs are no longer the new “disruptive” kids on the block, they’re more productive and additive partners to the customers who vouched for them early on. Shared success and bragging rights are important currency for lots of corporate decisionmakers who are always looking over their shoulder as more and more old-line organizations eliminate entire levels of middle and senior managers.   

Scaling business from inside the walls becomes dramatically easier and faster and – especially when you’re talking about having successfully penetrated industry-leading customers in oligopolistic markets. That’s when the flywheel effect of focusing on growing the volume of transactions, increasing the number of regions, serving more divisions and units within the customer’s organization kicks in . The doors your in-house sponsors and champions can now open for you means that the upside opportunities are virtually unlimited given the ultimately achievable total addressable market  size and the customers’ clear and substantial overall requirements for your products and services. In the service industry, this might take shape in the form of turning pilot programs and trial offerings limited to certain geographies into fully integrated and companywide sales that represent huge multiples in terms transactions, revenues and end users served.

The very last thing any smart entrepreneur wants to do – once he or she is inside the tent – is to confuse the issues or distract anyone from growing the basic business. You can’t be diverting scarce people and resources away from seizing the moment and capturing all of the available revenue embedded within major clients and customers. Having them conclude that you’re too small to handle all their business or not up to the task is a virtual death sentence and an open invitation to your competition.  

Worse yet, chasing new markets, rolling out new offerings when you’ve got the prospect of too much rapid growth on your plate, or otherwise taking your eyes off the main chance (and the low hanging and very sizable fruit) is a bad approach and a bad message for your loyal customers. Successful startups that eventually stumble and fail do so far more often because of indigestion than starvation. Too much, too soon – an embarrassment of riches.

Your best and biggest customers, unlike some of your investors, don’t want you chasing the next great thing. They want you heads-down, focused, and taking care of their business. The future can take care of itself for now – especially when it’s distant, risky, and likely to be diminished for quite a while. Even readily available and adjacent opportunities aren’t anything your direct customers want to hear about for now.

But the investors think this kind of deepening customer and market penetration, comprehensive integration and growing interdependence is old and tired news – just more of the same – and not entitled to the kind of exciting multiples they see being applied to other businesses in other industries.  To them, it’s not the short path to a successful exit or acquisition that they’re now looking desperately for because they gave up two years of development and new growth to Covid-19. They hear all about software eating the world and the dominance of the cloud and want to have their portfolio companies chase that rainbow and forget about the old and boring business as usual.

They don’t understand that these massive customer enterprises are perfectly happy to farm out various support services to third parties, and, in fact, increasingly excited to do so as they seek to turn their personnel costs more and more into variable rather than fixed expenses. Insurance companies these days are perfect examples of institutional customers happy to have other companies use their personnel to provide marketing data, customer surveys, inspection services, call center support, field appraisals, etc.

But big conservative outfits like insurers are insanely protective and hidebound when it comes to replacing decades of old enterprise level code with new software solutions, which are often untested at scale. For new businesses competing in oligopolistic markets, the service bird in the hand and a growing connection to a few of the key players is worth far more to the business in the near term than the distant prospect of convincing the giants to fundamentally change their entire operating system and adopt a SaaS or similar approach provided by an outside firm.

The investors might be right in the long run but asking a young company to make dramatic shifts in their base strategy – moving from efficiently providing important services to developing and providing enterprise-essential software – risks throwing the baby out with the bathwater and simply hoping for the best down the line. It worked many years ago for Netflix to basically bag the basic disk delivery business and shift to streaming, but – even there – it was touch and go for several years along with some fairly embarrassing stumbles like Qwickster.

The smart money in tough, troubled and uncertain times is to stick with the guys who got you to the dance in the first place. Investors who aren’t happy with management’s plans and strategies, and especially with the early numbers, results and growing post-pandemic demand for the business’s basic services, should give some serious thought to taking their chips off the table and heading off to find the next fantasy story or meme stock.

The opinions expressed here by columnists are their own, not those of

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