This is a big and complex topic that I won't attempt to unwind in a single post, but I had a couple of different exchanges with local investors and entrepreneurs just today that drove home just how real and how damaging this problem is.
Here's a quick rant on just one of the many issues in play here:
The behavior that triggered my frustration today is what I call "grinding" -- when an early-stage investor spends little to no time on team and opportunity, but centers the conversation around price.
Don't get me wrong -- purchase price has a direct bearing on expected return, and is a very real consideration in any deal. I've passed on plenty of opportunities because I felt the price was out of whack with the returns profile of the investment (and the current Bay Area fashion of uncapped notes or double-digit caps for "companies" that barely exist strikes me as absolute lunacy from an investor perspective).
But all too often an investor conversation that pivots around price instead of the intrinsic merits of the opportunity leads quickly to the next ask, the "special" price this investor believes they should receive because they're... umm... special.
This is what I call "grinding", and it's one of the most short-sighted and damaging behaviors an investor can engage in if they want to build trust with entrepreneurs -- and help those entrepreneurs maximize long-term value for founders and investors alike.
When good entrepreneurs ask for money, they aren't *just* asking for money. They're inviting you into their extended family and asking you to join them on a long and difficult journey into the future.
Your investment will be highly illiquid, so you'll be stuck with them -- and they with you -- for as long as it takes to succeed or fail. Every investor that comes along for that ride is now a partner in the business -- for better and for worse.
Entrepreneurs are at their most vulnerable when they need money, and "grinding" -- taking advantage of that vulnerability to try to eke out a little more return for yourself -- is the worst kind of relationship-poisoning, short-sighted behavior you can engage in -- if you believe that the really big gains in enterprise value are still ahead of you (and if you don't believe that, why the fuck are you investing at all?!).
I know, because I have been guilty of this myself.
I am still learning how to be a good investor, and when I started this journey I was under the mistaken impression that money mattered more than talent, and that the terms under which I invested were a private matter between me and the entrepreneur.
Both of those assumptions turned out to be badly, dangerously wrong.
When I approached an investment with a "grinder" mentality, one of two bad things happened: either I lost the deal and permanently damaged my relationship with a quality entrepreneur, or I won the deal and entered into a long-term relationship with an underperforming team and company, with strained relations between myself, the other investors and the company founders -- all based on a lack of trust.
So grinders have not one but two different ways to fail. They lose in both cases, but at least in the first one they don't also saddle good founders with bad investors.
I still have a ton to learn as an investor, but I'm trying hard not to keep on making the same mistakes. At this point, the only optimizing behavior that makes sense to me in early-stage investing is around two things:
- Team -- are these the most talented, relentless, creative and ambitious people I've ever come across?
- Opportunity -- is this team's vision so valuable and so exciting that if they pull it off it will be a massive win for everyone involved?
If the answer to both questions is yes then price is just a binary:
- If the price offered is fair given the stage and goals for the raise, I invest as much as I can.
- If I have conviction in the team and their vision but don't believe the price is fair, I offer that feedback respectfully and decline to invest -- or better yet, let them know at what price I would invest, alongside others on the same terms, and leave it up to them do with that information what they will.
- If I don't believe in the entrepreneur or the opportunity they've chosen to pursue, price and terms are irrelevant -- the answer is always no.
Putting an end to grinding won't fix all the problems with the Seattle startup scene, but it will go a long way towards focusing the conversation on the right questions:
- Are we fielding increasing numbers of amazing teams with huge visions?
- Are we doing everything in our power as a community to help those teams win?
Only when the answer to those questions is an unqualified 'YES!' will Seattle have a shot at the big leagues. Until then, it's chop wood, carry water.