401. Founder Vs. Investor – A debate between an Experienced Founder and the VC that Backed Her (Jerry Neumann and Elizabeth Zalman)

401. Founder Vs. Investor – A debate between an Experienced Founder and the VC that Backed Her (Jerry Neumann and Elizabeth Zalman)

Jerry Neumann and Elizabeth Zalman of Neu Venture Capital/Crane Venture Partners join Nick to discuss Founder Vs. Investor – A debate between an Experienced Founder and the VC that Backed Her. In this episode we cover:

  • Should Founders Even Want Venture Capital
  • Advice on Raising Capital
  • The Importance of Having a Hiring Process
  • How Many Full-Time Jobs Can a Founder Have
  • VC Attorneys
  • What Is the Purpose of the Board of Directors
  • Differences Between the Private and Public Markets
  • Tools Used for Profiling Founders

Guest Links:

Jerry Neumann:

Elizabeth Zalman:

The hosts of The Full Ratchet are Nick Moran and Nate Pierotti of New Stack Ventures, a venture capital firm committed to investing in founders outside of the Bay Area.

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Transcribed with AI:
Liz Zalman and Jerry Neumann join us today from New York. Liz is an investor and founder who has founded a number of companies, most recently StrongDM, an infrastructure access platform.
Jerry leads Neu Venture Capital. He also happens to be one of the earliest guests in TFR history, joining us nine years ago for episode 20 where we discussed how hard it is to pick Unicorns… a fact that seemed to elude investors over the past few years.
Liz and Jerry, welcome to the show!
Thanks, Nick. Glad to be back.
Yeah, it’s great to have you both. So In the fall of 2021, Jerry wrote a blog post called “Your Board of
Directors is Probably Going to Fire You.” The article reached the
top of Hacker News and crashed Jerry’s web server. Founders loved
it. Venture capitalists hated it. It had clearly hit a nerve. Liz called
Jerry, wondering why anyone hadn’t written something like it
before. “It’s not like things like this are a secret.” And so this book
was born
Right. So you’ve written this book, founders versus investors. I’d love to talk a little bit more about that today. But before we kick off this, can you give us a little more on your backstory and your path to becoming a founder and investor?
Absolutely. Thanks, Nick. So I’ve been a part of for startups to I was co founder and CEO of I started my career in in ad tech. I was a an analyst and SQL Developer. And afterwards, I was like, wait, I think I can do this better. So I started my first company and raised some money, and it got Aqua hired. And actually, that’s how I met Jerry was an investor in my first company. And then when I decided to start my second, he was the the first check in. I love startups, because it’s the hardest thing that I know how to do. And I am both the bet that investors are making the bet on and also many times the impediment to success all in the same fun package. And that’s me, I love my rescue pity dog. And I like playing tennis. And I like doing things that scare me as an adult like scuba diving.
Amazing. Wonderful. And Jerry, sir, this is a return for you. But it’s been some time. Can you refresh us here on your background and your current efforts?
Yeah, so I was a venture investor back in the 1990s. And then left venture to start a company. So I was a founder, started a company raised some money, got fired by my board. And then after that, I started investing again. So I’ve been venture investing as my primary job now for 15 years and a second time. This time, though, I’m investing my own money. So I am technically an angel investor. I think I’m one of the few professional angel investors that has been around this long. Yeah, that’s what I do. I also I teach at Columbia, I teach entrepreneurship to the engineers. And I wrote a book just recently,
amazing. If you want to see a great venture capital website, got a new VC. It’s one of the best. And I’ve seen some others that have copied you at this point. Well, let it be a surprise for the audience. So Jerry, let’s start out with a common question here. Should founders even want venture capital?
I used to tell people, there’s some old advice that you shouldn’t you should only take venture capital, if you absolutely can’t not take it. That should be like your last option. I don’t really I don’t think that anymore. What you the way I think about it now is you should look and see, which is the better vet taking it or not? Yeah, right. At my startup, I had this one startup. So I have this one anecdote. But at my startup, my co founder said, we should raise more money, at a height, we should just raise a lot more money. And I said, Okay, let’s do a scenario, we’ll put together the spreadsheet of how the company can play out if we take a smaller amount of money, and the spreadsheet of how the company would play out if we take a really lot, a whole lot of money, and see where you and I end up making more money. And there was a really stark difference in the spreadsheet of how much money he and I made because the company would grow faster, but we would own a lot less. And that convinced him and I think it’s the same thing you should do as a founder, if you’re taking venture capital at all, look and see how much you personally will make. If you sell the company in 10 years, if you don’t take venture capital and how much you would make if you do take venture capital, and it’ll help you make your decision. Is it purely a business decision? No. I think you could ask Liz the same question. And she might say it’s a purely business decision, except you then have to deal with venture capitalists. But what’s funny you and I know that maybe Caprica great.
I think when we last had you on the show, this is very much a cottage industry. And now it’s become this massive industry and so many people working in tech view starting a business and raising venture capital is the ultimate destination if you’re in tech, and I think they forget the reality of what you just expressed, which is venture capital is appropriate for a very nuanced and specific type of business but not all. And at times guidance on spending and hiring from investors. It can feel like a whipsaw in 2021 Blitzscaling was all The Rage only shortly thereafter, austerity and profitability has seemed to dominate the Twitter feeds. Liz, I’m curious, what’s your advice for founders dealing with conflicting growth information in times of plenty, like a couple years ago versus times of contraction?
That’s a great question. I think having been through it myself, the thing that has centered me is that at the end of the day, I am still building the exact same business and times of plenty as I am in times of nothing, right? I have a thing that I’m doing that is theoretically making money. And my job is to get it to make more money at some sort of velocity that is up into the right. And, and so oftentimes investors will say in in times of plenty, oh my god hire like crazy, you have to deploy more capital in order to go more quickly. And then in times of now, they’ll say something like, No, you need to scrimp and save because you have no idea if you’re going to be able to get to the next round of funding. And I think in both cases, that advice is probably on the extreme version of things do I need to hire? Yes. Do I need to hire 3x? My hiring plan? No. And then in terms of today, do I need to cut down my marketing budget to zero? No, somewhere in the middle is the truth. And so my Northstar is always focused on the business that I was building yesterday that I’m building today that I’m building tomorrow. And if there’s something fundamentally wrong with the business, take a closer look at that. But otherwise, it’s just keep your nose to the ground and focus on growth.
I suspect your position differs on this year? Not
in some ways. I agree. Right? What you’re looking for, as you’re building a business for 10 years from now, right, when you can potentially exit it, and you should focus on that. But the truth is, and you’re seeing this right now, people who raised money two years ago, are having a hard time raising money now. So just in the short term, it was a good idea that many of them cut their burn rate over the past year. Because if they hadn’t, they would now be out of money and have a hard time raising more so yeah, theoretically, not theoretically. But ideally, you build for the company you want in 10 years, and you just do that, right? But in practice, you can run out of money. And when you run out of money, you’re done.
What about the argument that in the gogo years, it’s easier to acquire customers? Right? The budgets have expanded. If you lean into sales with something that’s working, right, let’s assume there’s evidence of some product market fit. Why not press your advantage, instead of just having a default that you sit at, regardless of which way the winds are blowing?
Yeah, so I invested in the company actually back in the 90s. In no sorry, in 2000, right before the.com bubble burst, that all of their customers were other.com companies. And they had grown from basically zero to $2 million in revenue to $80 million in revenue. And so that when I invested they were at, they had just had a year, a $2 million year, and they were looking at an $80 million a year revenue was seemed like a good company. And they hired a ton of people, the we put a bunch of money in they hired a ton of people. They were growing like mad, and then the.com bubble burst, and all of their customers said, What can I cut? How can I lower my expenses? Oh, here’s one place, and the revenue went from looking like it was going to add to looking like if it was going back down to five cuts both ways. Right? Yeah, yeah, you want to grow when times are good. But you also want to, to make sure you realize that good times are transitory.
I would agree. I would definitely agree. I think if I take another angle on that, and I’m growing like crazy, and I’ve 3x my AD team, and they’re closing deals, do I really know that the A’s are trained? Do I really know that this is the customer that makes sense for my product at this particular moment in time? Do I really know that the expectations with my customer list are set such that when we deploy and go live, that we’re not going to have crazy churn or strife in three months, and they’re all gonna go away? And so do I want to hit the gas pedal? Yes. Do I also want to make sure that it’s still right for the company at this moment in time? Yes. And so there’s always going to be that tension there.
I think sorry, Liz. And I had this argument all during her second company. And I think when you’re grown when the opportunity to grow is there, you either take it or you don’t. And if you don’t, somebody else does. And it’s always controlled chaos. You may you hire people to see if they work out if they don’t work out, you have to get rid of them. You hire A’s, you don’t know if they’re going to work until you have them working with customers, right? Because the salespeople are great at selling themselves always. That’s like their first skill. And you hire them and you’re like, okay, all right. They can’t sell at all except for themselves. And I think there’s no other way of knowing you know,
how to present Jerry quickly. And when do you think founders should be hiring talent, especially non engineers in the early days?
I push for early. I think the biggest bottleneck I’ve seen for most startups after the first year, right? You have a product in front of customers, maybe you’re charging, maybe you’re not but you have a product that People like, right, and you’re still iterating. The biggest at that point, the biggest bottleneck that I usually see is the founder, right? The founder is the best salesperson that company will ever have. Usually, because they understand the product, they’re a true believer, they wouldn’t have gotten there unless they could sell. And anybody that hire is going to be a worse salesperson than they are at that stage in the company’s life. So a lot of founders are really reluctant to hire people who aren’t as good as they are. They’re like, why should just keep doing it? The problem that is that they are the only salesperson, and the company can’t grow faster than they have time. So I usually push for people to hire early and start training and start weeding out the bad people and finding the good people.
How early though Jerry, right. There’s a lot of investors out there that advocate the founders should be the one selling up through Series A. And at that point, you expand your team, do you believe in founder led selling or not? It sounds like you advocate hiring sales talent earlier on
the precede is the new series A right? I think, no, I advocate a hiring earlier. And I think get that it costs money. And I get that the person you hire might not be the best person you could possibly hire because you can hire better people when you have more of a reputation at your company. But I think you bring in somebody, if only to have to just have them describe the sales process and start to codify the sales process. Because once you start hiring more people, they need to have a sales process that works right there. A lot of salespeople aren’t technical, they’re not going to be able to go in and convince the customer that the product is what they want on a technical basis that we have found, or can I think you have to plan for that. So the sooner you have somebody in the sooner you can start that process going.
And Liz, what do you think I’m seeing you shake your head, it’s been this, you’ve been through this multiple times what worked for you,
I have and to Jerry’s credit and to advice that he gave me at my last company. After I raised my series A he sat down and went through an AE hiring exercise with me and one of my co founders and we realized we were nine months behind in hiring and there was no way we were going to be able to hit the play that we had just raised on. Now the flip side of that is I would argue it’s not a hire at precede or Series A, the way that I always thought about it was I as a founder will be incapable of handing off something to somebody, unless I know how to do it. And to Jerry’s point, I know how to codify it. So a mistake that I see founders making and that I made it my first company was I would hire people in and expect them to figure it out. That’s my job as a founder is to figure it out. And so what I used to present to my board was my sales process. And it was breaking down, right STR work breaking down the door of something, getting some first call second call demo, conversion, deployment expansion, and everything was color coded. It was green, yellow, or red. And I started to do the interview work on various functions as soon as something turned yellow, because we were getting to the point where we were about to feel very comfortable with it. And so it made sense to bring somebody on. Yeah, that was helpful to us. The mistake that we made was hiring a is too late. We had prospecting and demos and conversion down way, way early. Our issue was also to Jerry’s point, we couldn’t get over ourselves that B were right, a plus but you know what, like C minus was going to work just fine.
The other challenge is that functionally there there can be an optimal time to make these hires. But then if you miss hire, if you don’t have your hiring process, just super dial, which I think a lot of young founders, it takes time to figure that out, then you end up spending all your time with talent, that’s just not a fit at all. And it’s you’re trying to make it work until it doesn’t, and it’s just occupying the majority of your resources.
Yeah, I think you can hire some people on there. They’re great right from the get go. But I don’t know there’s like your salespeople, how long do they have to shadow you before they could take over? They were
not ready to I think slide. What’s the metaphor fly the coop, fly the nest until three months. So they learned every Yeah, because we were selling a highly technical product, two heads of DevOps and infrastructure. So you put an ad on the phone, who can’t tell you the difference between a certificate and an SSH key. And these guys would immediately eliminate you. So there was some training and vocabulary and familiarity with the space. But after three months, they were amazing with the sales or the sales engineer. I would say though, in terms of the hiring, it is 100 It is absolutely a full time job. And one of the things that we remember when the recruiting manager would say we got four people at the end of the road for product manager role. Why do we need to keep sending out emails to try to get people on their first round interview, like you have no idea if they’re gonna work out? You have no idea of any of them. We’re gonna get to the finish line. We should always be talking to people in hiring. And on the flip side of that Add wasting times in terms of trying to make people work actually, ROI behind a Bloomberg Beta once said to me, he said the moment that you have a thought that maybe you should fire somebody, it’s already too late and you should have done it.
It begs the question how many full time jobs can one founder? Because hiring, product sales like it’s all it’s a lot, I’d love to hear your opinion on venture attorneys. We’ve used a variety, some with success, some not so much, Liz, any thoughts on DC lawyers,
I do have thoughts on VC lawyers. So I learned this lesson in my very first startup, I’m not going to tell you about us. But it was one of the five or six names that come to mind that get recommended to you. And we went through an acquisition. And I think 10 months later, I got out with a double trigger, and getting my money was awful. And there was an insufficient, there was insufficient language there to describe a whole bunch of stuff surrounding the termination payout. And it was really frustrating and took months to get that money. And so fast forward to my storm. Yeah, my second startup, and we were looking for ways to save costs, especially early on. And one of my, one of my co founders, his best friend, was the litigation from boys, Schiller, Schiller, son, so boys, Schiller became our lawyers. And they were awesome. Because they’re litigation guys right in their top, whatever in the world. And they just fought tooth and nail for everything. And so when we said start with the most founder friendly, Doc’s possible, he literally crossed off anti dilution provisions for the first round. And Jerry was the only person who caught it. And he and we had this like, huge argument about it. He was right, by the way that it should have been in there. And so I think what I learned is that the main firms that get recommended to you who are highly competent, they do one deal every year for you, maybe one every two years, but they do 100 deals a year for the the VCs. And so they are by default in bed with the VCs. And so you asked to start with founder friendly docs, even the nbca. Doc’s, they are not founder friendly, they are much more on the side of VC to start. And so I am a big fan of choosing highly competent lawyers who know what they’re doing, who will also fight tooth and nail for you. And they can be hard to find, because there are a lot of second tier firms, you really got to find a top one, but I will not go with the top five or six anymore.
So how would you go about that exercise? Right? Do you reach out to a bunch of other founders? How do you find that second tier? That’s, I can do a Google search and find Gunderson and Cooley all day, but I can’t find?
That’s a good question. I don’t know that I have the answer. Because if I were to email 50 founders right now, the majority of them would have gone with Coulier, Gunderson or DLA or I think that I would probably email some of the VC funds and see who they use, because I find that there are some VC funds who don’t use those guys who are maybe going a little bit more boutique. And in at least one case, that boutique fund I’ve hired to do work for me, it was very good.
What about you mentioned something before your payout was very challenging and difficult? What do you think about the founder retaining counsel for themself? Because you’re retaining counsel for the company, typically as a part of a transaction? At what point? Do you start retaining counsel for you as an individual?
Sure, knee? I probably would. It’s a great suggestion. And actually one that I considered only after my last company, I would prop probably, for me, the flip is less from a fund round perspective. And it’s more, when is the company no longer a call option for investors? Like when do they actually think that this one might repay the fund? And at that point, your personal interests diverge from that of corporate counsel?
Any thoughts, Sherry, on which question, the personal one, or the lawyers generally,
VC counsel in general?
Yeah, listen, I totally disagree on this. I know she thinks that all of the VC lawyers are in the VCs pockets. And that’s not entirely untrue. The problem is that the non VC lawyers have no idea what standards you bring in. And this happened with boys, Schiller they came in, they’re like, Oh, we want all this stuff. And none of it was going to be given. So it was like there was a certain amount of wasting of time. I wasn’t the lead there. So I didn’t have to deal with them. But in another times in other deals where the lawyer has been a non VC lawyer, they just bring in all this stuff that nobody’s ever going to do. They and it’s just a waste of time. The VC lawyers know exactly what the VCs are going to agree to. So they may not push that hard, because they know they can’t win certain things. But at least you’re not arguing about things that are never going to happen. It’s hard for me when founders hire lawyers that have never done a VC deal before. And they come in to like, oh, I don’t know why we should have preference. That doesn’t make any sense. So you know what, that’s just how it is.
He makes a fair point. Liz. We’re calling for steel in Singapore and This has been the longest transaction cycle of all time, because it’s just there’s a lot of learning going on with founder counsel.
I disagree with Jerry’s premise, in that the VCs are only going to agree to this set of things. I don’t know as a founder, what a VC will or will not agree to a negotiation is this series of stuff. And there are things that matter more than others. And I also believe that that that the traditional VC lawyers aren’t incentivized in any way to introduce things that might be helpful to me, for example, I didn’t learn about CO sale rights or CO sale exemptions, for founders to take money off the table as companies great are my lawyers. I learned about it from some other founder who had heard about it from some other founder, and so on, and so forth. And if a lawyer is working for me, they should say, Hey, there’s this whole set of things you can ask for, I don’t know that we’re gonna get it. But let’s talk together about how to put together a negotiation package that makes sense for you. Let’s rank the things in order, and I’m gonna get as much as I possibly can. But how would
a lawyer who’s not a VC lawyer know about cosell rights, right? The VC lawyers do know the fact your lawyer didn’t tell you about them as bad, right? But most of you say lawyers will say, look, here are the 10 things where you have some wiggle room, you can argue these things back and forth. But some of the other things just aren’t going to fly. And I’ll tell you what standard right now this year, and I’ll tell you what isn’t and I’ll tell you whether or not you’re likely to win some of these things.
What they don’t say that I’ve never knew.
I don’t know. I don’t think that’s true, necessarily that lawyers aren’t gonna tell you that stuff. I just
last year, I went through, it was advising a founder who was raising a series a from a Mon Valley fund. And their lawyers were Gunderson. And Gunderson told them that they should not ask for an employment agreement on a Series A because it was incredibly non standard.
That’s bad advice. Bad advice. I mean, it’s also
the attorney. It’s not the firm in some cases, right? The attorney
was very competent, and I respected her opinions a lot. So like, I thought she was great. And yet,
I think you in the end, you should be getting advice from other founders and from, you’ve asked me for advice on later stage deals where I was the early stage investor. And I tell you what I know, I just think that if you’re arguing like the basics, I personally, as an investor, I hate arguing the contract, because there’s no value added in changing the contract slightly, it’s, you’re not gonna make 10 cents on the dollar. By getting rid of this or getting rid of that that’s just not the job, right? The job is to just get on with building the company, and an organ, the contract just takes away from that. But I just have found that you’re definitely argue the contract more with people who haven’t done it before.
I want to add my own pet peeve around attorneys, and you guys are welcome to disagree with me. But in some cases, first time founders. I hate to say it this way, but they hide behind the attorney. So you come to an agreement, you have a verbal agreement on the phone, and then surprise, the attorney asked for something different. And like you’re dealing with the attorney, and you’re trying to talk to the founder and say, Hey, it’s your business. It’s your decision. The attorney is a professional service provider, working on your behalf. Like this is getting complicated. Tell them what you want, and what we’ve agreed. So I think that
that’s both sides, though, I think, yeah, we’ve actually both in the book talking about this. The lawyer is going in freelancing, thinking they’re doing you a favor by asking for things you didn’t ask for, and somehow getting a better deal. In the end, like you have to talk directly to each other and be like, wait a minute, this is not what we agreed to, and tell the lawyers stick to the script. Because they doubt the boat on both sides. I’ve had when I was a founder had investment, sorry, went out. As an investor, I’ve had my lawyer go and ask for things I didn’t I had agreed not to do. And I have to go back and look and don’t do that. Don’t freelance don’t try to make my deal better than I made it. I’m the negotiator. You’re getting the documents together. That’s just the that’s how we split up the tasks here.
I’ve experienced both sides of that. And oftentimes, like the venture partner doesn’t know and the founder doesn’t know. And these things can get cleared up in two seconds. Just by getting on the phone. Yeah.
Yes, text or send an email. Now, the news is no time you got to pick up the phone. That’s right. That’s right. The phone wins at the end of the day. The phone call wins, please, that I’d be curious to hear more about your experience with boards. What do you think is the purpose of the board of directors,
the purpose of the board of directors, we have a whole 70 Page chapter on this. I think the classic definition of the board of directors, governance of the company making sure that the company is being run in the best way possible and in the best interest of the company. I think when the rubber meets the road, though, it just never ends up that way. As a founder. I feel like my job is to protect the vision that I have in my head and also to protect my job. I don’t want to get fired as a co founder or CEO or whatever my My title is in from the investor side, their job is to protect their returns and oftentimes their ego. And so when you’ve got those two personas sitting on the board, it’s the company, I think in real life that loses. Jerry might have a different perspective, Jerry?
Well, I think there’s one purpose to the board, right that the board of directors is there to manage the founder, right to manage the CEO. That’s just the truth of it. Right? I know, nobody likes to say that. But that is their job, right? That’s what it’s their job. Legally, it’s their job contractually, it is the purpose of the board. I think a lot of founders and investors have layered on other purposes, like giving advice and offering help and all these other things. But that’s not really the job, right. And I think you can separate those two things, the the governance piece of the board, and the asking the investors for help into two things. And you could do that in board meetings, if you want. Or you could do one of them in the board meeting and the other outside of the board meeting. And I think what I read, what I wrote about in the book was a hybrid where the board has to do governance. And if you go to the board, when they’re expecting to do governance and ask them for help, they may, with their governance hat on say, hey, maybe this guy, or this woman is not the right person to be managing this company. Right? Because they clearly don’t know how to do it. There’s always that danger, right? So I think it’s, as a founder, you need to be careful of that. And you need to be aware of that, right? It’s, they’re not there to be, they don’t work for you, right, you work for them.
So who is actually running the company based on these definitions,
the founder is running the company. And the founder works for the board. If you think about how a board meeting is run at a fortune 500 company, that the CEO is clearly running the company until the board decides that they shouldn’t be running the company anymore, and fortune 500 board meetings are not full of board members giving advice and telling the CEO what they think should be done, there’s a little bit of that maybe we should change our vision, we should change our direction, we should focus more on whatever. But for the most part, it’s the board members listening and making sure that things are going well. And it’s it should be more like that in a startup, not entirely but more like that than it is. I think it’s the board doesn’t want to run the company day to day, it’s a bad idea for the board to try to do that. I also think that in the end, they are the ones who can hire fire and change the compensation of the CEO of the founder. And that’s their job.
I guess a key distinction would be though, in the private markets, in many cases, you’re dealing with first time founders, right. Whereas in the public markets, you’re dealing with practice CEOs that whether they’re good or not, they have some experience that suggests that they’re qualified for the role. Whereas a lot of founders are learning on the job, right? They’re building the rocket ship as they’re flying it.
Oh, totally. And I think I’ll say, the reason I’m adamant about what the board does is because I think many founders believe it to be entirely different. And many investors tell founders, it’s entirely different. When they invest at the time of investing, they’re like, we’re gonna have board meetings where I’m going to come in, and you’re gonna tell me your problems, and I’ll help you solve them. That’s true, I think for a little while, maybe the first year. But after that, especially when you start getting, that’s not really what they expect. It doesn’t. It’s not entirely their job to do. It’s also their job to decide you, as the founder are the right person to run this company. And I think that’s, you’d have to be aware of that. Liz, what
kind of help do you think is reasonable to expect from VCs? And what was your experience like working with investors and board members?
Let me say something first about building something while you’re running it for a second. So one of my investors, the analogy that he used to use was driving the Ferrari while you’re building it. And so for our first board meeting, I asked one of my STRS to make a shirt with a red Ferrari on it that said, building the driving the Ferrari where we’re building it, and they give them all as gifts to the investors at this first board meeting. And one investor looks at it, and he says, that’s not a Ferrari. That’s a Lamborghini, and I’ve owned that car, and it didn’t have such good ventilation. And so I sold that. And I went to the SPR. I was like, Dude, you had one booking job. And all you he was like, What do you want? For me? It’s a rent sport
investors are known for their EQ, right?
Oh, man. So I think, look, I think as somebody said to me last week, man, all money is green. And it’s an investor’s job to make their money greener and shinier and sparkly are so that I want to choose their money, and especially the why I’m the founder and my company is hot stuff. It’s going to be more of a competition. And so what investors will do is Jerry’s point is they can fleet a whole bunch of this information and they say, I’m going to be really great at helping you with customer introductions. I’m going to He’s super helpful to introducing you to later stage investors. Oh my god, I’ve got this amazing go to market expert. And by the way, I’ve got this temp, CFO, and there’s just this huge list. And then the founder comes in with these expectations. And most founders, I would argue, don’t diligence investors sufficiently, if at all, and shame on them for that. And you get in, and then all of a sudden, there’s this resentment, because as Jerry says, He’ll say, I can introduce you to customers, and then the founder will call them and be like, Hey, can you introduce me to customers, you know, but I told you, I couldn’t do that. And so I’ll go call these investors and say, Okay, let’s go, and they can’t do it. And so I get frustrated, but it’s my fault. So it’s like, it’s both sides fault. I didn’t check that what they were saying was true. And they didn’t tell me the truth. They’re in marketing and sales mode as they should be. Because that’s their job is to deploy capital into the best companies so that they can have the best return, I get it, right. And so in my experience, what I now do is I try to figure out, most people are good at one thing, they’re really good at one thing, and so they’re everybody’s box is like this. So I try to find the one thing that they’re good at that one box, and then leverage that boxes as best as I can it create an amalgamation of all the quote unquote, help that I need in order to scale the company? Yes, that’s my perspective.
And can I add to that? I think many investors are good at something. And Liz says they’re good at one thing. Almost all good investors are good at something else, which is they’re good at investing, right? They’re good at venture capital. Listen, I had this conversation with her first company years and years ago, where she was meeting with a bunch of investors raising her seed round. And I had already invested and she said, Look, I don’t get it. They just they don’t understand what I’m doing. They don’t understand the product. They don’t understand how to run a company. They just don’t understand anything. And I said, Yeah, but you know what, here’s how you should think about it. They understand how to invest and just treat them like their investors. And that’s what they’re good at. And I think this is when I think which anybody who knows venture investors and has worked with venture investors will say, the help they can almost always provide is future financings. What your company has to look like, if you want to raise more money like this, some very simple things that they’re usually very good at, if they’re any good at venture capital. And those are the things you can rely on. Everything else is great.
Because you’ve been both the founder and investor has been on the other side, change your opinions.
Oh, I’m a really bad investor. I’ve written three personal checks that have my account, and I become so because I’m an operator at at my heart, and I am not a financier, I become so emotionally invested in them when the founder doesn’t do what I think is right. And I, maybe I’m right, 80% of the time, I get like, enraged, and I’m like, yeah, so I’ve just stopped doing that. So I’m an LP and other funds. But I do consult for Karina, a seed stage venture capital funded in Europe and I the work that I do there is essentially profiling, the personality of founders, like being able to having done 1000 interviews and whatever every year as a CEO, it’s like you can read people pretty quickly and where their gaps are, and specifically vetting, do these founders understand that when they take venture capital, and this is a pre seed and seed stage fund, that they are now on a path to monetization? And are they going to be able to get out of their own way and transition or not, we can still make a bet, if not long term from going from a founder with a vision to an operator, which I think is something you touched on earlier founders need to morph into something different. And that expectation, we’d often don’t know that’s going to be required of us until it’s too late. And so it has that work. Plus writing with Jerry and hearing his perspective has given me much more empathy. In terms of the founders, forgive me the plight of the investor in making sure that their money can make money, because I think oftentimes there’s a disc.
Yeah. 100%. What’s the primary tool that you use for profiling founders? Is it? Are you doing video based meetings? Or do you use assessments? How do you go about it?
I’ll tell you how I used to do it. My very first question with all interviews and strong DM. So first of all, are you on time, and on time means the video call starts and you’re there. You’re not 30 seconds late. You are on time right at the start of the hour, a half hour? Number two, the very first question I asked you, is so right. So excited you’re interviewing here, what a pleasure to meet you. Super, super interested to know. So obviously, you’ve done a lot of research on the company. Tell me your favorite fun fact about anything having to do with strong VM that you didn’t learn from the website. I don’t care what it is. I don’t care if it’s that you saw you went to my LinkedIn profile and you saw that I went to McGill. I don’t care if you saw Jerry mentioning us on his website. I don’t care if there’s some hacker news post that my CTO makes. What I’m Testing for is are you prepared enough when you get on this call to have some sort of a cogent conversation with me so that I think that you might put some effort into the job. And so that talks about
how many founders, people running businesses don’t do that on the investment.
And I test them on calls with founders. And just like so you just had a call with such and such partner. Tell me what were their expectations for the call? And nine times out of 10? I don’t know. They just set up the meeting. I assume they’re no good dead. You are dead in the water. Yep.
Doa, I’m the same. If they asked me like, so where are you based? I’m like, Ah, really, all you have to do is pull up the LinkedIn. So easy. 10 minutes, at most, five minutes. I’m curious if either of you change each other’s mind, because I’ve read some of the dialogue in the book. And it’s pretty heated, like you have different opinions on things like, either of you changed the other’s mind? Or are you pretty upset in your positions on these things?
I’m gonna let Jerry go first on this one.
It’s funny, I’ve been a founder and an investor and and I was fired by my board. So I’m not entirely unsympathetic to some of the things Liz says. But in the book, I was trying to take the rational investor point of view. But it’s funny, we had a friend of mine, who’s a venture capitalist who’s a very good venture capitalist. He’s been I’ve been on board with I mean, he’s been great for the companies and really helped founders. He read part of it, he’s I don’t know, it seems a little over the top. I think it was reading about boards, firing founders. And he said, if it’s better for the company, the founder should want to be fired. And I, part of my brain, like the lizard part said, Yeah, that makes sense. It’s better for the company, everybody should want what’s best for the company. And so I ran it by another friend of mine, who’s a founder. And I said, so and so said this, and it makes sense to me. And my friend said, Yes, spoken like somebody who can’t be fired. I think, yes, I have definitely come to appreciate reading losers writing the founder dilemma, right? You’re not just there for the money, you’re not just there to make your investors successful. It’s your baby. And I think it’s, people forget that even I forgot it after a while.
So coincidentally, we have over 50 investments as a firm, and the first CEO that was fired by the board, after two years was just brought back. The company has been pretty flat. So I’ve never seen that happen. But just went through that. So Jerry, you were fired by your board? What is the moment in a company’s life when the founder investor relationship will most likely go wrong?
I think it’s when one is the it’s one of two times it’s either in the board meeting where you’re in a board meeting, you’re presenting as a founder is presenting to the investors and says something like, we have this problem I don’t know how to solve. And your board table has a bunch of investors around it. And somebody says, Well, have you tried this? And the founders? Yeah, they’re the ones that have you tried that. And all sudden, there’s this kind of downward spiral where the investors realize that they’re the ones running the company, not the founder, or they’re the ones, they think they’re running the club, they’re not really, but they’re coming up with the ideas. They’re telling the founder, they’re managing the founder. And at that point, they may say to themselves, why do we need this person and this, do this better, whereas the same founder, and a board meeting could come in and be like, we have this problem. Here’s our proposed solution. Here are three other solutions we thought of with what we think ours is the best. And then the investors say they’re managing the company. So I think that’s probably the point where that’s one of two times where it is pretty dangerous for the founder to in the board meetings there. The second time is when there’s an exit opportunity. And I’ve had this happen actually, a couple of times, it’s always surprising to me, where a founder says, because I’m in a really early stage investor, they’ll often call me, when they won’t talk to their later stage investors to ask a question about how the later stage investors will react. Because the equity I own is much closer to the equity they owe, and is much more like common than the later stage investors who have all this preference, and who expect a multiple offer much larger. So they’ll come to me, they’ll say, hey, we have this offer to be acquired for $30 million. I think it’s a good offer, I think it’s probably the best way to get for a few years. By the way, I’ll personally walk away with $10 million. And then they bring it to the board and the board says we just invested at a 15 or 20 million valuation. We’re not here to make two times our money. And then the the board is wow, maybe this person isn’t ambitious enough. Maybe they’re not the person to run this company. And that can also lead to the founder being pushed out. I’ve seen this happen more than once. It’s always a little surprising to me, that would precipitate the being pushed out. But it has
to lose his point earlier expectations, right? You got to understand your investors in what they can contribute. And the investor needs to understand the expectations of the founder to when it comes to exits and what they’re planning to build and how big, how big and how far they want to go. In my experience some of the best founders So I handle a lot of these exploratory conversations in sidebars. So before the board meeting, they’re calling me up individually. And I’m sure they’re calling up the other investor saying, here’s something we’re struggling with want your input, then when they come to the board meeting, they got more of a plan around it. It’s not this brainstorming exercise.
You totally agree, completely agree that no surprises in the board be no surprises?
No, it’s not the best leaders who in the end, do you think works for whom does the founder work for the investors? Or does the investor work for the founder?
Oh joke that my investors work for me, I have, if I ask an investor to do something, they better do it. They they work for me they own equity in my company, Jerry and I’ve laughed about this. I had a bet, actually with I had a bet with True Ventures in terms of getting introduced to all of their portfolio companies that if I could sell into X percent of their portfolio, I got myself accustomed to venture sweatsuit, because you can get hoodies in the valley, but you can’t get branded sweat pants. So I got myself a sweat suit. And so I use my investors for introductions. There’s a founder that I work with, and she sells a piece of hardware, and she was having supply supply chain problems. And she was like, What do I need help in the factory and I go, you email all of your investors, and you ask them who’s available to show up and sit there with a glue gun for an entire day like you need help, but call them and ask for help. Now, I’m being a little flippant here. I think the flip side of it is that we both work for the company invests or works, ideally, to make sure the company can sell and is run well. And I work for the company in the sense that I’m a steward. And I need to shepherd it. And and I think if I’m the problem, I would hope as a founder, that I would be aware enough to be able to get out of the whale the most times that isn’t the case. I will say this where things break down and board meetings, and you both are totally right. No surprises and board meetings, board meetings ever. And Nick, of course, everybody is getting a phone call beforehand. Although I will say I’ll come in with a plan. But I want I go around the table. And I make sure everybody tells me what they think because it’s very important that investors look good in front of other investors. Yes, yeah. Where was I going with this? Are we just talking about founders and investors? You were about to disagree with me? Oh, my God, but I disagree with me, oh, my God, what was I disagreeing with you about now
that the investors should be doing something in the board meeting other than just sitting there watching you present.
So here’s something Nick that I wish that investors did a better job of, I think founders when they’re fired, or investors are like this needs to change. And now they’re more often than not surprised. And I find that investors are trepidatious, about speaking very clearly, to the founder about what’s bothering them. So for example, I’m an observer on the board of a company that’s worth 150 million open source, darling, blah, blah, blah, blah, blah, all of these big investors in the board. And the CEO is young, and he’s hungry, and he’s smart. And he comes into the board meeting with 26 pages of notion docs that you have to read and all of this additional detail. And the investors are asking him questions, and they’re delicate questions. So talk to me about your pipeline. So who have you successfully deployed on this new platform? And what he’s not asking is the question under the question, why are they asking these things? And so I can see, I as somebody who has been sitting in these boardrooms for 15 years, from a founder perspective, siloed shit, this kid’s gonna get fired in six or nine months, but they’re not speaking clearly enough. And he doesn’t know how to ask the why. And so that’s where the conflict happens. And I wish they would just say, Dude, you haven’t deployed somebody end to end on this new platform in nine months? Why should I have confidence that you’re going to be able to do it in the next quarter? Now, that’s the conversation. And the founder would relish that openness and honesty, so that he can say, you know, what, I don’t know. And I’m really scared to make the decision to throw it out. This is my hypothetical. But that doesn’t happen. And then boards overturn the founder, and then there’s all this resentment, and then the company suffers, because the thing that’s on happening is a decision about the best way to move the company forward into the future. It has just been this seismic dramatic leadership change. And the team is Wait, what’s happening? Why should I stick around here? One is the board
members aren’t direct. Sounds like you’re just asking them beat directly with what answers you want.
I think people in general do not like being uncomfortable. And it requires Jerry has a completely different view than this. I think people don’t want to be uncomfortable, and I think they don’t want to ruin their reputation.
And if you have a pro rata and things turn and go, right, you can’t be the jerk on the board. That was always like, coming right at me. Right, a little less likely to get that pro rata.
I think even before that, though, it’s like the founder can be a jerk as much as they want. The investors have to talk to the founder, right? They have to go back to the founder to to get any information about the company. They have no choice, but the founder doesn’t have to talk to the investors outside of the board meeting, they could just basically cut them out and not talk to them. And what can the investor do about it? I have found that if you’re too direct with some people, they’re just like, You know what, not gonna talk to you anymore. And I think that’s you have to be careful, right? Because if they stop talking to you, you can no longer do anything. So I don’t know, I think it’s more than just being direct isn’t the best strategy for everybody.
Maybe they need an exercise or some coaching from Liz and framing, of how to position things to get to get the answer, but also be polite. It’s funny,
that golf, I’ll tell you, then I Yes. But I should also probably go to finishing school.
It shouldn’t we all right, but you read some blogs, and you listen to some investors on Twitter. And there are VCs that say the founder is the customer. And there are VCs that say the founder is the product, and that there’s different philosophies and different ways of working with people, depending on kind of the the mindset you have about who they are and what role they play in your fund.
Yeah, but I don’t know that you’re both on the same team. In a sense, you may want different things. It’s not like once a customer, it’s not like the founder is the customer or the product. They’re They’re your, your they’re your partner, right? You have to partner with them. And I think it’s anybody who’s dealt with other people knows, you can’t always just be completely direct with everybody, please can. But the rest of us have to Oh, without any repercussions whatsoever. All right, a wrap up here.
What did we miss in the Great Investor versus founder debate? Liz, what did we miss from the book that you’d like to share with listeners today?
Somebody that read the book described it as an even handed thoughtful approach to what is perhaps the most unique relationship in all of capital, finance. And that stuck with me, because I think listening to Jerry and I speak, you might say, Oh, it’s very profound, or it’s very pro investor, it’s actually both and neither at the same time, it’s, here are the facts on the ground, as we have experienced them. And Jerry very much puts on 100% of an investor had an eye put on 100% of the founder had an our reality is much less extreme than that, I think, in most cases. And so this is not an operating manual, it is not a how to grow, it’s not a zero to one, it’s not crossing the chasm, or any of those things. It’s a, your the way that things actually work. And do your diligence on both sides before getting into this business. And so I think zooming out for a moment, that’s the abstract on it. And and I think it benefits both both sides of the table.
Amazing. Liz, if we can feature anyone here on the show, who do you think we should interview and what topic would you like to hear them speak about?
I kind of love Janet Yellen.
Okay, haven’t heard that one before just gets on the
screen. And she talks in a very even tone. It’s doesn’t really seem to get upset or ruffled. And she’s immaculately dressed. And she’s just doing her job. In spite of all the kerfluffle and I, I just admire the constancy and consistency of her and her message and her delivery. And I wish I could be as even handed as that in my day to day.
She has a pro Jerry, let’s move over to you. Is there a book and article a video that you would recommend or something in recent memory that you found informative or inspiring?
I read a book this summer by a friend and Columbia Professor Chris Wiggins called how data happens, our world was becoming somewhat more reliant on data over the past, really the past five years, 10 years, 20 years, but he really delves back into how data has been used throughout history and where it’s going. I think it’s great.
Amazing, Liz, do you have any habits, tactics or techniques that are a secret weapon,
I’m not going to talk about the how to take care of myself thing. So I’ll tell you something I do which infuriates my team, but keeps me sane, which is people will call me email me slack me text me what other ways there to get in touch with people LinkedIn message me, none of that works. If you want me to respond to you and actually guarantee your response. It’s got to get into my inbox and you’re gonna laugh. I use Outlook, love Outlook to this day, because I will not go to bed unless it’s, I have fewer emails than one screen that I’m staring at. And so it helps me to funnel everything I need to do into a single place.
All right, and then finally here for both of you maybe Jerry first, what’s the best way for listeners to to connect with you and to find the book?
Like Liz email is the only way that really works for me. People try to contact me through LinkedIn. I noticed it a month later. So yeah, email, GA Newman at New VC. And I respond to pretty much every email. Oh, that makes any sense. whatsoever.
Thank you for responding to mine nine years ago when I was desperate to start a show that people would listen to. And then Liz, can you give us some information on the book, how to find the book and how to follow along with your efforts?
Yes, sir. Just Google founder versus investor. It’s available on all outlets right now for preorder. The only social media I’m on is LinkedIn. So shoot me a connection request with a little blurb about why you want to talk to me and I will be sure to,
there you have it. Liz Elman and Jerry Newman, the book is founder versus investor. It’s a great read. I haven’t gotten through the entire thing. But I’ve read a bunch of experts. And it’s quite a debate. I’m glad that you both humored each other and collaborated on it because I think it’s much better than just hearing from one side. So thanks for joining us today and looking forward to picking up a copy. Thank you, Nick.