Investor Stories 1: Why I Passed (Brad Feld, Ann Winblad, Gabriel Weinberg)

Nick:               So our special segment series is called Why I Passed. Can you tell us a story about a startup that you evaluated, that you did not invest in and why it was that you passed?

Brad:               Sure early stage investment, sew a seed investment and a company that was started by a professor and she had a co-founder and the co-founder was CEO and the professor was the CTL and it was her work that she’d done you know from a research perspective. And you know as we got into it I was very excited about what they were working on.

I was in core technology, I like the people. I was not convinced that the person who was the CEO was the long-term CEO and rather than clam, bait and switch game in that situation I generally talk about that before I make the investment. You know I felt the person in the CEO role could be you know a strong participative contributor to the business but didn’t feel like she was CEO.

They ha d a third co-founder who seemed like it was more of a person who had attached themselves to the business versus really being a co-founder so you know there was some discussion about team dynamics and as we got into it I was very open on my side so whether that was good for them or not I don’t know but (laughs)

Nick:               (chuckles)

Brad:               probably wasn’t but you know I just view that as my way. I don’t want there to be any surprises and I want them to want to invest, take my advice as much as I want to invest in them. And as we got into it, near the end, so we were really negotiating the final document, there became a huge number of asks around vesting provisions.

And you know acceleration and employee contracts and stuff like that which clearly you know was a reaction to me being clear about my point of view. And then there became some stuff around the IP that was from the professor; and what happened and who kept it and whether the company kept it or whether she kept it.

And it really got to a place where it was clear that they were really struggling with whether they wanted to take the money or not and do this deal or work together. And I had a direct conversation with the entrepreneur and at some point I said, I’m not sure that I passed in this case so much as they decided not to go forward with the deal. I think it was both.

And in that case they had a company that was they said they hadn’t raised any money and I   did as gracefully as I possibly cold. I paid for their legal fees and I just said let’s call it a day you know hopefully we’ll all learn something from this and off you go.

And you know about 6 months later they dissolved the company. You know the relationship between the 3 people evolved kind of the way I’d expected. And that entrepreneur ended up starting a new company again based off of her work. And I’m not investor in the company we never really engaged around it. So I don’t know whether I would have been or not.

I’m happy that she got the company that she sort of had a dream about up and going and finance is doing something different than that first company from 4; 5 years ago but still based on her research. So I think that’s one that sticks in my mind. I just had a situation like that not one that I’m , I was directly involved in but one that you know I know the people involved, both the entrepreneurs and the angel investors that just fell apart at the 11^th hour because of almost exactly the same dynamics.

So it’s at some level it’s a trust issue between the entrepreneurs and the investors and I like to believe that the more open and direct the investors are in advance the easier it is for the entrepreneurs to process whether they want those investors. And if for some reason an entrepreneur doesn’t want me as an investor, that’s fine.

I have lots of things to invest in and I absolutely do not want to be somewhere where I’m not wanted. I think the worse thing that can happen is that people don’t say what’s on   their mind and how they’re approaching things and what they’re thinking about or concerned about.

And then you do get in a situation where you’ve invested and then something plays out a certain way and there’s contention. That generally sucks pretty bad.

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Nick: Alright, our special segment series is called “Why I Passed.” Today, we have Ann Winblad with us. Ann, can you tell us a story about a startup that you evaluated that you did not invest in and why is was that you passed?

Ann: We sometimes call these passes “sins of omission,” because if we use our hindsight we should have invested. And I will use one of my sins of omission, a company that we should have invested in that we passed on…probably five times. In the mid-90s, a really fantastic entrepreneur—and he’s heard me tell this story before, so I can use his name—name’s Zvi Alon. And he’s become a great serial entrepreneur as well. Started a company called NetManage. And Zvi had heard that we are focused on software and really interested enterprise softwares that came to pitch us. He has tremendous energy, he’s hardworking, and he actually already had his software built and was bringing it to market and needed a bit more money but had not taken any venture capital. Perfect for an A-run investor like us.
Zvi was selling a piece of software called TCP/IP connectors. Core piece of the internet, and a core piece of the software pack that was needed at the time. And he was selling it via phone. We heard him pitch and thought “Wow, this is a great entrepreneur” and then John Hummer and I went down to his little tiny office, which John will remember had no air condition cause it was hot. And he had his—people could call him and order the software. We were at his office for an hour and the phone just kept ringing and ringing and ringing. He got sweatier and sweatier and sweatier, because he was trying to give us more information while he’s taking orders. And we walked out of there going “Wow! People are really buying this stuff.”
And here’s where we made a real mistake: We went and called the bigger software companies. We called IBM. We called Microsoft. We called Sun Microsystems—a company at the time which is now part of Oracle. And said “Hey, are you guys working on this product?” We thought he’s gonna get killed soon by one of these other companies. And every one of them said “We have a project and we’re almost done.” We said “Well, how long you been working on this project?” They said “Two years, three years. We’ve got thirty-five or forty engineers.” So we went back to see him and said “You know, we love you, it’s amazing what you’re doing, but we did some due diligence and they’re all coming after you.” And he goes “Come on, they don’t have anything yet!” I go “Yeah, but they’re close.”
And Zvi goes “Okay…” Then Zvi went and pitched to some other venture capitalists, and he got a term sheet. And he came back and he goes “Look, I want your money instead. I like you guys. I think you’d be better for me.” And so we did some more due diligence, came back with the same story to Zvi Alon and said “No, we’re not gonna invest.” Actually, Zvi came back just two more times and we said no. NetManage became a runaway hit. And it because a public company. So, our learning there was it was a large market. We should have looked at that due diligence as telling us “Yeah, we should all be in this.” We should have listened to Zvi, saying “Well how long have they been working on it? Why don’t they have anything yet?” Ultimately, over a long period of time, they all got there and NetManage as a public company had to kind of renew itself. But by this time, Zvi, the investors, public market investors, had all made a lot of money with NetManage. So that was a good lesson for us fairly early in our financials. We were in our second fund. We’re investing our sixth fund now.
There’s something to be said about having—who should you listen to? The entrepreneur or the establishment? And you have to listen to both, but it’s really, really hard to figure out who’s right. In this case, we picked wrong answer. It was like—we got an F on that test. So we should’ve invested in Zvi. We would’ve loved working with him. We’ve all become good friends since that time, but he made the money on his deal, we didn’t. So that is a classic story of how venture capitalists are as imperfect as anyone how sins of omission have to rethink. We go at the end of every year and look back two years and say “Why did we back at that deal that’s now become successful?” and it could be that a company pivoted to something completely different, so our pass was appropriate. But if it’s a case like NetManage, we spent an adequate amount of time in self-flagellation to make sure we learn our own lesson.

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Nick:               Alright, for this installment of our special segment called Why I Passed we have Gabriel Weinberg. Gabriel can you take a few moments to tell us a story about a startup that you’ve evaluated, that you did not invest in and what the main reason was for passing?Gabriel:          And so I remember the stipulations about this is we shouldn’t name the startup right (laughs).

Nick:               (laughs) yeah, please.

Gabriel:          So I wrote a blog post about and I use this as an example just because I think it’s quite different from the examples you’re getting. But I wrote this post about how the investors often decide he can trace back to the very first email that you send them or the first interaction which often cases is email.

And you know they’re justifying their decision to say no after that but often time that fit happens almost right away and so you can really watch that fairly easily.

Nick:               Yeah, yeah.

Gabriel:          And great examples of that are you know sending really long logs of text; essentially not being cognizant of how people like to read or respond to email; or just being kind of rambly and you’re not concise a lot with what your ideas are. Not having a good call action of what you’re asking from the person, there’s a lot of ways you can kind of just mess that up. And I’ve passed on a lot of startups because of that. Just because it just didn’t seem like they were together enough to send a decent email; I know that can kind of sound harsh but that’s kind of the reality