A Venture SLA

There is an opportunity for a new VC Firm to brand itself. Recent brands in Venture Capital arose from transparency and founder-friendliness. YCombinator gives new, young, technical talent an entry into Silicon Valley. 500 Startups does it globally. Fred Wilson blogs the business. Marc Andreessen and Ben Horowitz back Founders to be Public Company CEOs. Ron Conway tirelessly connects his investments to his huge personal network. AngelList gives away investor and talent introductions for free. Founders Fund explicitly cashes out Founders. First Round Capital builds and operates an internal platform. Brad Feld, Mark Suster, Floodgate, Felicis, Freestyle, Softech, Harrison Metal, Baseline all have transparent, founder-friendly philosophies.

That’s not how most VCs work. Imagine if a young entrepreneur were to walk into a VC firm and say:

“We help our customers but don’t tell them exactly how. Our core product is a commodity, yet we don’t disclose pricing. Even when we do, there are substantial hidden costs. It has to be bought in bulk, more than they want. We can take months to onboard a customer. We reject most of them but don’t actually give them a straight answer. They don’t get dedicated support. They don’t get to choose or replace their representative. We don’t commit to serve them in the future. We have hundreds of competitors with the same strategy. Now where’s my check?”

Not even the DMV could get away with this. It’s only possible when the supplier has power over the buyer. As companies get cheaper to build, that power is eroding. Most great VC firms know this, and have built reputations to counter much of the above. That’s what “smart money” means.

But there’s the opening. No one quantifies it or promises it. A few are beginning to – Passion Capital has a Termsheet in Plain English. The accelerators of course do this.

But where’s the venture capital with a strict, quantified promise? A Service Level Agreement?

Imagine this pitch:

“Hello, we’re Founder Friendly Capital. We

• Give you a quick and clear answer. 3 meetings, 2 weeks, yes or no.
• Sign up to a plain-English, Founder-Friendly Termsheet. We pay our own legal costs.
• 1x Liquidation Preference, no veto on Arms Length transactions. Four weeks to decide. No one-way NDAs.
• We’ll always do our pro-rata in the future or sell you back our stake.
• Will never bring in an outside CEO without at least 50% Founder consent.
• You’ll get access to the following resources. X hours of our recruiter time. Access to Y network. Office hours with your Partner.
• Board Seat above $X, Board Observer below that, no Board Control
• No Option Pool Shuffle – the Pre-Money is the true Pre-Money
• Minimum investment amount is $__; Minimum ownership percentage is __%
• Choose your Partner – don’t be embarrassed to ask
• 10% of the Round can be used for Founder Liquidity

Change the numbers. Change the terms. It’s the transparency that matters. Instead of leaving every option open and wiggle room on everything, make hard choices up front. A Venture Capital Firm that voluntarily constrains itself will be viewed as Founder Friendly, Smart Money, and will never be short of opportunity.

19 thoughts on “A Venture SLA

  1. Now thats a pipe dream 🙂 500s has something very similar at the accelerator level but I am not sure how they negotiate terms after that i.e in the Series A and above.

  2. Nice work, Naval. Saw you talk about this at #premoney, seeing the SLA written and firmed up is encouraging. I’ve passed it to a few friends, I have no doubt someone will pounce on it soon enough. As you said, the first VC to “break ranks” may have a natural advantage.

    Unless of course these terms are like ToS and privacy policies: you actually win in the market by obfuscating and sugar-coating, rather than being clear and transparent.

    The top VCs these days are happy to compensate for the lack of transparency by allowing entrepreneurs to “fill in the blanks” with wishful thinking. Not such a bad the playbook: lead with nice smiles and helpful blog posts, establishing that “founder friendly” persona well before the entrepreneurs even walk in the room. Accurate or not, preconceived positive notions can lubricate negotiations considerably.

  3. There should be more firms which are more founder friendly but I don’t think today’s VC firms consider founders to their ‘customers’. VC firms consider LPs to be their customers and they deal with LPs with the level of transparency they must as customers.
    Indeed, when VC becomes a sellers market (in many niches it already is) then things will change

  4. Its a great vision Naval – and I think it will be soon realized by seed & early stage venture funds first (some of those are already happening). I think the fundamental behind this VC trend is that entrepreneurs are gaining more negotiation power when it comes early capital, as it gets cheaper and cheaper to start a startup. And it makes sense for the seed & early stage firms to act and serve more like an accelerator with a lot of add-on service and standardized decision process.

    But I am not too sure about the timing of how soon it will be completely realized – or it would be “soon” in the next 5 -10 years as the ones who don’t change will be short of good quality deal flow and therefore die out eventually.

    As for growth VC fund, there are, as of now, a lot of variables – SLA might happen, as of now, I am just not sure when and how.

  5. Naval, to add on Skeptic Medics point, I think your idea is based on the theory that the company funded by the VC firm is the customer. It is not – the Limited Partners in the VC firm are the customers and the venture-backed firms are the vendors.

    Hence the approach of a VC firm is to screen potential “vendors” that can provide a “service” to the VC firm; in this case a return on their money. And just like every other company, VC firms interview numerous vendors to find those that match their needs and can help the VC firm service the true customer, the LPs.

    And while many of the VC funds you cite in the lede of your article do a better job at “vendor management”, they still must serve the interest of their LPs, first.

    However, you do make a strong point about the value of Angel investors and/or VC firms where the majority of funds in the firm are from the management team. In these cases the true customer is the Angel/Manager.

    Hence their ability to find vendors for their specific needs, versus the needs of an LP, provides a more streamlined process and a tighter partnership because the customer and vendor operate without the intermediary (the VC management team).

    I think for any company seeking VC investment, it is crucial to understand who is the “customer” and who is the “vendor” in the relationship. And while many VC firms promote their “vendor” friendliness, the reality is that they need to meet the needs of their LP first – their true customer.

  6. Cool! In the former I would love to have heard “Once we have the funds on hand you’ll only need quarterly meetings on site in our conference room for us to ensure you the burn rates are being spent wisely on the company”

  7. Hi Naval. Brilliant vision! However, please note that ‘transparency and founder-friendliness’ are just surface trends. There are deeper forces at work here. Let us consider this line of argument:

    By leveraging technology, big established firms become more and more efficient at what they do, over a period of time, causing their employed/contracted labor to become surplus. When an economy-wide recession arrives, demand from customers starts dropping, and their inventories start piling up. So, they face heavy cost-cutting pressures, and they resort to massive layoffs. On the other hand, startups are the ones creating new jobs and new wealth, net-net, provided, they are able to survive and grow to become stable, medium-sized companies.

    Imagine, during the great recession of 2008-09, if the startup ecosystem had been robust enough to create jobs and wealth at a faster pace, that is, at a pace fast enough to offset, at least partially, the job losses and wealth destruction on Wall Street, then it would not have forced the government to provide massive bailouts for Wall Street and that could have avoided years of trillion-dollar deficits. In that eventuality, even your recent most recent posts “American Spring” and “American Fall” would have looked a lot different.

    Essentially, the processes of creative destruction, currently operating separately on the ‘new new things’ in Silicon Valley and the ‘old establishment’ in Wall Street, have to work in tandem, for the overall economy to function in a robust and healthy manner. Instead, the current reality is that the startup ecosystem is being hampered because of bottlenecks, most conspicuously at the venture capital stage, but also at earlier foundational stages.

    The advent of AngelList has cleared some of those bottlenecks. My understanding is that AngelList is currently being seen as a disruptive innovator in the startup ecosystem. But for the reasons described above, it is creating a lot more economic value. Hence, the above description provides a branding opportunity for AngelList as well.

    I have registered on AngelList ( https://angel.co/t-v-selvakumaran ). Currently, developing my company profile in private mode. Hope to be able to connect with you, so that I can discuss more on this topic with you, either by e-mail or by messaging on AngelList. Thank you!

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