The COVID-19 crisis has changed the lives of billions of people on Earth — including a small subset thereof, that is VCs and entrepreneurs. The change is not always positive or pleasant — but it's certainly here to stay, and it's very important to understand how to adjust for it.
In a recent podcast episode, we discussed what the crisis means for European venture capitalists with Fred Destin, co-founder of Stride.VC. The firm invests in startups in France and the UK across all verticals and helps them enter the US market.
An industry veteran, Destin started his career at J.P. Morgan and Goldman Sachs. Over the past 20 years, he’s worked as a partner at Speed Ventures, Atlas Venture (now Accomplice), Accel, and more.
“I've been doing this since '99,” Destin said. “So in the days of the great bubble, I jumped into seed investing and just learned on the job.”
This is the first part of our interview with Destin, where we focus on the function of a VC in times of crisis — starting with what it is not.
The interview has been edited for clarity and brevity.
Q: In a recent conversation, you disagreed with an opinion piece that we ran on Tech.eu. In the piece, Shmuel Chafets argued that “venture capitalists must use boards to exercise oversight and guard against excess.” Can you walk me through your reasoning? Why do you think that's not the right way?
A: There's a part of the statement I agree with: I think the oversight role actually is important. In fact, a lot of founders would say that they enjoy having accountability to their boards because it helps people be structured.
What I quite fundamentally disagreed with is this notion of excess and the way it was framed.
In my experience, founders are very good stewards of the capital that they're given. In other words, they're reliable businessmen, they care a lot about the use of cash and the survival of the company.
I think, fundamentally, the role of the board is not so much one of controlling startups, but it's one of helping founders make the right decisions in conditions of uncertainty. We help people think laterally about the problems they're facing, we try and be a cool level-headed influence when things get tough, such as in the crisis.
I also think that control is actually an illusion. You don't control much of anything as a board member; what you do is influence direction and help people make the right decisions. The only way in which you really exercise control at the end of the day is deciding who runs the company. In other words, the board's number one job is deciding who's the CEO — but I hate replacing founders.
When we replace founders, we always lose the magic that comes with the company.
We [at Stride.VC] would much rather give a founder time to grow into the role of a CEO if that's not their background, rather than think about replacing founders. We try and back people that can go all the way. And if they're not perfect, because nobody's perfect, we focus more on putting the right players in the field, giving them the infrastructure they need, and then helping them grow as people so that they can manage their business all the way to a successful exit.
There was a lot of the tone in that piece that I disagreed with. In fact, toxic boards, especially boards that are predicated on control, tend to destroy or damage companies extremely reliably. I've lived through that a few times in my career, so I felt almost emotional about the topic. This is not the right ethos for VCs and founders to engage, and I'd much rather think of myself as a business partner helping someone build the best possible company than some kind of control and oversight function.
Q: It's a great thing to believe that the founders are great stewards of the capital. But at the same time, it's not unheard of that founders would make wrong decisions that'd require intervention from the board. How would you work with this sort of situation?
A: First of all, you have to establish a relationship of trust. That is one where you as an investor can admit things you don't know and be quite open about the things you're good at and things you're not good at, the things you ignore about a business. And likewise, you have to create the conditions in which a founder is perfectly okay to come to you with their major issues and things that aren't working inside the company.
To a certain extent, you want to do that before you invest. You're not trying to be a cheerleader for the business; you're trying to be a person who speaks truth to the founder, even if the truth is uncomfortable. Before we invest, we try and go quite deep into some difficult topics about company building, even maybe have a disagreement or two and see how we resolve them.
One way to manage those situations is to avoid getting into them in the first place, which means — have real, engaged, hard discussions before you put a check in. This way you understand whether the person on the other side of the table is honest, open, transparent, coachable, but can also stand their ground and disagree with you, so it's not a rollover. So you try and make sure the relationship is real.
I've had a case where a founder kind of misrepresented things to the board and tried to be a bit of a hero… The reality is that the trust gets broken. And everything we do is predicated on trust, so if you don't fundamentally trust the other party, you get a problem.
I've had a few cases where a company was clearly going to hit the wall because the burn was out of control and product design wasn't really working. Sometimes you do have to step in and have a very powerful, direct, engaged and somewhat unpleasant heart-to-heart with the founder. You'd say, look, there are too many patterns I recognise here, you're going to be out of cash in nine months on the back of a big round at a high valuation — what the heck are you doing?
Ultimately, the only thing you can do is replace the founder — if you really have someone on your hands who's either not ethical, or crazy, or is not a good manager. If you can't do that, if you've given your rights away or there's no oversight over what the CEO is doing for whatever other reason, you're fucked.
But these cases are so rare.
There are some founders that are either unethical or dishonest in the same way that some investors are assholes. But focusing on these edge cases of extreme greed and extreme spend is focusing on 1 percent of outcomes.
I don't think it's helpful to draw conclusions from the industry as a whole based on Theranos, WeWork and that kind of horror stories that we've all seen.
I tried to avoid getting into that kind of situations in the beginning by being extremely careful about making sure I get into business with people whose mission, and ethics, and way of working I can appreciate. We always say that we never back businesses that we don't feel passionate about. If something looks like a money-making machine but we think that he or she running it is an asshole, we just don't go in.
We're not asking founders to agree with us, we actually like people that are sometimes difficult and have a bit of an edge, or come from the wrong side of the tracks. What we do care about is whether underneath what may be a difficult exterior, we have people who are intellectually honest and trying to do the right thing.
To be continued…
Image credit: Mind the Product