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 third part of our interview with Destin, where we talk about whether public blacklists of VCs who take advantage of crisis-hit startups should exist at all.
Make sure to also check out the first part, where we discussed the function of VC in times of crisis, and the second one where we talked about the changes that COVID-19 has brought to Stride.VC and other firms.
The interview has been edited for clarity and brevity.
Q: What is a good way to make the information about VCs' “bad behaviour” (such as predatory terms, re-negging of signed term sheets, etc.) public? I remember you said before that you were against any sort of blacklists, which would name and shame these VCs. Why are you against it? And what do you think would be a good way of dealing with this?
I think the industry has made a lot of progress compared to 10 years ago, and that “bad behaviour,” I'm hoping, will not be as prevalent as it was in the last crisis.
Having said that, I also heard the story of a VC who called or emailed two days before closing and effectively said the valuation would be halved. They didn't explain why, didn't sit down with the founder to talk and try to come to an agreement, which would have been a respectful way of negotiating, but basically told them — this is the new price. And then they had to be shamed and threatened by Matt Clifford and other people, and they ended up agreeing on a price somewhere in the middle. But you can imagine the destruction of trust amongst the parties there.
So, that behaviour does exist. The reason why I really don't like blacklists is that the nuances are really complicated. I'll give you a couple of examples.
I was involved in a company where we were doing a rescue bridge round. There were four investors, and two of them, including myself, were saying — let's just do a clean bridge: we either believe in the company, or we don't. The other investors, however, wanted multiple liquidation preferences. So they said, yes, we're putting a small amount of money, but we want the marginal return on our money to be sufficient. And at least one of the partners who was on the board was kind of being forced by his partnership to do it — I don't think he wanted to do it personally. We ended up doing a multiple liquidation preference bridge because we needed three out of four investors to agree and we needed everybody's cash. In that case, whom would you put on your blacklist? There's no way in hell you're going to know who triggered the behaviour. That would be one example.
I was also involved in another company where we had two offers at some point: one at $55 million pre-money valuation, very clean; and one at $70 million pre-money, not clean — it had full ratchet. For a variety of reasons, it actually went to a board vote — the only time in my career I've had a board vote, — and I got voted down on taking the $55 million offer. Part of the reason was that the founder didn't want to take a lower valuation, so he was pushing for the $70 million, even though I told him 15 times that this thing could destroy him.
So, guess what happened in the next round? His equity got effectively wiped out because with a full ratchet, if your next round's valuation is less than or equal to the cash you've raised, the equity of the founders goes to zero.
And it was awful, and so we ended up having to put more money in as well. So, again, whom would you put on your blacklist?
I think blacklists generally are a bad idea. People don't understand the complexities, and who's pushing for what, and sometimes founders shoot themselves in the foot, and sometimes one rogue investor pollutes an entire deal… You just have to go, do your diligence, understand situations and not resort to these very simplistic models, because life just isn't black and white like that.
Q: I do appreciate that there are complicated situations, but at the same time, I think for every one complicated situation, there are 10 very simple situations, when it's just one VC who is doing something bad.
If you ask me honestly about specific people, I will tell you honestly what I think. That is the best way, that is where reputation systems work. You just have to talk to enough people.
Founders should share their experiences, but people should avoid simplistic shaming methods. Half the time, people don't understand the dynamics of what happens.
If you're going to get into business with people, reference them, understand how they acted in certain situations, and then go ask them. If somebody came and asked me what happened through the funding history of company X, I would very openly tell them. I've had to make some hard decisions in my life, and I can explain why I decided to do what I did. This will be a learning process as well for you to see whether people are forthcoming and honest.
But blacklisting — I don't think so.