What I’ve learned about the VC / Entrepreneur Relationship at HBS

By Sahar Meghani

One of the things I’ve loved most about my HBS experience is that I was never told the “right” answer or “truths” that I ought to take away from my classes. As I was preparing for the LTV class where Fred Wilson visited, I reflected on the various entrepreneurship classes that I’ve taken over the last two years and tried to distill down my learnings from each. I decided in this blog to share my key takeaways from those classes and in the process, try to tease out my viewpoint on questions I might one-day face.

How do I feel about raising funding from VCs if / when I start a company? Will I be left with nothing in the end or will that decision actually be value creating for me? Can I trust that relationship and what am I left with if I fail? Will our interests always be misaligned? Maybe bootstrapping is the way to go?

After taking The Entrepreneurial Manager (TEM), our first year entrepreneurship course, I was extremely skeptical of VCs and very sympathetic towards entrepreneurs. My favorite case was Zipcar, and the day the founder came to class to share her story she was fired by her Board. Many other protagonists had faced similar outcomes. Others had been diluted down to miniscule percentages of companies that they’d founded and built! The information asymmetry in negotiating term sheets (with liquidation preferences, anti-dilution and control provisions) and power asymmetry in valuations seemed daunting. The entrepreneur appeared to be lucky to have secured VC funding (regardless of how onerous the terms might have been) and the VCs appeared to just be making another bet in their diversified portfolio. Unfortunately, the entrepreneur had all his eggs in his one venture. To me, starting a business seemed like the dream ‘job’ but I saw the entrepreneur as having very little leverage. If one could bootstrap, it seemed like the best strategy!

In my second year, I took Entrepreneurial Finance where the focus shifted on building a business with such constraints in mind. Term sheets are complicated and VCs negotiate them for a living so entrepreneurs must get smart on terms that are friendly to them. In fact, our final exam dealt with BzzAgent where the Chairman (my TEM professor Shikhar Ghosh) was very comfortable with the funding process and practically dictated the terms and valuation to the VCs. Moreover, understanding that entrepreneurs typically end up with a small portion of the pie, we learned to grow the pie. We studied alignment of People-Opportunity-Context-Deal (P-O-C-D) and examined ways in which entrepreneurs had (or failed to) leverage / create barriers to entry, benefit from scale economies and recognize network effects. Finally, the important thing wasn’t how much entrepreneur raised, but it was from whom she raised the funding.

Last week, in LTV Fred Wilson said to us that VCs don’t run / sell companies, entrepreneurs do. Our professors have echoed similar sentiments during the semester. Fred Wilson also said that a good VC should never force the entrepreneur to sell / scale the business of she doesn’t want to and that the entrepreneur must be in the driving seat of such decision. This was very refreshing to hear – studying young founders of Dropbox and Rent the Runway (among others), execute so passionately on their vision and leverage their VC relationships paints a much more collegial and mutually beneficial picture of the VC / entrepreneur relationship. One in which both parties are valued and expect to do well in the end.

The three courses and the professors have been my favorite at HBS and have played a significant role in my decision to work for a startup and hopefully found a company at some point. What I’ve realized is that the classes aren’t in conflict but they have showed me different viewpoints. They have made me aware of the pitfalls, but each course has taught me that no matter which side of the equation I am on, it comes down to alignment and trust. The VC and Entrepreneur will always have different profiles – one is diversified, the other isn’t; one is advising while the other is “doing”; one has seen company lifecycles and recognizes patterns while the other is myopically focused on the day-to-day. At the end of the day though, both the VC and entrepreneur will benefit tremendously from a successful outcome and will (hopefully) along the way develop a relationship that will outlive the venture. Both parties need one another and fostering trust and respect in the relationship should lead to a value-creating outcome.

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