A Dark Side Tale

Entrepreneurs have heard an array of warnings about the VC dark side. After toiling to build a business, it is snatched away by the investors. However, few can point to a specific example. I’ll try to forward on examples going forward with the goal of showing that often, these stories are a two person dance (not just one evil one).

The following link, Accel and Levensohn Get Rapt lays out the details of a current lawsuit regarding such a case. Daniel does a terrific job, as usual, laying out the specifics.

The key takeaways for me are:
1) If you raise a considerable amount of institutional money and yet, over a period of time (years), are unable to deliver results, bad things will likely happen.
2) If you have run the business such that no new investors are willing to come in (and even some existing ones don’t re-up), you a) are very vulnerable and b) have basically sucked most value out of the firm
c) if after doing the above and you elect to leave the sinking ship, you should expect remaining management and investors to reallocate the pie
d) if you do all of the above, litigation will only worsen your situation. Unless the investors have truly acted fraudulently, you are not likely to win the case and worse, few new investors will likely back a litigious entrepreneur.

So, in short,
1)don’t raise enormous amounts of capital (less than $10-12m if unproven)
2) Focus on your core milestones and hit them
3) If you miss, keep an open channel with your investors. Honesty and frank communications goes a long way.
4) Don’t have unrealistic expectations if you take on considerable capital and flatline the business. There often is no value and later round investors are basically rolling the dice that something can be salvaged.