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.

Comments

[Michael Bernstein]

Isn't ArsDigita a canonical example of stupid/evil VCs taking control of a company and running it into the ground?:
http://www.waxy.org/random/arsdigita/

[Andrew Fife]

Matt:
I think this is a very good post and I'm going to link to it. I also wrote my thoughts on Rapt and why I think that VC conspiracy theories are overblown here:

http://andrewbfife.blogspot.com/2006/09/suing-your-vcs-rapt-vs-accel-levensohn.html

Same link snipped:

http://snipurl.com/w1r4

-Andrew

[Rhon Daguro]

Great Article.

[mbmccall]

There is another piece on ArsDigita at michael.yoon.org/arsdigita by Michael who also worked there. I am not personally familiar with the ArsDigita story other than what I have read. It sounds like a tragedy for all involved. One thing that struck me as strange is that the company a) was profitable, b) took on a war chest and c) went under which implies they were bleeding cash. So, it is possible during the go-go days that the VC's made the company ramp up its burn (Go Big or Go Home). However, the CEO must have been inclined to do so and took the risk. When things didn't hit plan, the wheels came off. The VC's, unfortunately, just made things worse.