Picking the wrong VC can get a founder fired. The 'Ben Rule' helps founders find the right one.

Picking the wrong VC can get a founder fired. The 'Ben Rule' helps founders find the right one.
The "devil-eyed" frog was discovered by a scientific expedition in the high Bolivian Andes.Steffen Reichle of Conservation International/Handout via REUTERS
Welcome to VC View: a column by venture capitalist Ben Narasin.
  • I'm often asked by founders if they should seek venture funding. So I devised the "Ben Rule."
  • It is: if the dream outcome isn't equal to 50% of the fund, you are pitching the wrong VC.
  • And dire consequences could happen if that VC says yes.

It likely isn't obvious to the founder eager to raise capital from a VC, particularly when that journey is hard, but the founder and the VC are in the same game: the frog kissing game.

A founder will kiss many VC frogs looking for their prince/princess, but a VC will do the same thing in their quest to invest. I routinely see 1,000 or more pitches in a year but when I was a seed investor I would only fund 7-10 companies while as a traditional early-stage VC working for a major firm, the number is more like one, and in some years none.

There just aren't that many opportunities that meet all the criteria, particularly ones that can generate big enough returns to impact a $3.6 billion fund.
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To unpack that a little, let's look at this way: I am often asked by founders if they should seek venture funding and from whom, and I so frequently have to explain that I devised a rule. Let's call it the "Ben Rule."

The Ben Rule is: if 20 percent of your ultimate dream outcome does not equal at least 50 percent of the size of fund you are pitching then you shouldn't be pitching them.

I say 20 percent because that's pretty typical ownership for an early-stage VC and 50 percent because the outcome needs to be material to the VC. Remember, VCs work for their own investors, their limited partners (LPs). So a VC that does one deal a year and caps out at say eight board seats, meaning the number of companies an investor is hands-on working with, that VC needs to believe that every shot on goal has a chance of delivering big returns for the fund's LPs.
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I would even go so far to say that, for the very best VCs, they need to believe there is a chance, however small, that the deal could return the entire fund. By that I mean, that they believe the tiny startup will grow in value so much that the 20% stake will be worth as much as the whole multi-million or multi-billion fund.

A 100% fund-return result is the ultimate investment for the VC. And it gets harder as the firm's funds grow larger. But it remains the goal of the best and the brightest VCs, whether their fund is a few million in size or a few billion.
Picking the wrong VC can get a founder fired. The 'Ben Rule' helps founders find the right one.
Ben NarasinNEA

Kiss the zealots. Goodbye to the naysayers.

To founders in the frog game, I caution that their job is not to convert the naysayers, but to find the zealots.
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An investor isn't going to get talked into funding you. They need to have an intrinsic excitement about what you are telling them. Crossing a frog off the list is a very important skill, just like crossing a startup off the list is for the VC. And that's how VC and founders are the same.

But in one very important way we are very different. For founders, you have one business, one shot, one life to give so to speak, but I, as an investor, have a portfolio.

The harsh reality is that I have an army of founders fighting for the big win, as described above. I succeed even if not all my founders do, but if only one reaches that lofty "return the fund" goal.
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I only need one of my kissed-frog princes to become king. Clearly I want them all to win, but the reality is that, like a military commandeer seeking to take a hill, I know some of my soldiers won't come home, but I still have to take that hill to win my own war.

So when a founder considers taking venture money, if that reality offers itself, this is something they need to understand. While I haven't seen it in my own firm I have seen more than one instance where a founder had the chance at a small but meaningful outcome, a few million, a few tens of millions or even more than $100 million but their VC board member vetoed the deal.

That offer, while life changing for the founder, wasn't big enough to take the VC's hill.
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And even worse the very desire of those founders to take the "small" outcome may put the board in a position of needing to replace them is they believe that the business can reach the heights the VCs need but no longer believe the founder can lead to there.

VC money is, and should be, a long-term marriage with a one way pre-nup. And the founder isn't the one that controls the terms of a divorce. So be very careful what you seek and be sure you know the terms under which you take it.

Ben Narasin a Venture Partner at New Enterprise Associates (NEA) as well as a prolific entrepreneur. His career spans 25 years as an entrepreneur and 10 years as an early-stage investor. His knack for spotting emerging trends led him to make seed investments in companies like Dropcam, Lending Club, TellApart, Kabbage and Zenefits.
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He founded several consumer companies before launching his investing career, including Fashionmall.com, one of the first e-commerce companies, which he launched in 1993 and led to a successful IPO in 1999. Narasin frequently writes and speaks about technology and investing, as well as food and wine, a lifelong passion.

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