Feb 10, 2016 · 9 minutes

Over the last few decades, VCs have gone from financial misfits no one had really heard of, to super star king makers, to pariahs who shoved a bunch of unsustainable companies into the public markets, to the guys who say, “no, no, really, our portfolio companies are the real stars….” to “LOOK THE FUCK AT ME, I’M A GENIUS AND I BESTOW MY GENIUS ONTO THIS STARTUP! #CRUSHINGIT”

Top firms whose partners generally don’t love to be in the limelight, like Sequoia and [Disclosure: Pando investor] Accel, have all worried at some point in the past ten years: Are we loud enough? Are we losing deals because we’re hoping returns will just speak for themselves? And yeah, they probably were. A lot of entrepreneurs were doing deals with the partners who had the biggest Twitter followings and could be the loudest. The decision was about marketing as much as it was about cash.

Blame it on social media’s ability to twist us all into self-conscious reality TV stars of our own personal Survivor, Big Brother, or Amazing Race (depending on your outlook on life.) At some point in the last ten years the “social game” of being a VC changed. In a world that was all about “the cult of the founder” and social media and brands, what you blogged about, how loud you shouted and what you shouted, having the right “logos” on your Web site whether you had a meaningful stake in those startups, and strategically leaking stuff (Hey! Sometimes it’s even true!) to the media to help your portfolio are all that mattered.

But that, I’ve written about for years.

Now the game is changing again, and it’ll be fascinating to see how the always-on, always-marketing, always-be-closing-the-next-round crop of VCs “pivot” (to use their own over-used euphemism when things get rough.)

Consider:

  • Jason Calacanis talks up Zirtual saying other VCs should absolutely invest in the next round… just a few days before the company goes bust.
  • Theranos gets a $9 billion valuation, just months before the Wall Street Journal exposes major flaws it its technology.
  • Zenefits-- called everything from the fastest growing SaaS company in history to “seriously [underestimated]’-- gets a $4.5 billion valuation. Some eight months later, amid a string of scandals and missed growth projections its CEO is unceremoniously shown the door, as reportedly lost its biggest client.

And these are the famous ones. There are also big write downs of DraftKings, Snapchat, Dropbox by late stage investors. Doordash roared out into fundraising during the end of last year with Sequoia committed to paying at least a $1 billion valuation, only to struggle to do the round at half that amount.

It’s one thing when prolific angels who don’t have much skin in each game, like Calacanis, get snowed. It’s another when both Ben Horowitz, and Sam Altman -- head of Y Combinator, the top incubator in the world -- could be so staggeringly wrong about Zenefits.

Because they were so loud, because they were so confident in these companies, because they lent their credibility to so many of them, the credibility of the world’s most respected VCs is now hanging by a thread. Employees joined companies because of these endorsements, angels piled into syndicates, secondary shares were bought with little due diligence. Now all of those endorsements, all the blog posts of “why we invested,” all the assurances that these are solid companies, the valuations are just 20% too high-- none of us know if any of that is true.   

Perhaps the dumbest move of the last year: Entrepreneurs and VCs bragging about a company’s valuation, something that is typically never even disclosed to reporters. They’ve all put a number on their bullishness. Or as we may come to view it, a number on their bullshit. Calling someone a “great” company is subjective enough, investors can wiggle out of it. Saying a company is worth “$9 billion” or “$4.5 billion” is damningly specific.

What is a loud mouth investor to do?

There are a few options:

  • Say nothing about what went wrong, just congratulate new leadership. This is what several investors did when David Sacks took over Zenefits this week. The risk: Credibility is harder to rebuild when you don’t answer the implicit question on everyone’s mind: Did you know?
  • Throw the company under the bus. Fault previous leadership, explain why you were wrong about them. The risk: You look un-founder friendly. That can kill when times get frothy again.
  • Fall on your own sword. Write a blog post explaining that, as an industry, things have been allowed to get out of hand and that there should have been greater governance. That boards have become too much of a rubber stamp. That seed funds are doing too many deals, and don’t really know much about each one, so they probably shouldn't be talking them up in the press. That the Valley has to go back to the boutique, shoulder-to-shoulder building the company roots that got it here. The risk: Admitting you fucked up, in a time when VCs themselves are raising money. Also: Pissing off other VCs by pointing out an industry-wide problem.

In my opinion, #3 is the best and #1 is the worst. Bill Gurley of Benchmark has navigated this shift potentially better than anyone. His biggest hit is the most wildly over-valued, cash-burning company of all: Uber.

And yet, Gurley has managed to come across like the lone voice of caution when it comes to burn rates and valuations. He’s told anyone who will listen for a year that runaway burn rates will come back to bite the industry. It’s a discrepancy between what he was saying and doing. If Uber succeeds, it was an exception. In the unlikely event that Uber completely fails, it’s likely symptomatic of the problems Gurley has been pointing out with the industry. Either way, he gets out of this with his credibility in tact. And for good measure, he’s named a load of companies (conveniently not in his portfolio) that he thinks will fail.

He should be good at the shift in game. Gurley has lived this before. In the dot com era, a young Benchmark was way too fist-bumpy and went utterly silent for years after as a result. When they started to talk to the media again, they were cautious. They were clear they weren’t falling for fads: Whether it was seed investing, value added services, or growth funds. And they were the first and the loudest to caution everyone that funding and valuations were getting out of hand, even as they themselves played the game too. For good measure, Gurley has also frequently warned the public that when a VC’s lips are moving, he’s marketing. The implication: I’m not lying, but I am spinning. That’s my job. “Hey, I told you,” he can shrug and say if one of his companies blows up.

But many of today’s “top” VCs and seed investors weren’t investors in the late 1990s, and haven’t played the branding game with that kind of hedged caution. The Zirtuals don’t hugely matter because they weren’t unicorns and many people haven’t heard of them. But if more Theranoses and Zenefits are out there, some of these unqualified boasts are going to increasingly get hard to walk back.

PR is only one problem. Maybe no one remembers you said all those things about a company that now seems like damaged goods. There’s another looming problem for VCs’ social game to grapple with in 2016. What do you do about the inevitable down round?

Up until now, many founders assumed the worst that they’d face in 2016 is a down round. But as Mark Suster has pointed out in a few recent posts, closing a down round isn’t a given. Again, look at DoorDash. They’ve cut their valuation by 40% and the round still isn’t done. And while one of its two big investors Sequoia Capital has openly committed to leading it, Kleiner Perkins has not said on the record that it will re-up. My understanding from speaking to people close to the situation is it has every intention of being “supportive” of the deal. Still, there’s a difference in what Sequoia is saying and what Kleiner is saying.

Social game: Is it better to be the investor who supports an existing company no matter what-- like Sequoia-- or the VC who waits to see the terms, potentially pulling the plug and focusing on new deals with little baggage?

It’s even trickier if you aren’t an existing investor and you’re looking at a down round. Again: Social game. This is a small industry, with only about 100 or so active tech investors. Suster explains why that’s bad for founders:

Often that is a good incentive because it keeps VCs from screwing people over since a bad reputation or bad working relationships could cost you deals in the future.

But in this case it works against the founders. Many VCs would prefer to avoid having to cram down other VCs by investing at a lower price or even if it’s not a cram down they prefer not to invest in a down round that forces the VC to take a “write down” on their valuation sheets they should their LPs.

And most VCs are overwhelmed with deals. So given the choice of pissing off your VCs (and you) they simply give you a polite response and move on to the next deal (with less hair on it). 

In addition to being “the bad guy” who pisses off another VC, you run the risk of looking anti-founder even as you bail them out. You are the investor who came in, didn’t see the value of the company that everyone believed in six months ago, and crammed down everyone’s equity. Meantime, no one knows the silent partner who passed on a deal.

Mattermark’s Danielle Morrill released a particularly depressing Tweetstorm on this sudden acceptance, including GIFs of everything from cats pleading to panda’s avoiding an onslaught of laser fire to make the point.

Her advice in a nutshell:


The game has changed alright. And entrepreneurs should realize it’s changed for VCs too. A down round may not be the back-up plan you assumed it’d be.