Based in Boulder, Colo., VictorOps is a DevOps company that offers a real-time incident management platform. The company has raised $33.7 million since it was founded in 2012.
I didn't bring on aligned investors.
The majority of my career has been spent at three separate companies that I founded or co-founded. They are the kind of startup that address an appreciable market need. To start these kinds of companies, you have to raise money and that means working with venture capitalists.
On day one, everyone is aligned and it’s great, but it’s really easy to pick up investors with different size funds, different personalities, different capacities for risk, and different strategies. All those things will come up over the course of the life of the company.
What happens is, you raise money from Investor A. You make some progress with that money, then you bring on Investor B and Investor A participates in that funding round because he or she wants to protect their ownership.
As the years go by, and this process repeats, investor interests diverge and you’ve got a scenario where the investors are not aligned. Sometimes it happens that one investor’s risk profile is much more robust than the other’s. What happens there is, you end up five years down the road and one investor and the founder want to do something, but the other investor doesn’t have enough cash to participate.
I won’t name any of the names, but basically that exact scenario happened at my last company. Everyone was excited to continue to invest in the company, except one backer. That reticent party could have participated but didn’t want to because of their own internal dynamics. The bottom line is that they were forced to participate or be faced with their stock being converted from preferred shares to common shares.
That caused a lot of friction in the company and at the board level. Because there was no longer that trust between the investors and the CEO, which was me, when the opportunity to sell came up, we took it.
We rushed to judgment because of uncomfortable investor dynamics. It turned out to be a very bad transaction, and we are still dealing with the ramifications five years later. We all will make money, but we were supposed to realize a gain sooner.
We rushed to judgment because of uncomfortable investor dynamics.
People don’t really see this stuff. When you are a first-time entrepreneur, your way to determine if someone is a good investor or not is their willingness to write a check. But that’s not the right way to do it.
The thing I do differently now, the thing I’ve learned especially at VictorOps, is that every time I acquire a new investor, I make sure we’re aligned.
What’s your appetite for the total you want to put into the company over the life of the company? What’s your max amount? What’s your desired amount? These are the kinds of questions you need to ask.
If a small fund were to come around and want to invest, as I’ve had at VictorOps, I’ll just shut that conversation down.
I know that over the course of this company, we’ll probably raise $50 million. If you’re a small fund, and that doesn’t fit your fund dynamics, you have no business investing in us. I’m sure you’ve got a great fund, and I’m sure you’d bring a great board member, but it just wouldn’t work. Interests would diverge rapidly – maybe everyone else would want to put another $20 million into the company because it was growing so fast, and they couldn’t.
I think this is largely missed by those first-time entrepreneurs that don’t really grasp what it’s going to take to get their company all the way to where they want it to be.
Photo courtesy of VictorOps.