Fear and the Venture Capitalist

There are many pathologies that venture capitalists can develop and bring into the boardroom. Common ones include being convinced they know better (because they are rarely challenged), acting like the boss (because they, objectively, have power) or getting lazy (because there’s little immediate accountability). One of the most damaging behavior, though, is when venture capitalists let their fear into a boardroom, and this is what I want to focus on today.

Imposter Syndrome

Venture capitalists don’t know for a long time whether they’re any good. Most suffer from some degree of imposter syndrome, which they keep hidden. For those who establish a solid track record comes the anxiety that their best years might already be behind them.

Fear in the venture capitalist comes from many places, including for example:

• not being in control and being limited to an advisory role, as well as having asymmetric information about the reality of a startup when making decisions;
• being constantly anxious that their portfolio of projects is moving too slowly and that they are not building a decent track record;
• having to admit to their investment committee that one of their companies is going to hit the dust and make a small or large crater in the portfolio.

The latter is in my experience the most common and the most pernicious.

Your board member may be outwardly supportive, but inside he or she might be panicking about how to explain to his partners why you’re off track. Maybe he or she fought hard to bring the deal to the table and is not yet proven inside the partnership. Maybe it was a contentious decision and he or she used a silver bullet to get it done, and is concerned about the fallout. The best partnerships of course close ranks behind a partner after an investment has been made, but these are few and far between.

Venture capital is wonderfully privileged work but, behind the scenes, the anxiety is real. You’re meeting so many people a year that your mind is melting just trying to remember who’s who. You’re always concerned you have missed the next big thing, or passed on it. You’re wondering how long before you’re exposed as a fraud, the bad investor you’re afraid you might be. This is in my experience how many if not most VC’s really feel: they’re clutching at straws and their mind is always racing, no matter how many mindfulness apps they’ve downloaded to their phone.

Fear makes you a bad board member

When you bring your fears into the boardroom, you stop being a good board member. You can’t think calmly about the required adjustment to strategy when a project is off track. You get upset about missed numbers and can’t acknowledge that it is time to readjust your expectations calmly, along with the annual budget. Maybe you start to get other investors agitated about replacing the founder because you need an outlet for your fear. To try and appear like a responsible investor to your partners, you start talking tough with your partnership (let’s fire the founder!, let’s recover cash by any means necessary!).

However fear expresses itself, your judgement will suffer. Perhaps you will let yourself be convinced by your partners that a forced early sale is the right way forward, where in your heart of hearts you know the company just needs more time. Perhaps you will decide to blame the founder instead of your own flawed market analysis.

Whatever it may be, VC fear is a plague to startups. It drives poor decisions and damaging behavior. It leads to entropy at the board, and that entropy soon extends to the whole company. It spreads like a virus.

Learn to stop worrying

It is on us, as venture capitalists, to learn to recognize and manage our fears.

Look at how SWAT teams are taught to manage fear in combat . They are told to recognize it, accept it and turn it into something else. Fear of death is for most impossible to shake, but accepting fear and focusing on controlling your body and mind to get through a battle is the best way to stay alive. Warriors turn fear into energy. Thankfully, VC’s don’t (usually) need to fear death!

A way to overcome fear is to visualize the worst outcome. The bottom line: it’s usually not as bad as you think. It may be that after 5 or 10 years in VC, you realize you are not cut out for this and move on. Not exactly the end of the world. In fact, it’s much worse for the teams you backed, and they’re not allowed to complain, or at least, not to you!

In the meantime, doing the right thing by a startup with a calm mind is, in fact, the best and only way to build a great track record.

In practice this means:

• Abandon the fear of shame or failure that comes from a troubled investment, and remind yourself that some form of failure is statistically the normal outcome of startup investing.
• Let go of whatever fantasy you had in mind about how great that latest investment was going to be, and start living with its current reality.
• Calmly assess the situation your startup is facing and the resources it has available. Line up your troops and go.
• Retain empathy and trust. Remember that whatever fear you are feeling, your startup team is probably feeling it 10X worse. They didn’t have to wait for you to freak out … or to develop guts of steel. Do the same.
• Find the courage to stand up to your partners if you have made a poor investment and always, always do the right thing by the company. It’s on you.

Fear is useful if you want to stay alive in combat. It’s also useful in startups because it’s your instinct forcing you to take action… provided you can master it. For entrepreneurs though, partnering with investors who freak out when things go sideways (which is pretty much always) can lead to disaster. So make sure your funding partner isn’t one of them.