Robert Wuebker
by Robert Wuebker
Thu Sep 4th 2008 at 12:43am UTC

On Whose Terms?

The world of venture capital investment can seem murky and opaque, especially for a first-time entrepreneur. Depending on your perspective, the venture capital industry can look like a densely networked set of professionals or the so-hot-right-now party to which you didn’t get an invite.

While the prevailing wisdom is that venture capitalist is in the driver’s seat in the relationship with the entrepreneur, that’s not necessarily so. The relationship is better characterized as one rife with asymmetric information. And, as it turns out, both sides are flying by instruments. For example, an entrepreneur inevitably possesses more knowledge about their business and its prospects than the venture capitalist. It’s pretty easy to imagine an optimistic founder overstating the technology, business environment, or the capability of the management team in order to secure financing or negotiate better terms. A more unpleasant – but unfortunately not uncommon – scenario is outright opportunism where, after receiving financing, the team squanders the invested cash, turning the startup into their own personal ATM.

Venture capitalists invest other people’s money in small teams of unknown (often dubious) quality, shepherding bleeding-edge technology to an unproven market: a truly risky business. A rich literature details the incentives and controls that venture capitalists use to mitigate that risk and align the goals of the entrepreneur and investor (a standout paper on this subject by Thomas Hellmann is available here). Unfortunately, the existing literature tends to focus entirely on opportunism by the entrepreneur, with little or no mention of what happens when venture capitalists start behaving badly (in a forthcoming paper, I have worked with my colleagues to redress this imbalance). The fact of the matter is that a huge, dispersed collection of individuals asking for capital from a small number densely of networked investment professionals seeking an outsized return is bound to go awry for the entrepreneur a good chunk of the time.

Enter Launched in early 2007, the site allows entrepreneur-members to rate, review, and discuss their experiences with venture capital firms. By scaling up and enhancing informal entrepreneurial social networks, provides entrepreneurs with more information about venture capital firm operations, as well as firsthand reports of experiences with investors and board members. It has also generated a firestorm of publicity and controversy. In 2008, the site provided the ability to upload and review term sheets, allowing entrepreneurs to compare deal terms. You can imagine how well that went over on Sand Hill Road.

Initial reaction to the launch of was pretty predictable: chewed-up or jilted entrepreneurs gleefully celebrating the new state of affairs and venture capitalists trying to game the rating system or even sue anonymous posters. But many venture capitalists are discovering that the benefits of connectedness and transparency outweigh the downside of the sometimes bruising public feedback.

Both entrepreneurs and venture capitalists ultimately benefit when both sides know what’s what. Through, entrepreneurs may now know a bit more about firms, partners, and deal terms. However, the knife cuts both ways. Perhaps the informal network of venture investment and startup culture will firm up a bit, and a public mechanism for quickly sorting out a capable founder from the mass of cranks, creeps, and bozos will emerge. This would benefit venture capitalists, but also the startup’s early hires, all of whom are signing up to work themselves into the ground for the chance at breakout cash. Imagine anonymous postings detailing tales of management’s goofball antics, inexperience, and malfeasance written by employees, venture investors, and board members. Reputation is an extremely powerful corporate governance mechanism.

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