Flipping the Telescope: An Interview with Woody Benson – Info Entrepreneurship

By Patrick Casey

Originally posted January 21st 2018

As a long-time operator and investor in the fast-moving world of technology, LaunchCapital’s Woody Benson is known for working with his portfolio companies as a business partner and company builder.

In this interview, Woody shares his perspective on life as an early-stage investor.

As founders approach a fundraising round, how should they think about potential investors?

Every one of these deals is like a mini-marriage, so work with people you believe in.

Founders will probably spend 7, 8, 9 years working with their investors — it’s an amazing commitment of time and energy.

I think many founders know almost nothing about early-stage investors. That sometimes shows in pitch meetings. For example, some founders are so focused on pitching their company that they’ll spend a full hour in a meeting before asking anything about the investors.

The notion that all VCs are bad, want to take control, and will fire the CEO — that’s fake news!

It’s not accurate about my style of doing business, nor that of most VCs. In all my years of doing this, I’ve never been in a room where VCs considering a deal plot how to take control and fire the CEO.

And as founders conduct diligence on potential investors, they should find out where each fund is in its life.

Most funds’ mechanics require their returns to come from just a few deals. Because of this, knowing each fund’s age will help you understand any timing expectations that your investors bring to the deal.

Most funds are set up as 10-year funds with a 5-year primary investment period and a 5-year follow-on period. In reality, though, most funds live longer, because it takes longer than it once did for companies to achieve an exit.

What else should founders know about VCs to build great relationships with them?

I’m pulled into crises all the time.

Investors might be working on 10–15 projects, but they tend to hear about the biggest problems and the thorniest issues. That creates a lot of stress. It’s extremely rewarding to work with founders as they build companies, but the journey involves plenty of pressure. I sometimes joke that this job comes with a great lifestyle, but not a great life.

My schedule is full by default, so that forces the really important work — like CEO 1:1s, problem solving with portfolio companies, and crisis management — into after hours.

In this environment, relationships are extremely important — and that explains why the VC business can’t be scaled.

To be successful as a VC, you need to have conviction in your insights and the drive to stay involved long after a deal closes. For the most part, VCs also operate alone — so you need to be willing to stake a lot on your convictions.

I think people on the operating side think that investors just provide money and sit back. That’s not how I or many others of us are wired. As an investor, I could spend all day every day looking for new deals, but that’s not how I operate.

What do you find most challenging about working with early-stage companies?

It’s very difficult to coach executives to compartmentalize.

In a startup, there are always so many things that need to be done — raising investment, improving go-to-market execution, building the product, and more — that executives tend to get hyper-involved in one area and forget about the others.

It’s natural for humans to focus on areas where they are comfortable. Every CEO and executive has expertise in a particular domain, so they tend to focus on that and shy away from areas where they don’t have experience.

Another major challenge is that many founders struggle to break bad news.

Entrepreneurs are optimists by nature. That means they’re wired to communicate only in positive terms. Plus, they face constant pressure to operate in sell mode. Young founders, especially, tend to have a hard time stepping back from this mindset when talking to their investors.

Investors depend so much on the executives for information that they can easily end up blindsided. Also, poor visibility makes it very difficult for investors to help solve the company’s problems.

Problems are inevitable. Surprises, though, are far more common than they need to be. And investors hate surprises.

In my experience, bad news dumps always happen on Friday afternoons. It’s as if CEOs want to purge themselves right before the weekend. As you can imagine, this can really put a damper on investors’ weekend plans!

These communication challenges explain why it’s so important for startups to implement good governance as early as possible.

My belief is that all private companies are in practice mode to become public companies. Why would you found a company unless you want to build a profitable business that can create long-term value?

Founders should want a strong board to help them implement good governance. In practice, though, resistance to establishing and empowering a board is common. I don’t get that — good governance is helpful for any company.

It takes a village to get a company to a successful place.

Final question — founders often search for a VC to be their “lead investor.” How do you approach a round differently when you are leading?

I approach it the same way.

It’s the CEO’s job to raise the money. It’s the investor’s job to provide a thorough and balanced evaluation.

The CEO’s job is to capitalize the company, develop the strategy, hire great people, and get out of the team’s way. That means it’s up to the CEO to front run the investment process. With all the tools that exist today, it shouldn’t be too difficult for founders to find the appropriate lead investor.

Then, the lead investor needs to deliver a balanced evaluation to potential co-investors. By nature, that evaluation will be positive — why else lead a round? — but it should not be a sales pitch. In this sense, the lead investor’s role is no different than that of any other investor.

The criteria investors use to evaluate companies is very stage-dependent.

In a perfect world, I’d like my investment opportunities to nail these criteria: product, market, team, and deal. The earlier the company’s stage, though, the less information is available to investors. That’s why it’s so important for early-stage investors to have confidence in the entrepreneur.

That said, at the end of the day, early-stage companies live or die based on the founders’ ability.