I recently watched part 3 of the Hobbit, the final portion
of Peter Jackson’s adaptation of Tolkien’s beloved book. While there are
many aspects of the Hobbit I could write about (it's one of my favorite books of all time), I’d like to explore one that
caught my eye and applies particularly in Startup-Land: Dragon Sickness.
I’ve often compared embarking on a startup journey to be a
mythical adventure, not unlike those of Bilbo Baggins and his dwarvish
companions. Though startup adventures usually last longer than Bilbo’s journey
(which was a mere 13 months!), there are a lot of valid comparisons to be
Like many mythical adventures,
startup journeys are fraught with peril; each twist and turn can have life-changing
implications; they bring out odd traveling companions and bedfellows (not to
mention enemies and advisors); and there is often a seemingly unattainable
golden treasure somewhere near the end of the quest! More importantly, startup adventures can push
you out of your comfort zone, and as Bilbo so aptly complains in an earlier part
of the Hobbit, adventures can “make you late for dinner”!
In a previous entry, Gandalf the Venture Capitalist
, I focused on some of
the positive aspects of having an investor/advisor who is wise like Gandalf
with you on your journey.
right investors, particularly those who have personal qualities like Gandalf
can be very helpful on the startup journey, and get you out of many a scrape.
In this entry, I’d like to explore the opposite: when an
investor turns out to be someone who’s extremely selfish, difficult to work
with, valuing money above all else, and causes great difficulty on the startup journey.
you can easily get rid of an unhelpful advisor or employee, it’s not so easy to get rid of
an unhelpful investor, particularly if they are a VC. Moreover, many investments in Silicon Valley
begin with convertible notes, which have their own special characteristics and
once you’ve entered into them with an investor, you may be stuck with that
investor until the end of the journey.
Believe it or not, I’ve seen investors (VCs) in Silicon Valley
contract something that looks a lot like the “Dragon Sickness” in the recent
In the film, the leader of the
company of dwarves that Bilbo is traveling with, Thorin Oakenshield, falls
prey to this sickness when the company finally achieves the quest they set out
on: to reclaim their homeland in the Lonely Mountain, and more importantly the gold
and jewels that it contains. Their main
obstacle is of course, the Dragon Smaug, who is a selfish but formidable figure
and who has claimed the treasure for his own.
When Thorin finally achieves the Quest, in many ways because
of the contributions of others (Bard from Laketown actually kills the dragon,
and Bilbo Baggins rescues and saves the life of Thorin and the company more
than once!), he starts to see things differently. He starts to see himself as “entitled” to the
gold, and won’t part with any of the treasure, in the process, forgetting every
promise he had ever made to people along the way.
It’s called “Dragon Sickness” because, as Bilbo tells us in the
prologue, “…for dragons covet gold with a dark and fierce desire …” And it leads to a certain kind of
self-centered madness. As the first the
dragon say and later Thorin finds himself echoing: “I will not part with a single gold coin.”
It's usually typified by someone whose only goal is to “possess as much
of the treasure as possible” without any context or caring how their
relationship with others are impacted can fall pray to this sickness, just as
Thorin does when he finally takes over the gold. In Thorin's case, it was his relationship with his companions, the residents of Lake-town, and even the elves.
Let’s summarize revisit what happened to Thorin and see if this might
apply to anyone we know in Silicon Valley:
Achieve a treasure, largely through the efforts of others, claim as much
of it for yourself as possible, and refuse to give up any part of it, ignoring
previous agreements about sharing.
While some entrepreneurs definitely fall prey to dragon sickness themselves (I may do another entry on this another time), I personally have seen it more with investors in Silicon Valley than in founders. They often forget whatever agreements were made in the past and decide to find a way to maximize their “take” right at the end.
Since I moved to Silicon Valley in 2007, I have seen this first-hand
several times, usually when a company is about to be sold. I’ve had VCs say they want more of the gold
than they are currently entitled to and want the founders to take less. Of course, they don’t say it that way, like a sneaky, experienced dragon they speak in sweet tones and make it
seem like what they’re proposing is “the right thing to do” even though it
benefits just them and hurts others.
Moreover, while a company is not a zero sum game at the
beginning, when a purchase price has been negotiated to sell a company, it does
suddenly become a zero sum game – i.e. each dollar that goes to someone else,
doesn’t go to you.
They often, though not always, imply that they won’t go
along with the sale unless they are "satisfied". Now, many investors
have vetoes over selling the company, and while VCs don’t like to use vetoes
explicitly, investors can cause plenty of harm when a sale is happening. This is doubly true if the company is being
sold, or even if the company is not doing well and is about to run out of
money, and needs to raise money quickly at whatever valuation it can get.
I had one entrepreneur tell me that he thought that what the
VC was doing was basically extortion. While I wouldn’t call it that, I would
say that someone whose only desire is “purely financial” or "purely transactional" will
do whatever they can to make sure they get “as much gold as possible”, no
There are of course many ways that a bad investor can be
destructive to a startup, but this is one of the most frustrating ways. It’s like a serpent that you've let into your house, which
starts to eat the company and the team from the inside. This usually happens in two instances: when
the company is doing really well financially (and everyone is getting greedy),
and when the company is not doing well and the company needs to either do a
fire-sale or raise money quickly.
This is why it’s important for entrepreneurs to vet
investors in the same way that VCs vet entrepreneurs. Many entrepreneurs are so happy to be getting
“money” that they don’t consider the ramifications of who they’re bringing into
I’ve often said that it’s pretty easy to tell if a co-founder that you don’t know well is easy to work with in a place like Silicon
Valley. Because people here usually
start multiple companies, you just see if that person’s co-founders started
another company with them. If they did, then that person is probably relatively
easy to work with (or at least acts reasonably when things get tough). Of course, if their
co-founders didn’t start another company with them, it doesn’t absolutely mean
they are hard to work with, but it’s a pretty good indication.
Similarly, you can do the same kind of research on VCs by interviewing
founders of companies they have invested in before. Of course, you have to interview more than
one – preferably one whose company was financially successful and one whose
company failed – you will probably learn much more about the investor from the
failed company than you will from the successful one! Each situation provides a
ripe environment for the dragon to come out, even when they seem entirely
reasonable and on your side when you’re getting your financing.
So, how can you spot an investor who’s likely to fall prey
to “Dragon Sickness” well before you get to these stages? It’s not easy, but here are things to look
for in both your own company and others founders experience with investors.
for investors who are looking for an advantage over everyone else. I’ve
seen some investors who not only want to invest, but they want a better deal
than the other investors they are investing alongside them. Now, don’t get me wrong, if an investor is
doing services for you beyond just the money, it might make sense to give them
more (perhaps warrants or just pay them for their services). But when an investor, at each juncture, co
investing with others, tries to get advantages over the other investors in his
round, asking for rights they don’t have, that’s a sure sign that they may turn
out to be slimy when push comes to server.
- Every discussion is like a zero-sum game. When startups first get going, they are not a zero sum game. That's why it makes sense to take investors in the first place, by giving up shares of the company, you are theoretically expanding the pie for everyone. When every part of the negotiation to do a deal feels like they are playing a zero sum game - not willing to give in to anything, you're starting to see their personality seep out. If they are like this when there's plenty for everyone, what will they act like upon a sale of the company, where it really does start to look like a zero-sum game?
what’s right for them vs. what’s right for the company. I’ve
seen many investors push companies to do deals that are right for them but not
right for the company. On the flipside,
I think having board members who are on other boards in the same industry can
be extremely helpful, but the key is whether they “insist” on doing things
their way even if it doesn’t make sense from the founders and other investors
perspective. It’s more about the way
they do this – again speaking in sweet tongues and making it seem like
something is “best” for the company when it’s actually “best” for them.
Participating. If a VC Fund puts
in money at the beginning, or while the company is doing well, but are
unwilling to support the company in any way financially when the company is not
doing well, this is a sure sign that they will be a tough investor to work with
and will try to manipulate events so that they get “more out” than their fair
share by withholding consent. Like a "fair-weather" friend, the a "fair-weather investor is the worst kind to have. Now, VCs have obligations to their general and limited partners, so they can't always put in more money when they personally want to without their partners consent. But any serious VC Fund, which has set aside money for follow ons, should be willing to put in their pro-rata into subsequent rounds, even if they aren't investing a lot. When VCs don't do this, it scares off new investors and actually hurts the company's chances of raising more money. The new investors start to think, there must be something seriously wrong with the company.
- Beware of well-known investors with big egos. Sometimes, an investor, because of their firm
or reputation is known as a "big wig" and has developed a big ego. There’s of course nothing wrong with bringing
in well-known investors, it is often a benefit to your company, but sometimes
their reputation and how much money they’ve made in the past belie the
specifics of how they acted behind closed doors. Most hollywood stars, for example, are nothing like their public personas in private. Many comedians aren't funny and many super-likable TV stars are not really nice guys behind the scenes. The same is true with VCs.
In the film the Hobbit, to help break through Thorin’s
Dragon Sickness, Bilbo, the "junior member" of the company, does something to try to get Thorin to do what’s right for the Quest
and to others that Thorin had made promises to.
He willfully gives up most of his share of the treasure!
I’ve often had investors ask founders to take less than
their percentage of the company so that they could have “more”. Usually this comes out of pure greed, which
is pretty common in Silicon Valley investors (and even in some entrepreneurs). But it also comes from ego, which is
sometimes even more common.
Luckily, I and other entrepreneurs have seen situations
where, like Bilbo, some founders are willing to give up a chunk of their piece
of the treasure upon a sale, in order to make rogue investor or founder to go
along with a sale that the founders wanted to do. They are doing it not as a reward to the investor, but for the greater good - they want a deal to get done and no longer want to work with the investor inflected with dragon-sickness, so they're willing to give up something to make it happen. This isn't necessarily a sign of weakness (though dragon-sickness infected people might think so) - it's being practical and thinking of others as much as yourself.
So, when talking to investors, do your own due diligence on them. Find founders of companies
that they do not recommend you talk to, you can usually get to them through friends
The real question you need to ask yourself is: are you
getting a Gandalf, or are you inviting Dragon Sickness into your little
I’ve had both, and it’s much
more fun to have Gandalf!
Labels: Bilbo Baggins, bootstrapping, dragon, entrepreneurship, exits, gandalf, lord of the rings, mergers and acquisitions, Silicon Valley, Smaug, startup, Venture Capital