[VC Politics] ISAI & the deal terms that go beyond valuation & equity

Nov 20, 2013
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The relationship between founders & VCs is a delicate one, to say the least. Because of the nature of their relationship, it is often in their mutual benefit for both to brush any tension under the rug. As such, the dark side of working with Venture Capitalist is often neglected or ignored, and so the vicious circle of unsuspecting founders getting into bed with VCs with bad practices continues. In an effort to provide clarity into such relationships, I am writing a series of posts called “VC Politics.” I have kept all sources anonymous, in order to preserve relationships, however in each case, I have talked to several actors deeply involved with the VC in question in order to get a well-rounded perspective. 

Founders spend most of their time thinking about fundraising – my dad told me the other day that the day you close a round of funding is the first day you start thinking about the next round. Founders think about investors who would be interested, investors who would be interesting (rarely the same investors), they worry about deal terms and how they’re going to justify the valuation they’re asking for. They look at their portfolio, they speak with other portfolio companies to get a sense of how they will be on the board; however, sometimes there are terms that you wouldn’t expect, and sometimes they have nothing to do with the valuation or the equity asked for.

ISAI is a pretty incredible fund. Despite their relatively small portfolio, they’ve gotten in on the first rounds for several of France’s top companies: Blablacar & Commerce Guys, to name a few. Recently, the fund led a round of investment into Predictive CRM startup TinyClues. You may have read about it in our blog, or you may have met them at our Job Fair last september where they were recruiting (with a fresh round of funding, nonetheless); however, likely, the first place you heard about it was FrenchWeb, a French-language tech blog.

In fact, the vast majority of ISAI investments are announced as exclusives on FrenchWeb. This isn’t an odd practice – when VCs have good relationships with journalists, especially affluent ones like Frenchweb, it’s normal for them to feed them great news in order to give their investments the best visibility; however, the relationship goes beyond ‘exclusive,’ and we’ve learned from many ISAI startups that among the terms of the deal are that ISAI GM Jean-David Chamboredon gets to dictate the communication strategy around the funding.

Again, the practice of VCs leveraging their relationships with journalists is not uncommon – Balderton and Index Ventures both have PR representatives who regularly give heads ups about announcements to journalists they have good relationships with (and trust with an embargo) – however, where the practice goes too far is that startups with investment from ISAI are forbidden from speaking to other journalists until the Frenchweb article goes out. Of course, for some publications, being the first to cover a story is the highest value they have to offer – and scoops are certainly good for traffic – however, we at the Rude Baguette are less concerned with being first to report, and more concerned with having adequate time to cover a story before it is announced.

The problem becomes even worse when you take into account the fact that Jean-David Chamboredon is a minority investor in FrenchWeb, a point rarely noted in FrenchWeb articles, and which Chamboredon denounces by saying he’s not on FrenchWeb’s board – a point I think most people who followed the TechCrunch-Crunchfund debacle in 2011 would find mute.

Should VCs dictate communication terms?

Ultimately, the question arises whether VCs should be restricting founders from using their existing relationships with the press. In the example of TinyClues, we had been talking with them for months leading up to and after our September Job Fair, and it was only after the fundraising that the founder apologized, saying he hadn’t been permitted to speak to other press about it.

I’ve communicated with Jean-David Chamboredon about the subject, and promises of change around this point have been made, but I continue to be troubled by two points: the intermingling of personal investments and fund activity, and the suppression of founder relationships as part of deal terms.

There are certain things that VCs can bring to a startup, which founders should be aware of – money, network, experience, visibility, authority – however, founders are more often caught off guard by the things that VCs can take away from a startup. There’s more to a VC than his wallet, his CV and his address book, and founders need to do their homework on this, because VCs won’t exactly lay their weaknesses out on the table.