John and Susan meet for a blind date and talk for an hour. It is a delightful conversation and they really seem to hit it off. They part enthusiastically. Then John calls back later that night and proposes to Susan. Not a second date — marriage.
What woman in her right mind would agree to that proposal after one date? None. For that matter, what guy in his right mind would make that proposal? None.
Yet, just like the story above, this very scenario is playing out all too often in today's venture world. Above and beyond a valuation bubble, we are living in a "speed bubble." By speed bubble, I mean that entrepreneurs and venture firms are often making investment decisions in extremely compressed time frames. Some decisions are made in a few hours or days. With timeframes so short, one can only speculate that this will end badly for all parties involved.
By the way, I am not talking about seed-stage investing, where an angel investor puts up a small dollar amount as part of a passive syndicate. I am talking about Series A and B rounds, where the founder is accepting a $5 million, $10 million, or $20 million investment, and the investor is joining the board. The founder and investor are going to be working closely together for at least five years — maybe ten. Over the years, the founder and investor will be exchanging ideas on topics as diverse as product strategy, go-to-market, hiring, organizational evolution, financing, and business development. There will be good times, but there will also be tough times. The initial product may miss the market, or the company may miss revenue two quarters in a row. Maybe a huge competitor pulls a judo move, or a key executive quits.
Just the way that stuff happens in a marriage, stuff happens over the life of a start-up. There will be a lot of great times, alongside many challenges. When facing those challenges, one's partner matters a lot. In the same way that an individual wants to get to know their prospective spouse very intimately before tying the marriage knot, a founder and an investor should get to know each other very well before agreeing to tie the Series A or B knot. That is very hard to do in one meeting, or even a couple short encounters.
When I was co-founder and CEO of Edify, I did not enjoy raising money at any point — Series A, B or C. The fund-raising process was stressful and emotional, and no matter what anyone said, every rejection felt personal. Like any other founder, I wanted to get through the fund-raising process as fast as I could and get back to running my business. I was tempted to take the first acceptable term sheet that came my way and be done with it.
Fortunately, I had mentors who advised me early on to take the time to get to know my investors, especially the ones joining the board. As an investor at Norwest Venture Partners, I have tried to take a similar approach — getting to know the founders/CEOs in depth before an investment — which has yielded benefits, because I have ended up on boards for long periods. There were many, many important decisions at those companies over the years, and some of them were pretty tough. Every time, it really helped me as a board member to have a strong relationship with the CEO.
We are currently in a time when venture firms are competing fiercely for attractive companies, and one of the ways they are competing is through the speed of their decision-making. The speed of venture decision-making will not slow down as long as this investment cycle remains heated.
An entrepreneur who is fortunate enough to be the recipient of quick term sheets from aggressive venture firms does not have to get overwhelmed by the flattery and attention and therefore rush to a decision — s/he can actually stop and take a breath. Even when the venture firms are pressuring for a "yes" as quickly as they fired off their term sheets, the entrepreneur can throttle the process a little and make sure that he or she takes the time to get to know the potential partners by spending more time with them, posing penetrating interview questions, white-boarding potential strategic decisions, asking how to solve current problems, and talking to other portfolio company CEOs.
Further, a founder should also feel comfortable that their prospective investors have done the work to really understand their business. If the investors have only done cursory work while rushing to throw in a term sheet, they are much more likely to be surprised — and not in a positive way — after the investment. Without properly assessing the start-up, they are much less likely to be able to help when problems arise. No entrepreneur wants a surprised, disappointed or unhelpful investor on the board. And no entrepreneur wants a board member who is prone to making important decisions off the cuff.
I should point out here that taking the time to get to know one another does not mean an excessively long period or slow process. Of course, the best scenario is when the founder and investor have been meeting multiple times over a period of months before an investment decision is required and can really get to know one another in a relaxed setting. But that is often not possible, and many times a founder and investor will have their initial meeting amid a fund-raising process. In that instance, the time-frame to get to get to know one another is usually measured in days, maybe weeks. It does not require months. But it is also not measured in hours.
When I was a CEO, I would have loved to have picked an investor after one meeting, in just a few hours. But today's speed bubble leaves entrepreneurs and investors prone to making rushed decisions. And rushed decisions can lead to long term pain for everyone.
For all involved: Take the time. Do it right.
Jeff Crowe was co-founder and CEO of Edify for nine years and is Managing Partner at Norwest Venture Partners, where he has been an investor since 2004.
Follow @CNBCOpinion on Twitter. Have an op-ed idea? Email us at commentary@cnbc.com.
