You have probably heard the stereotypes before.
East Coast investors are conservative, Oxford-shoe-and-three-piece-suit types. They’re cut-throat negotiators and glass-half-empty analytical thinkers who try to anticipate worst case scenarios. West Coast investors, on the other hand, are younger, hipper, flip-flop wearing surfers and free thinkers. They value big ideas over hard financials, and tend to be much more flexible when it comes to valuations and exit strategies.
Truthfully, neither of those cliché descriptions is totally accurate or fair. There are East Coast VCs, for instance, that behave like West coast firms, and vice versa.
But I’m not really interested in igniting yet another debate about the virtues of East and West Coast investors. Nor am I looking to make sweeping generalizations based on some rather narrow stereotypes. Instead, I’d like to share a few humble observations about the differences between East and West Coast investors from my experience as an East Coast VC.
What are East Coast Investors Really Like?
Generally, we are more conservative, typically offering term sheets with more stringent protective provisions and lower valuations. And that approach can be both a good and a bad thing, depending on how you view an investment.
On the pricing side, I think it’s fair to say that East Coast VCs are a bit more conscious about responsible and accurate valuations, but I think that’s a good thing for both our investors and entrepreneurs. After all, it’s statistically improbable that your software/tech business will sell for more than $125 million (don’t believe me, just ask Mark Suster), so, being the sensible people that we are, we generally take that into account.
Additionally, East Coast investors still issue term sheets with a participating preferred security. Gasp! That must make us evil, right?
Over the past few years, entrepreneurs have been programmed to universally perceive a participating preferred investment as unfair, but that’s just not the case. In reality, it actually serves to further align incentives between an investor and an entrepreneur, and I think it actually makes your business much more “backable.”
Why? If you balk at the notion of raising a round of participating preferred (with a kickout), it speaks to your lack of confidence in being able to return 3x your institutional investors’ money. And if you aren’t fully confident that you can build a big business that delivers the returns your investors expect — whether they’re based on the East or West Coast — then why should we have complete faith in you?
What are West Coast Investors Really Like?
Yes, West Coast investors do tend to be a bit more relaxed. And, yes, they are generally much less rigid when it comes to valuations and term sheet negotiation. But they are also prone to “momentum investing,” and “spraying and praying.” You’re likely to come across a West Coast fund with numerous bets in the same space and portfolio companies that compete with one another (in some form or fashion). Additionally, the West Coast investor/entrepreneur ecosystem engenders a pseudo-celebrity culture, which I find bizarre. Just talk to any Silicon Valley entrepreneur and you will begin to understand what I’m talking about.
In my experience, early stage entrepreneurs in the Valley don’t use last names — a practice perpetuated by VCs who refer to celebrity CEOs by their first name. For instance, if you meet a West Coast entrepreneur, you might hear him or her casually say, “Oh, yeah, well I met with Ron and Dave last week and they’re really interested.”
First question: Who are Ron and Dave? Second question: Why does it matter if an entrepreneur refers to potential investors by their first name only?
There are, of course, a lot of Ron’s and Dave’s in Silicon Valley, but the indoctrinated investor or entrepreneur might know that this entrepreneur is referring to Super Angels Ron Conway and Dave McClure. And to me, the first-name thing simply speaks to hype culture that is pervasive on the West Coast.
VCs treat entrepreneurs like Hollywood stars, and entrepreneurs dish that sometimes unwarranted adoration right back at them. And that’s just one reason why the West Coast eco-system is conducive to VCs battling each other to invest in companies with 100x revenue valuations. If a company is growing fast in a hot market with a strong team and it’s made more than several appearances in TechCrunch, you can bet your bottom dollar that all of the big name West Coast firms will be scrambling to hand them a blank check.
That said, the celebrity aura of West Coast VCs can be a great thing, particularly if you’re a consumer-oriented business. I certainly don’t know Ashton Kutcher, but lots of early stage investors do and, you know what? One tweet from Ashton singing the praises of your new online juice cleanse business would do wonders for your brand and early customer acquisition.
What Does East vs. West Mean for Entrepreneurs?
Though East Coast investors are more likely to be tough, we are also more likely to participate in “practical” deals that offer us a clear opportunity to triple our money, even if the opportunity of achieving a 10x return is minimal (or non-existent).
By contrast, West Coasters are more inclined to sniff around for deals that provide opportunities for huge returns in huge markets but in exchange for that opportunity, an entrepreneur may find a more easy-going term sheet negotiation and due diligence process. If your business can’t do that, it’s likely that you will run face first into a lot of closed doors in Silicon Valley.
I’m not saying one is better than the other. But I am saying you should know whom you’re getting into bed with. There are strengths and weaknesses to both styles of investor and as long as an entrepreneur moves into this process with both eyes open, everything should work out just fine. And hey, if you’re more of a first name basis kind of guy/gal, then you know where to seek capital.
Nick Hammerschlag is a Vice President at OpenView Venture Partners, a Boston-based venture capital firm focused on investing in expansion-stage SaaS companies.