You've got to admire Alex Kenjeev's pluck

A blog at the request of reader David A.:

Somewhere out there in marketland is a fellow named Alex Kenjeev. He’s formally presented himself to all of us via a “guest column” he wrote for Scott Adams at the Globe and Mail titled “I work for the ‘brutally honest’ Dragon” (aka Kevin O’Leary, KO, our Decade of Daddy Mirror Fund foil, etc., etc.). One can surmise that Mr. Kenjeev’s role is to negotiate and paper all of the angel deals that Mr. O’Leary purportedly cooks up on his two mutual fund promotion TV spots (Dragon’s Den and Shark Tank).

Fresh out of MBA school 18 months ago, Mr. Kenjeev convinced the Globe’s editors that he had the business cred to explain to us all how an investor should deal with entrepreneurs, and why Mr. O’Leary’s tactic of bringing people to tears is the “honest” thing to do.

As almost every professional Angel and Venture Capitalist will tell you, without the entrepreneur, there’s no business to fund. And the idea that pounding entrepreneurs is the way to build a reputation that will drive business your way in a fashion that will help you ultimately find that needle in a haystack is, to use a phrase, utterly insane.

As is going on TV to find proprietary investment ideas: I’ve yet to see a Partner from Accel, Kleiner Perkins, Sequoia or any of the top 100 firms in North America find their next Twitter or Zynga on a TV pitch show. When I go on BNN’s The Pitch, my simple hope is to boil down a few messages about the investing process for the CEOs of the day — and the viewers who are tuning in to hone their own equity tapdance. But when the guy asks for a $30 million pre-money value on $300k of trailing revenue, that discussion is best left for off-air; and there’s no pounding of the chest.

As a public service, and at David’s request, here is another way to look at the issues raised in Mr. Kenjeev’s piece (I’ve excerpted in italics):

Truth lets companies move faster. In an O’Leary culture, everyone helps kill bad ideas. No formal report. No all-hands meeting. You simply let the numbers tell their story, and move on to something that adds more value.

At our firm, we find that team engagement and dialogue is the perfect way to share information and reach the best business decisions. We’ve closed 41 deals in our third fund, and have led more than $380 million of deals as a firm. Numbers are what they are; but there’s more to investing than “killing” a bad idea by reading the financials. Saying “no” is easy, but reflection, putting your thoughts on paper, and challenging assumptions in a team environment are all essential elements in being a success in the VC business.

Brutal honesty is a lot more than good TV – it’s a huge competitive asset. The faster you can say “Stop the madness!” (to use an O’Leary-ism) the sooner your company can give good ideas, and good people, the time and resources they deserve.

Most folks in the VC business hate to waste time. There’s a temptation to think “now that’s an hour of my life that I’ll never get back”. But there’s something about class and tact that has a far bigger impact on your brand than you can gauge.

Case in point: I had a call with a guy a couple of years ago. We’d been connected by a VC named Howard, and the business had great growth potential. When the call started, he asked me to tell him how we “could help his firm”; or something like that. Since I didn’t know anything about revenue, burn, IP, customer traction, etc. (which are essential to our analysis), I not-so jokingly said that he’d better go first. Two years later, he’s railing about me at a dinner party to mutual friends: “no one has ever made me talk about our business before he’d talk about his.” Or something like that. When I next see him I plan to apologize for the unintended offense.

Here I thought I was being efficient, and he was mortally offended. This stuff matters in business. I’m pretty sure he’s not sending his CFO pals our way for their next financing. When Mr. Kenjeev preaches being “brutal” — what the more gracious of us might call “efficient” — you can do yourself far more damage than you know.

Honesty improves teams. Candid feedback – with money and action to back it up – is part of Mr. O’Leary’s formula for finding and retaining top people. It’s very simple: reward your top performers, and let go of people the minute you know they aren’t working out. It sounds harsh, but it will boost your team’s morale and productivity immediately. Your employees already know who adds value and who destroys it. Reward and fire accordingly, and they will know for sure that the best way to do well is to do good.

Most CEOs agree that they never regret firing someone, and they usually acknowledge that they also would never say: “I’m glad I waited that extra 9 months before deciding to let XYZ go.” However, when Mr. O’Leary responds to the pitch of a professional female entrepreneur on CBC with a dramatic: “why don’t you just find yourself a rich guy and get married?”, that kind of so-called “honesty” can get a CEO faced with a very credible $10 million human rights violation lawsuit. And, if Damian Goddard’s Twitter experience is any guide, it certainly would get you thrown off most self-respecting public company Boards.

The truth hurts some, but white lies hurt everyone. If you think the truth hurts too much, consider the cost of the alternative.

This pablum isn’t very novel. Of course the truth is better than the alternative. But bringing an entrepreneur to tears over their “stupid idea” is more than rude; you’ve actually created an enemy. As we saw with Napster Founder Sean Parker in The Social Network, an angry entrepreneur can cost you big time. Mr. Parker settled an old personal score with a certain California-based VC fund when they were trying to put money into Facebook. He went out of his way to make sure that didn’t happen, sending Mark Zuckerberg into the pitch in his bathrobe. And then allegedly called his VC nemesis to say: “I told you I’d eventually make you pay for f*@king Sean Parker”. An expensive lesson.

Since Mr. O’Leary likely never expects to see these spurned entrepreneurs in the confines of Monaco, Aspen, Hollywood or St. Bart’s, he thinks the tears flow with impunity. I doubt it. Everything comes full circle, eventually.

In the long run, the truth can set you free. People often feel sorry for the entrepreneurs who get rejected, sometimes with very harsh feedback, on Dragon’s Den and in our offices. This is a mistake. It’s hard to find out that you poured money, time and energy into a bad idea. And it’s hard to be fired, demoted or shot down in your job. But it can also be a turning point, and an opportunity to set off on a different track – one that’s a better fit for your strengths and weaknesses. Even in the cold, harsh world of business, the truth can set you free.

We see about 600 ideas a year. Based on the sheer law of numbers, plenty of them aren’t a fit. And some might just be a really bad idea. But we know we are going to make mistakes, and unwittingly turn down good deals. And even if we turn down a bad one, there’s the likelihood that this very same entrepreneur will come back with a new pitch if the earlier one doesn’t get traction; do you want to see that one or not? You’re not infalliable just because you have a chequebook. And without dealflow, you’re not an investor: you’re just a lonely rich guy slinking around the 8 Ball looking for talent.

Mr. Kenjeev, I admire your pluck. But until you’ve done a few wildly successful deals, or OGE’s returns beat the Decade of Daddy Mirror Fund (see prior post “Decade of Daddy Mirror Fundâ„¢ Quarterly Report” April 2-11), I don’t think you should be giving any lectures on how to earn superlative returns as an investor.

MRM
(this post, like all blogs, is an Opinion Piece)