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Playing with Other People’s Money: Thoughts on Stewardship

May 9, 2012

Brad Svrluga

These are heady times in startup-land, as we all know. $1 billion Instagram acquisitions, Facebook roadshows, dozens and dozens of companies raising private capital at valuations deep into nine digits. It’s an exciting time, for sure, but it also leads to some delusional expectations and crazy behavior. We’re seeing a lot of it these days.

So in that context, it was especially striking – and refreshing – when I heard a nearly forgotten term used the other day to describe an entrepreneur. I was talking to one of my co-investors in a great company that we helped seed called RealDirect. Doug Perlson, the RealDirect founder/CEO, is an experienced entrepreneur, and we think he’s building a very important platform that is going to put a pretty massive dent in the residential real estate brokerage market.

We were talking about the fact that late this year Doug will be out on the road to raise a new financing round, and were projecting what we thought people would find appealing about the company. After a robust discussion of what we love about the company and why we think Doug’s a great leader for it, my colleague said “And on top of all that, Doug is just a good steward of capital.”

“Absolutely,” I replied. “Absolutely.” And then I was struck by how unusual that comment seemed in today’s environment.

What is a “good steward of capital”? Let’s start with a quick glance at Webster’s:

steward |ˈst(y)oōərd|, noun, a person employed to manage another’s property, esp. a large house or estate; a person whose responsibility it is to take care of something

It’s pretty simple – a good steward of capital is someone who is going to “take care” of the capital with which he has been entrusted. He’s someone who, unlike many of today’s entrepreneurs, recognizes that he has been entrusted with his investors’ capital, not given it.

Like all good stewards of capital, Doug is a guy who respects the implicit contract between investor and entrepreneur, and knows that it is his responsibility to work for the benefit of all his shareholders. As a result, he manages cash carefully, and does things like initiate conversations about the next financing round 9 months before he needs it, because he doesn’t want himself or his shareholders to get caught off guard.

This may sound like conservatism, but being a good steward does not at all mean being especially conservative or risk averse. Stewardship and rapid fire, nimble risk-taking can very mutually coexist. But stewardship does mean being transparent about risks and choices, communicating effectively with your board and investors, and not surprising people with bad news.

Bottom line, Doug’s a guy in whom you can have extreme confidence, that he is not going to do anything crazy or immature. And that makes him a pleasure to be in business with. He also, by the way, happens to be a damn good CEO.

Contrast Doug’s behavior with some of what’s going on these days and it almost makes me long for a flopped Facebook IPO and a 30% correction in the NASDAQ (To be clear: I said almost, and I didn’t even really mean it!). I’m seeing entrepreneurs increasingly treat prospective investors as little more than glorified, outsized ATMs.

Last week I had an entrepreneur whom I was meeting in person for only the first time tell me that, on the basis of our two prior phone calls and this face-to-face meeting that I must be at the end of my decision process. This was a first-time entrepreneur, and we had had a couple of 30 minute phone calls prior to this meeting. Yet here we were, in a room together for the very first time, and he was pushing me to deliver him a term sheet the very next day. I respectfully pointed out to him that if I were to invest in his company that he and I would be effectively married for the next five or so years. If he was looking to get married after the first date, I told him he was talking to the wrong guy, and suggested he find another partner.

It’s crazy, but like so many things, you have to see the worst to appreciate the best. Guys like this certainly make me appreciate the Doug Perlsons in our portfolio. Fortunately we’ve got a whole bunch of them.


One Comment

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  1. Cathleen Colehour #
    May 10, 2012

    Brad–what a great story about a solid investment partner. Good for you if your team has managed to find many such high-calibre entrepreneurs to fill your portfolio. It speaks highly of everyone concerned. Reminds me of employees years ago asking for approval with various expenditures. My reply was always the same: “Spend the company’s money like your own.” The same goes for entrepreneurs spending investors’ capital. Yes, there is always a risk associated with investment and the investor knows that (and assesses it accordingly), but in the end, it is all about respect. One should never look at investment capital as a birthday cheque–it is “someone else’s hard-earned money”.

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