Why it’s good to have VCs to pull the plug

About a week ago I had an interesting conversation with a friend whose startup was being shut down by the VCs. As you can imagine, he was complaining and blaming them for not being able to see that success was just around the corner…

It might sound crazy that having been an entrepreneur I am now advocating for VCs to pull the plug when needed. It will make more sense after this story…

When I started my company in 1999 we raised a seed round for a social networking platform (we called them virtual communities at that time) and used the money to build the technology. In 2000 it was impossible for us to raise more money for a company that had no revenue and not even a clear path to profitability. However, instead of shutting down, we used the technology and re-invented the company focusing on the e-learning market. Some revenues started coming in but the growth rates were not there and we kept on raising small amounts of money to get to the “end of the rainbow”. We always had some “major contract” coming in the next 6 months that was expected to turn around the company. The contract never came.

After running the company for 8 years I decided to step out of operations. Looking back, it would have been great to have a VC pulling the plug early on. I didn’t have the experience and was not capable of detaching myself emotionally to make the best business decision. The same happens when early hires are not capable of performing their jobs at a much larger scale: few founders have what it takes to fire them. It feels like when parents tell their kids they will only understand them when they grow up…

Having said that, not always VCs pull the plug for the right reasons, but, as an entrepreneur, I can assure you it helps to have a sounding board helping you pull the plug whenever it is the best business decision. You’ll see, you'll understand when you grow up!