The Honest Truth About Founders and Investors: An Author Interview

Estimated reading time: 11 minutes

I was so impressed with Founder vs. Investor: The Honest Truth about Venture Capital from Start up to IPO by Elizabeth Zalman and Jerry Neumann that I just had to reach out to them. In my interview with the authors, they share how the book came about, how they often didn’t agree, and how vital that was to the integrity of the story they hoped to tell. I know this interview will be just as valuable for you as it was for me.

Dan Beaulieu: Let’s find out about the both of you. Elizabeth, what is your background?

Elizabeth Zalman: I started my career at an ad tech startup. Being “Employee No. 7” meant I was able to do pretty much everything—account management, analytics, product management. Then the startup bug bit me and I decided to become a founder. I haven’t looked back since.

Beaulieu: Jerry, what is your background?

Jerry Neumann: I got very excited about the internet in the mid-’90s and joined Prodigy, one of the first internet companies. When things really started heating up, I joined the venture capital division of a big company and helped fund some of the early web startups. About 15 years ago, I co-founded a company, Root Markets, and started venture investing again. I also teach entrepreneurship at Columbia University’s engineering school.

Beaulieu: Where did the idea for this book come from, and why was there a need for it?

Zalman: About two years ago, Jerry wrote a blog post called “Your Board of Directors is Probably Going to Fire You.” It was the first time I could remember a venture investor being so publicly honest about what went on in the boardroom. Many other founders thought the same. It hit the top of Hacker News and crashed his web server. I called him, told him it was terrific, and that there needed to be a whole book written like this. 

Neumann: Many VCs told me they hated that blog post, not because it wasn’t good advice but because they thought it would make an already contentious relationship even more difficult to manage. So, when Liz called and suggested we should write a book, I agreed on the condition that I could unreservedly represent the investor’s point of view while she did the founder’s point of view. I told her I wouldn’t compromise or say things because I thought they were what founders wanted to hear. I expected her to do the same with her part: not saying things because they were what investors wanted to hear. I didn’t want the book to represent some “consensus” point of view or purport to be some divine truth. I wanted to show the messy reality of two people whose goals and means are often very different.

Beaulieu: Who was the book written for?

Zalman: It was written for founders and investors. I tell founders what they must protect themselves against and how to do it, but I hope investors read my part and understand better what it’s like to be in a founder’s shoes. Every founder I know sometimes gets angry at their investors, but they never tell them because they know that might get them fired. Jerry said he learned something about what founders don’t tell him from reading my sections.

Neumann: I hope investors realize they need to better explain to founders what they are doing and why so they can avert some of that anger. I hope founders read my part and understand that some of the things VCs do (and that they complain about) are perfectly reasonable from the VC’s point of view.

Zalman: Most of them really are perfectly reasonable; I admit that as a founder myself.

Beaulieu: Why did you decide to use this particular format?

Neumann: Liz and I have worked together for almost 13 years. It’s been a constructive relationship and we respect each other’s opinions. Yet, even after 13 years, we still disagree on the issues brought up in this book. Not because either of us is wrong, but because we each have different frames for the problems. Even though I have been a founder and Liz has worked for VC firms, we’re both pretty visceral in defense of our side, so the back-and-forth made the most sense. No book that just gives one point of view can tell the whole story. 

Beaulieu: What did you hope to accomplish?

Zalman: I hope founders understand a bit better what they’re getting themselves into. Simply because it’s a founder’s first time starting a company doesn’t mean they have to fall victim to naivete.

Neumann: I hope both founders and investors read the book and realize that even if a meeting ends with everyone smiling and shaking each other’s hands, it doesn’t mean they’re seeing the whole picture. There are inevitable tensions, and they be aware that they may be unspoken. 

Beaulieu: Where did the idea of using Little Red Riding Hood and the Big Bad Wolf come from?

Neumann: The wolf always gets a bad rap. Did you ever think that maybe Red was the big bad one, cruelly filling the wolf with stones and sewing him back up to die? The wolf was just doing what wolves have to do to survive. Anyway, in the story they start out on equal footing, just walking and talking. But in the end, both Red and the Wolf have had bad outcomes. When they were walking together in the woods, before the wolf ate grandma, could they have worked something out that didn’t end with Red traumatized and the wolf dead? 

Liz and I suggested the story to designer Marty McCall, and he came up with a beautiful cover. We loved it.

Beaulieu: Elizabeth, the book seems more like a primer for the founders than for VCs. Is that true?

Zalman: The book was designed from the beginning to be an even-handed approach to what may be the most unique relationship in all of capital finance. As we wrote, we both learned new things. Jerry’s been in this business for decades and he didn’t even realize that his founder friendliness had limits. Imagine what other investors will learn.

Beaulieu: Jerry, sometimes I almost get the feeling that VCs are the “bad guys” That in some ways, you as the guy with the dough, holds all the cards (and the money) and that the poor founders need all the help and protection they can get. Do you think that’s fair?

Neumann: VCs go into it because they want to be part of an innovative company’s success. If all they wanted to do was make money, there are easier ways. VCs are some of the few financiers who hope their money enables something real, not just that it makes them more money.

When a founder can’t convince any investors that their idea deserves funding, it seems to the founder like the VCs hold all the cards. When a founder has multiple VCs interested, it seems to the VC like the founder holds all the cards. Neither is true. VCs don’t have to invest in your company, but they have to invest somewhere, and they need founders who start and run companies so they can put their money to work. On the flip side, founders don’t have to take VC money, but they might grow their business faster if they do. 

Both founder and investor have the option to say no to a relationship. VCs use it all the time because good VCs are better set up to look at founder after founder until they find a fit. Founders have the opportunity to do the same, of course. But founders might only raise money a few times in their lives, so there’s a difference in expertise that there’s no getting around. We hope the book can help founders understand the process well enough to feel like they are on equal footing. That obviously benefits the founders, but VCs are also clearly better off dealing with a knowledgeable founder.

Beaulieu: Elizabeth, I highlighted your LizAF in my review as one of the most important aspects of the book. Can you comment on those rules and how they came about?

Zalman: Thank you, they’re my personal favorite. I developed these rules over a series of years and something like seven rounds of funding. Some became obvious fairly quickly—being more powerful together as a co-founder team than as a hero CEO, for example. Others took some pattern matching, like never-ending diligence dragging a fundraising process down. They all boil down to one key theme, though, which is the founder staying confident and in control. That can be an easy feeling to lose in this process, so it has to stay front and center.

Beaulieu: Jerry, what a VC is looking for in a founder? What is the most important characteristic?

Neumann: Luckily, I don’t have to decide based on just one thing, but tenacity is up there. There’s always a point in a startup’s journey where things look bleak, and no one knows exactly what to do. The successful founders are the ones who can bull on through that. It’s a tough thing to gauge, because when tenacity turns into stubbornness, it becomes a bad thing. 

Beaulieu: Elizabeth, I loved the advice you give on selecting a board. I have found that is always an issue when I have been involved in mergers. Can you talk about that a bit?

Zalman: My view of boards is certainly pessimistic. For me, startup boards are designed to fail in their intended function (governance). So, I focus on surrounding myself with folks who can help me move the needle. These folks don’t sit on the board per se, and may even be investors in the company, but I call them to help me think through problems or get advice. I call them my “shadow board,” and they’re my operational gurus, not the board itself.

Beaulieu: Jerry, what do you feel is the single most important takeaway from the book?

Neumann: In most founder/investor relationships, there are times when one thinks the other is completely wrong about something really important and can’t argue them around it. Founders sometimes complain in public about VCs because the VCs push them to grow when the founder doesn’t think that’s best or because no investor will back some passion project. VCs complain about founders, too, only it’s usually in private. These complaints can lead to dysfunctional management of the company and decisions being made without consensus. The only way to work through this without damaging the relationship is to understand why the other person is thinking that way or making that decision.

Liz and I talk about these things in the book, and everyone who reads it, founder or investor, will strongly disagree with something either Liz or I say. The exercise is to recognize the motivations and constraints that cause us to say things you disagree with. If you can start to do that, you’ll be able to predict how your own founders or investors think.

Beaulieu: Elizabeth, what are your thoughts here?

Zalman: Earlier in my career, I thought I knew better than anyone. That’s a quality you want in a founder, certainly, but you also want the founder to learn. This book is the culmination of everything I’ve learned in 13 years as a founder, and much of it came later in my career. If that’s a pattern that I experienced, then one must imagine investors have the same one in their career. My hope is that both sides can accelerate learning of what the other is experiencing and feeling and, by doing so, there’s even one iota less friction in the relationship. One iota is all I hope for.

Beaulieu: I am always interested in the process of writing a book. How do two people write a book like this together?

Neumann: It was hard. When we started, we looked for other books where two people who disagreed with each other had written together. We couldn’t find any, so we had to wing it. It became a very iterative process, where we would each write, read what the other had written, and then write (or rewrite) more. We had our friends read sections and tell us where it didn’t gel or didn’t make sense, then we would rewrite. We had the first draft written in about three months and we rewrote for another nine.

Beaulieu: Any final comments?

Zalman: As exhaustively as we touch on various topics, we definitely missed some: down rounds, friction over pro rata rights, pref stack implications, and the list goes on. Keep in mind that this book is our combined experience of startups—probably 40 years combined—and we are still learning. Think about that as you read.