Venture Capital Creed: Do VCs Have a Shared Philosophy?

Assessing Din Djarin: Lessons for Venture Capitalists and Innovators

Venture capitalists and corporate innovators can gain valuable insights by evaluating Din Djarin, the central figure in The Mandalorian. Initially presented as a bounty hunter – a profession traditionally associated with antagonists within the Star Wars universe – his character offers a unique case study.

The Appeal of Honor and Flexibility

A particularly compelling element of Jon Favreau’s series is Din Djarin’s internal struggle with the strict tenets of Mandalorian culture. His dedication to honor establishes him as a sympathetic protagonist, and his development is marked by his ability to adapt while remaining true to his core beliefs.

While the phrase “This is the way” gained prominence as a memorable quote, another line holds greater significance for those involved in venture capital and corporate innovation: “You’re changing the deal.” Din Djarin employs this statement when confronting those who attempt to alter previously established understandings.

Shifting Terms in Venture Capital

The dynamic nature of agreements is commonplace in venture capital and entrepreneurial ventures, frequently placing investors and founders in situations akin to Din Djarin’s. Terms are often subject to revision and negotiation.

This inherent flexibility is embedded within the structure of venture capital fundraising itself. A Series A funding round is typically followed by Series B, then Series C, with each subsequent transaction often involving modifications to existing terms, altering the initial agreement from the perspectives of both the startup and its investors.

Addressing Unilateral Term Changes

However, shifts in terms can also occur outside of formal financing events. A colleague recently sought guidance on navigating such a situation.

He had participated in a startup financing that included specifically negotiated information and observation rights, clearly outlined in the financing documents. Following the round’s closure, the lead investor, during the inaugural board meeting, declined to acknowledge these agreed-upon rights.

My colleague, understandably frustrated, inquired about enforcing their rights. He was even more taken aback by my response: he possessed no practical recourse.

He questioned, “Surely, a signed contract obligates them to comply… doesn’t it?”

The Reality of Enforcement

I explained that while the lead investor, also serving as board chair, might be legally bound by the contract, enforcing it was effectively impossible. “What would you do, initiate legal action against a co-investor? That’s a detrimental course of action. Such a move would likely preclude you from future venture capital opportunities. Your best approach is to cultivate a strong relationship, fostering a willingness to honor the agreement. Focus on building rapport.”

The Cost of Unresolved Grievances

The accumulation of resentment stemming from such alterations can be costly. When individuals perceive unfair treatment, they may seek retribution at a later opportunity – perhaps during a subsequent financing round, through withholding approval, or during compensation discussions. Even without a specific opportunity for retaliation, escalating tensions can damage crucial relationships within the company, diverting attention from the primary goal of value creation for all stakeholders.

Navigating Shifting Agreements

Therefore, how should deal-makers approach situations where counterparts attempt to modify an agreement? When is adaptation acceptable, and when is it essential to maintain a firm stance?

Communication as the Key

In the case of my colleague, the issue stemmed from a lack of communication. The lead investor and board chair was unaware of the existence of the agreed-upon terms. This wasn’t a matter of bad faith negotiation, but rather a breakdown in information flow – a common occurrence in the fast-paced environment of startups where communication can become fragmented.

Consequently, I adhere to the following principles when confronted with changing terms:

• Avoid Escalation: Refrain from employing conflict escalation tactics or retaliatory measures that could jeopardize the overall success of the venture.
• Clarify Objectives: Determine everyone’s goals and positions to ascertain whether a simple misunderstanding is driving the adversarial dynamic.
• Acknowledge Changing Circumstances: Recognize that situations or priorities may evolve, necessitating accommodation.
• Stand Firm Against Bad Faith: If it becomes clear that a party is negotiating in bad faith, maintain your position.

Both entrepreneurs and investors must understand that contracts hold limited value without consistent relationship management to ensure alignment among all parties. Enforcement is a rare occurrence in the startup world and generally proves unproductive. In my experience, effective communication remains the most reliable solution. This is the way.