Ron Conway: Third-rate VCs are paying off entrepreneurs

Ron Conway, the most prolific investor in the latest wave of Internet companies, is hot for video companies, and ways to monetize them.

http://services.brightcove.com/services/viewer/federated_f8/452319854

However, he’s upset by some recent investment practices, he says. Some VCs are offering entrepreneurs cash out of financing rounds, he tells reporter Kara Swisher. Basically, he says, it’s a “cash bonus for going with that VC….a payoff or a bribe… I think payoff is a great word for it.”

He continues:

What’s happening is third-tier VCs are trying to get deals away from Sequoia and KP and offering entrepreneurs some cash as part of the deal. I firmly believe that all the cash going into a company belongs in the company. I don’t want entrepreneurs to be bought off. All the money raised belongs in the company, so the entrepreneur can hire more people and build the company faster, and test out their idea. The entrepreneur taking a million bucks out of the company that should have stayed in the company says the company doesn’t have as much a potential for success.

Elsewhere, he says “entrepreneurs are in charge of the dining room table.” See video above (RSS readers will have to go to site).

While many may support Conway’s point of view, there are many entrepreneurs who vehemently disagree. They’ll argue that giving entrepreneurs cash in a financing gives them enough financial security to focus on the long-term — and thus willing to swing for the fences. Instead of yearning for pay-back for their work, and taking the first offer for an acquisition, they’ll be more likely to want to think really big. There are plenty of examples of this, the main one being Facebook. It is well known the founders took money out of the financing round, and that is arguably one reason why Mark Zuckerberg has pushed aside billion dollar offers, and stubbornly sought the big time. Facebook’s Sean Parker has since become a major proponent of this, helping push it at his VC firm, The Founders Fund.

Update: Another reason this is eye-opening is that Conway is an advisor to Facebook.

Update II: We should note that Parker’s cash-out plan may be intended for companies that are more mature, whereas Conway’s criticism of the cash-out practice (again see video) focuses on seed and first rounds. Now, Parker’s FF class plan technically can be implemented at the first institutional round (many companies are already quite mature by that stage). We’d argue, though, that each entrepreneur has different needs, and VCs should assess each company on a case-by-case basis.