Lemming! Lemming! Lemming!

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ILLUSTRATION: Panel from “Liquidation Preference” • watercolor & ink

Cross-posted from the Foundering Blog. Apologies to those who subscribe to both.

Despite a very clear and not-at-all tongue-in-cheek “all persons fictitious” disclaimer, we’ve gotten a lot of questions about who might be the basis for some of the Foundering characters . Who is “Perry?” the Lemming? Which firm is Lemming Capital? Did one of your board members try to molest one of you? Do you want to talk about it? Oh God, will you please stop crying?

Some of you have insinuated that you know these cartoon animals in real-life which really shocked me, because most of my imaginary friends are attractive women (Ed. Note: What about Jeero? Or that alligator? –fair point). It’s not that the FertilizeMe gang doesn’t borrow personalities from folks Bryan and I have met in our startup travails, but more often than not, the characters are amalgamations based on Silicon Valley caricatures or archetypes. Lemming Perry is a great example.

In venture capital, it’s a common story (and as far as I know, non-apocryphal) to hear of junior employees arriving in the morning to find a voicemail waiting from John Doerr, the well-known investor at Kleiner Perkins. Before Kleiner was known more for sexual harassment and before Doerr was more well-known for crying during a self-serving TED talk promoting cleantech investments, he was well-known for investing in companies like Google (where he still sits on the Board) and Amazon. So if you’re a twenty-five-year-old venture capital associate, receiving a voicemail from John Doerr would be pretty exciting. And the mother****er knows that.

“Hi, John Smith. This is John Doerr from Kleiner Perkins, and I have a special investment to talk to you about in the on-demand fertilizer space. Have you heard about FertilizeMe?” He proceeds to breathlessly describe the company, the opportunity in on-demand fertilizer fertilizer on-demand and asks you to call him immediately if your firm might be interested in this special opportunity that he’s sharing with you. Aren’t you lucky? Of course you’re calling back! Of course you’re investing!

I’ll call this the Lemming Pitch: “Follow me. Don’t mind the cliff. I know what I’m doing.” The story of Perry and Lemming Capital in “Bored Meeting?” represents a range of VC behaviors. Lemming Capital might be a second or third-tier VC firm that follows a more prominent one into a deal primarily because the prominent VC is involved. Or Lemming Capital is the financial institution who has zero knowledge of technology but will price an inside round to protect the Board from shareholder lawsuits (with a wink of course).(1) Or it’s the firm that gloms onto a relatively successful syndicate in follow-on rounds, syndicates that exist ostensibly to reduce risk but are often used to give these lower-tier investors an incentive in returns and brand halos to invest in more questionable deals in the future. Remember when we let you invest in Twitter in their Series D? Well what about FertilizeMe’s Series B?

The Lemming Pitch is an institutionalized scam taken to the next level. It’s like the demon spawn of a “100% guaranteed stock” scam crossed with a Nigerian spam email. Except then that demon spawn married the child of a Boiler Room pump-and-dump scheme and your uncle who sells Amway and subsequently gave birth to the Anti-Christ. Now you know why the shark’s named Damien.

Perhaps the funniest thing about the Lemming Pitch is that the higher your own self-regard, the more likely you are to fall for it. This happens with senior VCs _all the f***ing time_. Because admitting that an offer like this is a scam would mean that the person offering the deal doesn’t think very much of you. (He might not even like you at all.) But similar to the 100% guaranteed stock scam, these deals do work out every once in a while, thus allowing the firms to raise new ten-year funds. So if they’re lucky enough not to get stuck in a watercooler or forget the safe word at an S&M club, a firm like Lemming Capital can stick around for ten or twenty years before being replaced by the next mark.

And speaking of lemmings, Bryan and I were pretty honored to see the HBO series Silicon Valley namecheck lemmings this week as a tribute the recently departed Lemming Perry. Well, I guess it wasn’t a tribute to Perry and didn’t have anything to do with us at all, but it’s a fitting way to send off one of our favorite characters.

Lemming! Lemming! Lemming!

– Ben

(1) “Pricing the inside round” – There’s not much online about this situation, so Bryan and I thought we’d explain. When a startup goes sideways, often the only option for additional capital is from current investors—insiders—investing in what’s called an inside round. Nevertheless, the Board may go to a very friendly and less discriminating external investor who will validate whatever valuation has been chosen in return for access to this deal and others.

The valuation chosen is often flat to preserve the company’s capital structure (at least until the Board decides the founding team needs to go), but “pricing the inside round” allows the Board to ward off any pesky shareholder lawsuits regarding fiduciary duty and also allows the startup to suggest that it has succeeded in finding new capital from an external party. These investors are usually well-known to venture capitalists, so everyone in venture knows you’ve _really_ done an inside round. However, you can usually fool your employees, the press, your customers, and most of the competition.

In the comic, Lemming Capital is really more like a third-tier VC following Damien’s firm, since Lemming Capital is providing a significant capital infusion, but the insinuation, of course, is that FertilizeMe has been going sideways for a while.

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