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Prosper’s outside Directors – How “hands on” are they?

September 9, 2009

In the ongoing litigation against Prosper Marketplace (prosper.com), one of the issues being discussed is the level of involvement by Prosper’s outside directors in key strategic operational decision-making.

I recently came across a piece which details the relationship between Chris Larsen (co-founder of E-Loan and later co-founder of Prosper) and Bob Kagle (Benchmark Capital). Kagle later went on to become a key financial backer of Prosper and serves on Prosper’s board of directors.

I thought PCASM readers would find this May 2000 item of some peripheral interest (emphasis mine):

http://hbswk.hbs.edu/archive/1497.html

The Power of Partnership: Entrepreneurs and their VC Backers Say Success Stems from Solid Relationships.

What does it take to make things work between an entrepreneur and a venture capitalist? According to the founders of two Internet startups and the venture capitalists who backed them, success stems from solid relationships. “When you’re looking for a venture capital investor,” Bob Kagle of Benchmark Capital told MBA students in California for the annual HBS WesTrek, “you should really look for a partner, somebody who’s going to build this business with you.

Chris Larsen, CEO, E-LOAN:
First, let me give you a quick summary of our company. E-LOAN is the leading online lending company in the United States. We have about 350 people and did about $2 billion in loan volume last year. We originally targeted the loan business because we thought it was poorly served by the distribution networks. Our idea was to use the Internet to bring consumers to the point of production—to take out all the unnecessary costs. We knew that was going to get big play, but it was very difficult to get people interested at the time, which was about in 1996. We pitched to a lot of angel investors and several large venture capitalists but couldn’t get anyone interested. So, after about six months of being very frustrated, we basically self-funded. We used our credit cards and $100,000 from family and friends and launched the product. After a couple of failed starts with some other venture capitalists, Bob [Kagle of Benchmark Capital] called us. At that time, we were literally running on fumes. Bob said, “Let’s just meet.” I think it was about two weeks later when he actually cut the check. In that time we had developed a really trusting relationship. A VC is a partner who’s going to be on your board. If you can’t bear to hang out with him or her, it will not work. You will be out, and your company could be wrecked. I’m absolutely convinced that our company would never have made it if we went with another VC.

Bob Kagle, General Partner, Benchmark Capital:
Shortly after we formed Benchmark, we decided to focus a lot of our energy on the Internet. I don’t think that was a terribly courageous thing to do at the time, because there was a lot of evidence that this was a really significant phenomenon. In some ways, I think it’s more courageous to try to do that today, given the environment.

Mortgages were actually number three on our list of targets. We started calling around and heard a lot about this company, E-LOAN. We were really impressed with what we saw. They had done a number of very inventive things to put themselves on the map, early on, with few resources. Resourcefulness is something we always look for in entrepreneurs, and we saw it there, from a distance, in E-LOAN.

So I called up Chris. Actually, I didn’t ask him if he was looking for money because I wasn’t sure he was. I asked him if he had any sort of bias against venture capitalists, because I wanted to come by and just talk with him. We had a chance to get together, and it was immediately apparent to me that there was a very special partnership between Chris and [E-LOAN cofounder] Janina Pawlowski. Among all the advantages and attributes I saw that made E-LOAN an attractive investment, it was probably their partnership that impressed me the most. They had this combination of respect and affection for one another, which gave me a lot of confidence that they could get through the tough spots. In addition, we always look for a lot of domain expertise, and they had a tremendous depth of understanding of the business; they had started a mortgage brokerage business prior to E-LOAN.

Now, one of the things we like to see in entrepreneurs is that they will start their businesses without venture capital. What turns me off more than anything else is if people come in to pitch us an idea, and it’s clear to us that they’ll go after their idea only if they get the money. I like those people who are going after it, come hell or high water, and if you are fortunate enough to come along for the experience, good for you. I definitely saw that commitment in Chris and Janina. Another thing that impressed me is that Chris kept coming back to the customer experience. I find that the most successful entrepreneurs have a real sensibility about why they are in business. It’s not for the employees or the shareholders, it’s for the customers.

The other thing I saw at E-LOAN, which has proven out in spades as I’ve watched them face and overcome a number of challenges in the last couple of years, is a real decisiveness in the company. They don’t waste a lot of time mulling over important decisions. They think them through carefully but, more important, quickly. They’re not afraid to decide and move forward aggressively.

When you’re looking for a venture capital investor, you should really look for a partner, somebody who’s going to build this business with you. On the one hand, you should trust your gut on the chemistry; on the other hand, there’s no substitute for homework. You should call at least a half dozen people who’ve worked specifically with that venture capitalist, not just with the firm. And don’t ask, “Was there any value added?” Ask the entrepreneurs, “Is the world any different for your company because so-and-so was involved? What, specifically, did he or she do?” For the best venture capitalists, those answers are going to roll off the entrepreneurs’ tongues. In fact, you’re going to have to quiet them down a bit. And for the others, you’re going to have to struggle to get them to respond to that question.

Finally, I don’t think getting rich quick is the reason to come into the venture capital business or to be an entrepreneur. I believe it’s about satisfaction, making a difference, believing things can be better, and being willing to make personal sacrifices to make that happen. It takes a lot of personal sacrifice to grow a business.

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