Bob Metcalfe, the inventor of the Ethernet computer-networking technology and founder of a tech company sold in 2010 to Hewlett-Packard for $2.7 billion, called this negotiation tactic of a potential venture capital investor the “Oh-by-the-Way Syndrome.”
Here’s what happened. This venture firm would reach a tentative agreement with him on all the major terms, but then – just when he expected to sign – they would say “oh, by the way, we also need …,” and add another significant term.
Metcalfe got so frustrated with this move, which the firm pulled multiple times, that he chose a different firm with a much less attractive financial offer. He told his new funders that only one non-negotiable condition existed for their deal: the “Oh-by-the-Way” firm be frozen out of the funding.
This tactic, which we in the negotiation world call “nibbling,” is just one of many negotiation examples from a fascinating book I recently read on the Silicon Valley venture industry: The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby.
What should Metcalfe have done when his counterpart first nibbled? Either a) reopen the negotiation and ask for something more valuable in return (in effect, nibble back), or b) stick to his guns, reject the nibbler’s new condition, and go with his Plan B/alternative unless they stick with their original deal (which he eventually did, but not until after a ton of frustration and wasted time).
Here are some more lessons, with additional ones in my next column.
- The value of likeability, reputation and relationships
I can’t count how many times Mallaby noted the likeability, common personal interests, rapport-building, and backgrounds of the venture capitalists and their startup company founder counterparts. Immigrants or immigrant families. Stanford alumni. Engineers. Poor backgrounds. Bootstrap mentalities.
Mallaby also continually emphasized the power of the venture capitalists’ relationships and networks. These are extraordinarily valuable traits for many negotiators.
A prime example of this related to venture capitalist Bob Kagle – an engineer with a Stanford MBA – and eBay founder Pierre Omidyar (an immigrant engineer). Here is how Mallaby described their relationship and why Omidyar accepted Kagle’s offer to invest $6.7 million at a valuation of about $20 million.
“Omidyar’s goal had been solely to get rich, he might have rejected Kagle. He had received a rival offer from a newspaper chain that proposed to buy him out for $50 million [a far better financial offer]. But Omidyar had come to like Kagle as much as he had liked Kagle’s partner Dunlevie [who had introduced them and with whom Omidyar had a previous relationship as Dunlevie had counseled him on his earlier startup] … and he went with the venture guy who seemed to understand him. When the investment was concluded and [the firm] wired over the funds, Omidyar left them in the bank untouched. He wanted Kagle’s connections and counsel. He didn’t need his capital.”
It paid off, as Kagle lured in the experienced executive and skilled CEO Meg Whitman. The rest is venture history, as they literally made billions.
- The power of questions, information, empathy and reading people
One of the most successful early venture capitalists was the legendary Arthur Rock, who had backed Intel among other home runs. What was his secret sauce? Mallaby wrote that:
[Rock and his partners] relied on emotional intelligence. . . . His shy outsider’s temperament made him an expert listener, and he would meet promising company founders multiple times before committing to back them. His method was to pose open-ended questions – Whom did they admire? What mistakes had they learned from? – and then wait patiently for the entrepreneurs to fill the vacuum created by his silence.”“
Rock and his partners weren’t technology experts – they were experts at getting information and reading people. It’s an invaluable skill in the most successful negotiators.
Latz’s Lesson: Beware of nibblers and emulate the best negotiators’ most effective traits, which include: likeability, excellent reputations, strong relationships, and the ability to ask powerful questions, exhibit empathy and read people.
* Marty Latz is the founder of Latz Negotiation, a national negotiation training and consulting company that helps individuals and organizations achieve better results with best practices based on the experts’ research. He can be reached at 480.951.3222 or Marty@LatzNegotiation.com.