Auctions are curious things. Moreover, the mere perception of being in an auction is more than enough to inject fear into a discussion.

I’m writing this because of two things. First, I connected recently with another VC, who commented that his firm was about to invest in its first [insert here name of famous incubator] company. But, he said they normally don’t invest in companies out of incubators because they’re concerned about over-paying and the “winner’s curse.” If I heard him right, the supposition is that those companies are shopped around heavily. In other words, they feared the pricing impact of an auction.

Second, the Red Sox were not able to re-sign Jon Lester, who was one of their star pitchers.  They last year supposedly offered to him $70 million, perceived as a low-ball number (no pun intended), with the hopes of ending up around $115 million. They probably feared being in an auction, but also calculated that Lester himself didn’t want the uncertainty of where he would live next and thereby would take a “hometown discount” (like other baseball players often do).

Since Lester was still under contract and could not negotiate with other teams, the Red Sox presumably had leverage. But, here’s the rub. Lester’s agents declined to counter-offer, as the offer was so low. They suspended the talks. They instead guided Lester to hit free agency, or the auction, once his existing contract expired.

Today, Lester has signed with the Chicago Cubs for $155 million. The Red Sox’s had upped their offer to $135 million but lost out. So, their strategy of pre-empting the auction didn’t work.

As a VC, you’re always mindful of The Auction. You always want to be the first person on whom the entrepreneur calls for a financing. You never want to be one of dozens of VCs, or worse, be at the bottom of the list, whereby the entrepreneur has called on all other VCs, who passed, and now comes to you. This is what VCs call a “busted auction.”

That’s the perception.

But, I wonder what the reality is? IMO, I think every financing is effectively auctioned these days. With social media, blogs and more accessible VCs, the entrepreneur can reach out to anyone pretty quickly.

But, with human nature the way it is, if you’ve been fundraising for months or years, the VC is likely to know. Just be up front and have good and honest answers about why. Reasonable and good reasons I’ve heard include the following: the company has done a pivot, there’s more “traction” now, you called on VCs who aren’t really experts in your space, you’re new to fundraising and it took time to get good at it, etc.

I think the worse thing to do is to ignore the elephant in the room. Auctions are real, as are perceptions of them, and the entrepreneur should consider how he/she manages the VC’s views of them.

I think two of the most powerful human emotions are fear and greed. VCs want to make money, but they fear that they’re the “sucker in the crowd” if everyone else has seen a financing and passed. Many entrepreneurs focus on the VC’s greed, but IMO, not enough focus on the VC’s fear.