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January 01, 2008

Dealing with EIRs

Recently, I have come across quite a few VC (and in some cases even PE) firms in India taking on board Entrepreneurs in Residence (EIRs). Simultaneously, I have begun to hear entrepreneurs pitching to these firms express concerns on the potential conflicts of interest in the EIRs sitting through their presentations and doing diligence on their companies.

What exactly in an EIR? Here is an extract from the Wikipedia entry:
The role of an EIR varies from fund to fund (and entrepreneur to entrepreneur), but typically it involves an individual that wants to start a company. The entrepreneur may enter the position with an idea at various stages of development. Sometimes an entrepreneur has already spent a great deal of time on the idea and is leveraging the EIR position for office space and mindshare with VCs.

Another EIR role is to act as a “partner” and help VCs evaluate potential deals where the entrepreneur has a particular expertise. An EIR might also spend some time with an existing portfolio company to provide his or her functional expertise. In this scenario, the EIR will sometimes enter the company as a full time executive (typically CEO or some “C” level role) if the company and the executive feel there is a good fit.

The Funded has an (anonymous) post which expands on the "inherent CONFLICT OF INTEREST posed by EIRs sitting with the VCs who in turn sit at the gathering point of new ideas from trusting entrepreneurs".
I can't imagine that it's ok for a doctor to refer his patients to surgical clinics owned and funded by himself. There could be all kinds of arguments as to how that would be practical, but it still appears inappropriate and fraught with ethical compromises. Which is why the American Medical Association rejects this concept of self-referral. The EIR concept is even more problematic, even with full disclosure, since there is no easy ethical resolution for the inherent conflicts of interest.

For those VCs who would shy from any hint of impropriety, it would be a simple matter to set a policy that no EIR would form a startup in an area where someone has pitched an idea in the last 12 months. Alternatively, don't receive pitches where an EIR wants to start something.

But I’m sure we’ll hear a thousand reasons why such guidelines would not work ... which then leads to a simple solution: Do away with EIRs entirely.

As EIR programs have been around for quite a while at US VC firms (and apparently becoming more popular), VCs importing the concept to India are unlikely to abandon them. However, in the interest of a healthy ecosystem, here's hoping that VCs actively inform entrepreneurs (who approach them for funding) on the role of their EIRs and give them an early option to "opt out" of disclosing more information about their companies/plans.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.