So You Want to Be a Venture Capitalist - New York Times

Summary:
Number of VCs in Silicon Valley declining, ascribed to exodus of "tourist VCs." Huge amount of turnover below the surface in VC industry. No obvious resume for the perfect venture capitalist. You're a natural athlete (good sense of small about a deal) or you're not. Only way to find out is by taking to the field. E.g. failure of Mitch Kapor (Lotus 123) at a VC firm. According to Kramlich (Sequoia), venture capital doesn't necessarily take a lot of technical talent. I mean, it doesn't hurt, but it's more about people skills and the ability to assess whether there's a market for something. (Published: 22/05/05)

Notes:

• exodus of "tourist V.C.'s"
  
• Silicon Valley term for people from nonfinancial backgrounds
• hundreds fewer venture capitalists in 2005 compared to 2003
• Darwinian characteristics to venture capital
• huge amount of turnover below the surface
• talent for spotting promising technologies and undiscovered start-ups before others not sufficient
• no obvious résumé for the perfect venture capitalist
• "Venture capital doesn't necessarily take a lot of technical talent. I mean, it doesn't hurt, but it's more about people skills and the ability to assess whether there's a market for something." (Kramlich, Sequoia)
  
• need to have good sense of smell about a deal
• can't really have people learning on the job
• venture investing is best left to the professionals
• you're a natural athlete or you're not
• "Some can do it, and some can't, and like with athletes there's no way of telling until they take the field."
• e.g. Mitch Kapor
• founder of Lotus Development (Lotus 123)
• enormous success investing for himself
• e.g. RealNetworks and UUNet Technologies
• staggering payouts
• joined VC firm Accel Partners
• failed to choose a single company that made him any money (0-for-5)
• "The fact that it's someone else's money you're investing, and that you're investing as part of a partnership, that was more different than I thought it would be."
• At the end of the 90's, it seemed everyone in Silicon Valley wanted to become a venture capitalist
• ranks of venture capitalists more than doubled
• from less than 5,000 in 1995 to nearly 10,000 by 2001
• firms started hiring people from outside traditional fields like finance or operations
• suddenly many lawyers, entrepreneurs, journalists and executive recruiters were trying their hand at playing venture capitalist
• reason:
  
• vast rewards
  
• a general partner at a top-tier firm typically earns at least $1 million in salary
• real payoff is what venture capitalists call "the carry"
  
• the 20 to 30 percent of the profits they share among themselves before disbursing the rest to investors
• a partner working at a top-tier firm in the 90's could pocket roughly $50 million over the life of a single fund
• thrills
• not unlike a movie producer auditioning tomorrow's stars
• "Being a venture capitalist was viewed as a very exciting, top of the feeding chain sort of thing. But what I think a lot of people learned is that it's not as much fun or as easy as it might have looked from the outside." (Scott Dettmer, founding partner at the Silicon Valley law firm Gunderson Dettmer)
• early years are often painful
• John Doer: "training a new venture capitalist was not unlike preparing a fighter pilot for battle: it takes probably six to eight years and you should be prepared for losses of about $20 million. Of course, while we take risk, we work like hell to avoid crashes."
• venture gods
• someone who has made $100 million to $500 million on a single investment
• e.g. Mr. Doerr, Mr. Kramlich and Michael Moritz at Sequoia Capital

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A Unified Theory of VC Suckage - Paul Graham's blog

Summary:
Paul Graham on how the economics of the VC business is the reason many VCs behave the way they do and are so disliked by many founders. Problem with VCs is that they're funds, and that a lot of money is at stake. As a result, VCs take an agonizingly long time to decide, their due diligence feels like a "cavity search", they steal your ideas, and they want to micromanage your company. Add up all the evidence of VCs' behavior, says Graham, and the resulting personality is not attractive. "In fact, it's the classic villain: alternately cowardly, greedy, sneaky, and overbearing." But they're not intrinsically jerks: "VCs are like car salesmen or bureaucrats: the nature of their work turns them into jerks." VCs often complain that in their business there's too much money chasing too few deals. Few realize that this also describes a flaw in the way funding works at the level of individual firms. (Published: 23/03/05)

Some reactions to this essay: VenChar, global-themes.com, Rick Segal

Notes:

• problem with VC funds is that they're funds
• get paid a percentage of the money they manage:
  
• about 2% a year in management fees
• plus a percentage of the gains
• want the fund to be huge
• means each partner ends up being responsible for investing a lot of money
• since one person can only manage so many deals, each deal has to be for multiple millions of dollars
• explains
  
• why VCs take so agonizingly long to make up their minds
• why their due diligence feels like a body cavity search
• with so much at stake, they have to be paranoid.
• why they steal your ideas
• every founder knows that VCs will tell your secrets to your competitors if they end up investing in them
• only reason VCs are so sneaky is the giant deals they do
• with so much at stake, they have to be devious
• why VCs tend to interfere in the companies they invest in
• with so much at stake, VCs can't resist micromanaging you
• huge investments
  
• something founders would dislike, if they realized how damaging they can be
• VCs don't invest $x million because that's the amount you need
• but because that's the amount the structure of their business requires them to invest
• like steroids, these sudden huge investments can do more harm than good
• Google survived enormous VC funding because it could legitimately absorb large amounts of money
• less fortunate startups just end up hiring armies of people to sit around having meetings
• giant investments mean giant valuations
• otherwise there's not enough stock left to keep the founders interested
• high valuation not a great thing
• you can't benefit from a high valuation unless you can somehow achieve what those in the business call a "liquidity event"
  
• the higher your valuation, the narrower your options for doing that
• puffed-up companies that went public during the Bubble didn't do it just because they were pulled into it by unscrupulous investment bankers
• most were pushed just as hard from the other side by VCs who'd invested at high valuations, leaving an IPO as the only way out
• only people dumber were retail investors
• VCs are like car salesmen or bureaucrats: the nature of their work turns them into jerks.
• VCs often complain that in their business there's too much money chasing too few deals.
• Few realize that this also describes a flaw in the way funding works at the level of individual firms.
  
• 
  

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