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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