The absurdity conceals a reality you don't understand yet, which is that VCs often have to make investments not according to their deep understanding of a specific market, since there are too many markets to study, but by using a few signals that apply to all startups. Those are traction with users, social proof from other investors, and the track record of the founders. Startups are all organizations in search of a business model, as Steve Blank puts it. So you want someone leading the organization who is adaptable enough to figure that out, no matter what initial idea they start with. That's why VCs go with strong founders.
I really don't get the feeling that VCs in general are good at picking the formidable founders
The sentence you are responding to is the whole point of the article. VCs don't have to be good at picking formidable founders. (I don't know whether they are or aren't.) They just have to believe that they are good at it - and they do.
I think there is some notion that VCs are these rational, brilliant people who are making money hand over fist investing in the best projects. The reality is that many VCs do not make money and invest in tons of bad projects all the time.
Why would they invest in bad projects? Because they are humans who happens to have a crap ton of money. As humans, they're susceptible to FOMO and hype. They are susceptible to things like first impressions, a good slide deck, a good sales person, etc.
All this to say is that it might be the VC, it might you, or it might be your project. Who knows. This is why many founders end up pitching to 30-40 VCs because sometimes it's a numbers game.
The whole VC funding thing is a game that you have to learn about and crack. The easiest way to crack it is to show you have growing revenue. The next best thing is to show you have growing users. If you do not have growth, then you'll just have to hustle and put on your best sales game.
I think this is how VCs select startups as well. They are investing in the people. That's why Loudcloud can get $45mil valuation after 2 months from founding and anyone else with the same idea would get laughed out of the building.
Startups are not defined by their growth. However, VC-backed startups are customarily focused on growth. The difference between these two statements is subtle but important.
'Revenue first, growth second', a paraphrasing of Clayten Christiansen.
VC's essentially use founders like race horses. They pump in the steroids, exercise them to the point of optimal performance or death, and then put them out to pasture if they don't perform. Founders are part of a portfolio plain and simple. They are part of a stable. The VC's are benevolent trainers but they have one goal: ROI. Their benevolence is in direct correlation to their ROI, which is largely determined by growth. The irony is that Wall Street operates in exactly the same way. The difference is that the relationship between Bank and Borrower or Shareholder and Company is more clearly defined than the relationship between VC and Founder.
There isn't anything wrong with VC's. They play a vital role in the financial community. Yet, at the end of the day, a VC is going to look at a startup as a financial product. VC's are offering their partners a product just like a startup is seeking to offer the market a product. The fortunate part about the rest of the business world, cut-throat though it may be to some, is that no one expects anyone else to be benevolent. They expect people to conduct business.
The better the VC-Startup relationship is defined, the better it will be for the long-term health of founders. On the other hand, VC's have no incentive to change course because their is still a willing market of young people who want to strike it rich. In some sense, it would be far better for the market and founders if data was more readily available. In fact, it is a jilted environment. It is always in the VC's favor because they hold the money. However, it doesn't mean that they hold future value. If it did, they wouldn't need to go fund startups.
The current VC-Founder relationship is imbalanced compared to other portions of the marketplace. The VC's hold additional chips because of the allure of a successful exit, the siren of Silicon Valley.
This is true, but I don't think VCs use young founders to prove an idea. A startup is a very different environment than an enterprise.. and it's very rare that a person can execute well at all stages. So eventually the startup grows to a point where more professional leadership is helpful.. and VCs will happily replace a founder if they think it'll make them more money.
There's a lot of research on this (and dating back quite a while.. not new at all). So here are just some quick links I found:
One annoyance I have with VC funded startups is how they all try and use the same playbook. Founders are generally inexperienced. Likely good ICs, very good talkers, but not capable of holistically building a company from the ground up. They hire the same roles, in the same order. So many small startups will have over embellished leaders, who are 'head of' or 'director of' something, with 1-2 or sometime zero direct reports. You'll hear how "We NEED a" head of UX, data, support, etc. These types don't want to do the IC work, but want to be 'early stage'. Those people come in, buy the same crap SaaS tools and institute the same culture as the previous place. Maybe this is changing with money tightening up, but it can be off-putting. When considering a new job, I look at who works there, and if its a small company, with inflated titles and people with short tenure everywhere, its a pass.
Interesting but I often wonder how much better VCs are than the rest of the population at determining startup success. In hindsight they can always say "see, those two factors were important, for my X exit. Told you so" but they also pick companies that make zero sense. Like the $400 juicer company (backed by the most respected VCs in town).
Some also claim to have a thesis but will quickly drop it the moment a hot company comes along that violates their thesis and everyone seems to be investing. I'd like to see a VC publicly state a thesis and then invest in only companies that fit it for 10 years and then do better than average.
And how much of it is confirmation bias? If you back a Facebook early in your career, the very best entrepreneurs will gravitate to you and you will have more success.
As someone who helped design than a 100 startups in various capacities and has been heavily involved with the whole VC scene one of the things that I kept seeing was the misalignment between the founders and the VC's type of skin in the game.
A founder for most startups is either trying to find product/market fit or raising money. Many VC/Angels are great for the operational/financial side of the advice but at least in my experience when it came to finding a proper market for your company their advice often sounded right but wasn't possible to implement for various reasons as it was very generalized.
One of the primary and perfectly reasonable reasons is that VC's are thinking about an entire portfolio of companies and doesn't have the same kind of skin in the game as the founder which mean they will think differently and less contextual about the companies.
There is definitely an argument to be made for the fact that it's not the VC's job to care about the specific company more than they need to and there are plenty of VC's out there who are perfectly able to care properly but it's also a very exaggerated market and let's be frank not everyone who has money to invest have a lot of experience in "the work".
After I left Square in 2017, I wanted to find a way to help both with getting much faster to product market fit but at the same time also having the opportunity to provide capital alongside which I believe will align my interest with the founders much more.
So I ended up deciding to set up a creative venture studio which so far has been a great decision as it allows me both do my own and invest either capital or sweat equity in other companies AND I get to meet some really amazing people from around the world.
If you're brilliant and idiosyncratic and delivering something truly compelling, then vcs are more than happy to look past these things. God knows how many very eccentric founders have received funding
I can't shake the feeling that only one of the examples needs VC investment to function and succeed, and all of the others could be bootstrapped or take minimal investment.
Investing in and promoting startups that can only exist with VC funds sounds like a fair enough strategy for a VC.
I'm not convinced that the interests of founders and VC are always the same.
Regardless of your attitudes towards VCs, purely from a statistical perspective this makes sense. If you consider only a small percentage of individuals are capable of running or leading a high-growth company to millions or billions of dollars of revenue, then for every VC you add to your board, you have a greater chance of adding someone who isn't capable of adding value. Say only 1 out of every 10 individuals are rockstars in the startup/investing world. Assuming you and your co-founder are those rock-stars, the other 3 people on your 5 person board are only going to drag you down ;-)
The broader thing I've realized of late is that so many startups exist simply because they are building something that appeals to VCs, not something that necessarily appeals to any sort of customer.
So we have reason to be skeptical of any claim to wisdom from VCs and even any claim to understand relevant metrics or KPIs. Good VCs are humble about this, but others posture behind it.
What we should really be wondering is how many bad decisions are made by startups based on pressure from VCs.
Since average (non-accredited) investors are prohibited by law from investing in early stage startups, those who are not prohibited get a highly leveraged game which some are bound to play successfully several turns in a row.
There is nothing wrong with this, but it's sad to see promising startups make bad decisions because they are simply striving for rapid growth at all cost.
If I was a founder and I found out a VC would hedge their bets by investing in other startups besides mine, I would drop them in an instant. A VC should guarantee they will put their full faith in only my startup. /s
It's not the "startup" label that's a problem, it's that VCs breed a monoculture. There are lots of startups that don't secure funding because they don't fit the VC mindset. This is a survey of "what VCs want in their portfolios", not "what entrepreneurs choose to do", which are very different things.
reply