These are great points. Someone else addressed much of it but one thing to add is founders can actually sniff out each others' BS, sometimes better than career VCs. Seems to be common knowledge in SV that builders make the best investors: https://www.fastcompany.com/90266921/alexis-ohanian-on-why-f...
I think the point here is, a Founder-VC is better than a traditional VC because the Founder-VC understands ”the life and art of being in the trenches”.
My personal and vicarious experiences with VC's have been that they are very much a mixed bag, and choosing to work with them in general is a necessary evil depending on the type of company you want to build. For my future startup attempts, if I can help it I will not work with VC's.
And if I have to work with VC's, then I will have a strong preference for working with VC partners who are former operators. The investor having substantial experience in the trenches (such as former founders) makes a massive difference in the productivity of the founder/investor working relationship.
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.
That's an interesting point. I wonder if the reason why startup culture thrives so much is because a lot of the VC's/Investors are ex-engineers who made their wealth from their own companies... and there is a better understanding in SV of what it takes to succeed (and how to handle failure).
The best VCs optimize for the founder + the business thriving together as the ideal package unit.
Overwhelmingly the greatest outcomes are produced by companies with founders at the helm for long periods of time. The best VCs in the industry know this well, with few exceptions. If you're dealing with VCs that routinely like to replace or marginalize founders, you're dealing with either a subpar firm or one of the couple old bureaucratic dinosaur firms that occasionally are prone to 'IBM thinking.'
Examples: Amazon, Microsoft, Apple, Google, Facebook, Alibaba, Tencent, Baidu, Netflix, Salesforce, Qualcomm, HP, Dell, nVidia, Sony, Intel, Oracle, Airbnb, Twitter. Even IBM, at its most successful it was run by the Watsons.
There's an angle to consider – why is it that people who are technically skilled and financially experienced do not take on venture funding and build billion dollar plus companies? [1]
Perhaps, they know (from business experience) that the VC treadmill is not in their best interests, when everything about that life is considered! :)
Perhaps investors actually benefit from the naïvete (read: not incompetence, just naïvete) of their portfolio companies?
It's a symbiotic relationship, but there's a reason that the road between founder and VC is generally a one-way street.
[1]: There are notable exceptions to this observations. They're worth understanding, too.
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.
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:
I’ll add on to this - I’ve worked closely with a few folks I consider to be in that brilliant mix of charisma, business sense, and technical competency.
I’ve watched them found rock-solid companies and build great teams (I’ve worked on them)… and then for some reason several times in a VC-backed Boards like to bring in their own guys and push out the actual founders.
In short, I’ve watched VC rob my friends of their joy and in some cases cheat them of their blood, sweat, and equity. Good luck exercising those options on a non-IPO firm when you’re scrambling to find a new job to keep the mortgage current.
I’m really soured in the whole “start a startup.” There’s so much chicanery going on in the business world that it’s just sickening to see.
The OP's advice wasn't meant for VCs, it was for the founders. Their role is very different and the advice looks sound to me. Or do you disagree with it from founders' perspective?
I should clarify point 2 then. I don't mean that for founders it is a finance game, I mean that the idea of a community of high-growth, venture backed "Startups" which Y-Combinator and the various VCs sit at the seat of - is 100% finance driven. In other words, their goal is returns, not "changing the world" or doing anything different than the nihilists [1] on Wall Street. Investors like a company blowing them off to get traction because it is basically no risk for the investor, and helps them track their progress so they can come in later for a massive round.
I point this out because there is such a strong ethos around SV as being this kind of "Anti Wall-street" which I think is reinforced because founders/employees genuinely to want to make impactful stuff. The founders here and elsewhere in the startup world constantly talk about "making a difference," "changing the world" etc. So whereas the junior analysts and salesmen on Wall Street all know and acknowledge that making shitloads of money is the primary goal, I have a hunch that the VC's and LPs in SV (and elsewhere in the startup world) are using the naivety of high producing young, enthusiastic people to make a killing. This is why the archetype of the SV founder is someone who is personally low risk (single, young), is expected to work an insane amount to get growth going, tapping into growing markets and has already validated the market.
That is not to say that founders & finance are de-facto in conflict across the board, and it is also not to say there is some kind of conspiracy between Ron and Jim to juice labor, but I do think that founders are largely seen as a commodity to the finance class in the startup world. My guess is that they VCs are threading the needle really carefully with giving out information about how to get more "founder friendly" terms because founders are too smart to get screwed.
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.
That's a nice overview but IMO it fails to take into account how the founders (oftentimes inadvertently) influence how helpful/harmful a VC is.
The most common (negative) example of this I've seen is when founders sell the VC on the solution, not the problem they're solving.
Everything starts out fine (you have a VC who is really excited to help you build and sell product X, even if they don't really care about problem Y). But then you realise that actually, the market wants you to pivot slightly to product Z to solve the same problem Y.
And that's when the VC pivots from being helpful to harmful.
There are probably multiple other examples of how founders can influence the value-add of their VCs, but that's the big one that springs to my mind. And I bet it accounts for 90% of the 'harmful' instances.
> another reason for VCs encouraging founders to sell shares: giving them a taste of wealth
VCs are wealthy. Some of them weren't born wealthy. The best among them recognise that removing the worry about e.g. paying rent will make a better CEO.
> Furthermore, in the Bay Area Founder-VC scene, FK/PK tension simply isn’t perceived as a problem. Founders increasingly think of themselves as capital allocators who think in bets, and the angel investing scene has brought founders and VCs together as social peers. There’s no FK/PK tension between investors and founders. They all want the same thing, and they all hang out at the same parties. The tension has simply been redistributed, largely onto employees. The greatest trick VCs ever pulled was convincing founders, “you’re just like us.”
Recommend reading the whole article if you're curious about the nuance in this. It flies above the current milieu.
It's about the same in practice actually. Founders and VCs both have the same critical resource: time. For founders because they bet on only one horse and it needs to work, for VCs because they bet fractionally on multiple horses and there are only so many bets they can place if the bets are to be meaningful. If you multiply the chances of success by pay-out in case of success it turns out the positions of a partner at a fund and a founder are roughly the same. The biggest difference is that the founder has much more control over the outcome than the VC (which is one reason why VC returns suck).
you are right, I've worked with a few. Problem is that it's a cost to the company they often don't want and they don't value the work (I think this is what SA is trying to change). Also, vetting/hiring folks etc. is it's own burden. VC pushing this gets rid of the friction and forces founders to take this seriously.
Agreed they may have divided loyalty, hopefully mitigated by a very temporary relationship and the fact that at early stages, VCs and founders should be super aligned, at least around the ops numbers (sale decisions, etc. are a totally different ballgame for sure).
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