Maybe a bit OT, but when I read articles like this, I look at the VC scene here in Europe and feel sad. It's hot here (amongst MBA types) to be able to say that you're affiliated with a VC-, 'innovation-' or 'seed' fund (leaving aside that many of these are funded at least in part themselves by public money) but the sort of talking in this article is widely foreign to the type of people who typically get the reigns in such organizations. Over here, they don't see 'founders' as such; tech people or people who actually build things for customers are seen as commodities who just execute simple rote tasks and who are really just employees that don't need to be paid a salary until the point the company is bringing in money and then they get paid (x years times double or triple median salary). 'Liquidity event' for founders in an investment round? They'd look at you as if you had gone nuts if you proposed something like that over here.
(again sorry for OT and the above may come from observation bias - I'm just bitter today I guess ;) )
I've been a little disappointed to find out that aspects of this view are sometimes adopted at startups with a lot of VC funding, and not just enterprise companies.
I think that there is some element of truth to that, for some people. Remember that VC is first and foremost a financial profession: they have a fiduciary duty to their LPs to get the highest returns possible. They invest in a different asset class, but they are money managers responsible for allocating capital to the teams most likely to make good use of it.
I also think that there are some founders who are clearly in it for the money as well. Probably moreso of late, with the gold rush mentality these last couple years.
I'd disagree that this is everyone. I think that there are still a large number of founders around who genuinely want to change the world. Many of them are not seeking venture capital, or if they are, they are getting turned down. But I also think that among this population, VCs are seen as the commodity, a resource to be used when their startup has proven itself and needs to scale. Sam Altman used to say many things to this effect, back when he was on the entrepreneur side of the table.
One of the most illuminating quotes was something I read in Dale Carnegie, to the effect of "The guy you're holding a conversation with probably thinks himself superior to you. Let him. You have nothing to lose and everything to gain from maintaining this illusion." It made it clear that there's nothing wrong with different people having different perspectives on who's got the higher status in the relationship, or, more cynically, on who's using whom. In fact, the world runs on this status ambiguity - nobody would ever do a deal in which they think they are going to get screwed, so the only reason we have any commerce at all is for both parties to believe they are the ones getting the better end of the deal. We wouldn't be able to function without Lake Wobegone. (There's another interesting psychological finding where the only people with a realistic self-image are clinically depressed; apparently, if you lack this inflated sense of self-worth, it really does make you unable to function.)
Sorry that your experience has been influenced by people that are obviously not good at their jobs (both on the founder and VC side). What you describe definitely happens, but is not what the best founders and VCs actually do.
If you're raising money from a good fund today you're definitely not subject to "predatory contracts". People are raising a lot of capital for pretty low dilution, and there's plenty of secondaries availability.
I also don't know what you mean by founders having a smaller network or less experience; if you really spend time with good founders you'll see that a lot of them 1) have expertise in their area of focus 2) are pretty well connected.
I'm worried about too much of this narrative being repeated on here; just like with any other job, some people have only be exposed to bad managers / co-workers. That doesn't mean the whole industry is like that.
I'm disappointed you got downvoted for this, because I think it's a legitimate viewpoint.
I actually showed this article to a few VC friends in draft form for feedback. I got mostly positive comments, with one person who was upset at the "golf games" wisecrack (to be fair - that comment was born of a very specific, very frustrating experience with one person). I think an important point of context is that I've raised money from 6+ funds, work closely with many VCs, and count several of them as friends.
"Otherizing" is a legitimate point of criticism for general social discourse. But this article had a very specific goal: to take a number of widely-seen behaviors, and explain them in economic terms. I used light language to do that, but I think it's a crucial point of understanding that most entrepreneurs lack. In fact, I think much of the criticism of VCs is born from a misunderstanding of what they're about.
So while you're right that we're all human beings who can live in harmony together, I think there's more useful analysis past "they're entrepreneurs too".
And I think if most entrepreneurs sit down with VCs, they'll have better things to talk to them about than fund structures and carry terms. I'm just weird in that I find that stuff fascinating!
I know this isn't the point of the article by any means, but the first sentence (Raising millions of dollars from VCs is still the tech entrepreneurs’ dream.) bothers me a bit. I don't know about anyone else, but my dream is to run a profitable company, and how I get there has no bearing. Am I in the minority here?
1) "Tech investment barely exists outside of Silicon Valley, and when it does, the terms are horrible. In my former city, many companies still ended up flying out and courting investors in San Francisco because the local scene was so bad for it (even though we had several local "startup accelerator" and incubation programs).
I also just think VC terms are bad in general, and I think their intentionally exploitative nature prevents a lot of good things from happening."
Which is incredibly packed with completely correct information. It shows a very deep level of understanding of the situation. You don't elaborate on "prevents a lot of good things from happening" but there are actually volumes behind those 8 words as well.
2) Looking at your immediate posting history, I find your suggestion on Twitter being forced by "open[ing] up computer access and intellectual property laws so that the content stream can be combed over by anyone who is interested in doing so, with or without Twitter's permission" (I hadn't seen it before I came to my previous conclusion about your level of insight) extremely sage. In fact, it reminds me of the philosophy behind "FRAND" (Fair, Reasonable and Non-Discriminatory) requirements to license. It's extremely reasonable. (Despite currently being greyed-out due to downvotes.)
3) your pithy response
>>tinalumfoil 1 day ago
>>Being a founder (or co-founder or startup employee) means taking a decade out of your life for low pay and financial instability for the chance of having stake in a successful company. If you're not wealthy you're not in a position to be a founder in the first place.
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>cookiecaper 1 day ago
>Someone should really inform the college kids who keep applying to incubators like YC...
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shows a deep understanding.
4) you have 10570 karma and have been a HN user for 2797 days - 7 years.
5) I agree technically with your recent comment history on slack.
6) actually I've looked through a bit more, all of your comments are fantastic, including the ones on VC.
I don't know what else I can say. I don't have you confused for anyone: I came to my own personal conclusion based on your comments which I read.
If you don't want to reply to your question publicly, since I see your insightful comments are routinely downvoted, you can email me at the email listed in my profile.
Not sure how much more I have to flatter you to get your insights. There's nothing sarcastic about anything in this post - you know how insightful you are and what you do and don't know about.
Anyway my request was:
>What do you think solves all of these problems? (You also allude to what's being missed with "prevents a lot of good things from happening".) Can you give me your comprehensive platform or idea of a solution? You have a great understanding of multiple areas of the problem.
with respect to VC's not spreading out. if you have no thoughts whatsoever, that is fine. just because someone can identify a problem doesn't mean that person can see a solution. I'm just curious what you think.
I think the amount of VC bashing in the post is unwarranted. It makes it sound like VCs make fat salaries on the backs of other people - either in form of investment or startup founder's hard work.
The fact is that some founders, including the author, feel that VC confirmation is a validation of their idea/business. So, while founders shouldn't raise huge amount of money for niche projects they do it anyways because that's how they see validation of their idea.
The article really lost me with the line "Unsurprisingly, venture capital firms – an equal victim of this culture"
In what way is a VC firm a "victim" of investing millions in a startup to try to get in at the ground level of the next unicorn?
The whole thing is this weird self-fulfilling prophecy cycle. I don't blame either side of the equation, per se. But it sorta kills me how people think of this standardized rite of passage now for launching a startup, getting a ton of money before you've made any, and then exiting. I wouldn't take any of that for granted.
Well, on the other hand I worked in a company which lived for about 14 years of such VC money. They never made profit and all VCs got mad. But I, as an employee, got paid a handsome amount of this money and I guess I'm not the only one.
So I can understand that some people think VC money is for the founders.
IIRC, you've said things more along the lines of "VC interests are often not aligned with founders' interests" and "VC funding isn't really my cup of tea". Amy Hoy and 37signals/Basecamp are the ones who ardently speak out against VC funding as a business strategy.
I wouldn't call it misleading; VC-funded startups (and the decisions they make) can be incredibly unintuitive for someone who has no understanding of the VC funding model itself. There's even an entire section titled Difference in Business Philosophy, where the person being interviewed recognizes the VC-funded startups are operating under a different philosophy and towards distinctly different goals:
> Albrecht says she she quickly realized her tenants weren’t trying to build a sustainable business like her. They were swinging for the moon.
and
> Albrecht says most of the people she has met at these companies are very different from her and owners of other local food businesses. She struggled to characterize the difference, but it was more than just their corporate philosophy.
The article seems fairly balanced in that it includes examples of behaviors and seemingly illogical decisions characteristic of VC-funded startups, while also including an entire section expressing that there does seem to be something deeper at play driving this behavior, she can't rationalize what it is from her experience.
The article does feel incomplete though, as it never actually attempts to address what that fundamental difference is that Albrecht struggles to characterize. Which is the fact that VCs and VC-funded startups are gamblers with distinctly different risk profiles from traditional businesses and financiers:
- A typical small business owner is gambling with a finite bankroll, based on whatever capital they have or are able to acquire in the form of guaranteed debt. Going bust is a catastrophic outcome that they will personally bear the consequences of. So their betting strategy optimizes against going bust, resulting in a conservative play style of short odd bets of moderate value.
- The financiers those business owners have access to operate under similar dynamics, just with far larger bankrolls. This reinforces a typical business owner's behavior, as they understand their access to capital is dependent on not being seen as a long odd bet by their potential financier.
- A founder with VC-funding is similarly gambling with a limited bankroll, but well funded by someone else with no guarantees attached and an express mandate of spending it with a "go big or go home" mindset. Going bust is pretty inconsequential for this gambler - the worst outcome is that they can't get their bankroll topped up and walk away having wasted a bunch of their time gambling. So their play style is super aggressive, solely consisting of large bets on long-odd plays. Small business owners can recognize these players when they show up at the table, based on their reckless yet distinctive play style and propensity to go bust in the end. But these players defy logic to small business owners - they someone convinced someone to bankroll them despite being such obviously risky bets, their play style has absolutely no sense of self-preservation to it (ignoring safe bets even as their bankroll dwindles), and show far too little distress when they go bust. There's absolutely nothing about these players in and of themselves that allow their existence to be rationalized.
- Then you have VCs, the deep pocketed financiers that create and fuel these incomprehensible players that are flooding the gaming floor. Their gambling strategy is both elegantly simple and fundamentally different than all three of the above. They walk right past all the table games, pick a slot machine, and pull the handle. Then keep pulling it again and again until one of their spins eventually lands a jackpot. They fully know the odds of a jackpot going in, and come prepared with a bankroll to play those odds. So the only criteria they evaluate with any given bet is whether a particular machine's jackpot payout and cost to spin is a match for them.
Once you understand the gambling strategy of VCs, everything else falls into place and makes a ton of sense. But if you're missing that piece of the puzzle, it all just seems bonkers.
I know of a company where the parent of one of the founders made a ton of money for the VC. Twice. In exchange, one of the partners has put some seed money into the kid's startup. The seed money is a pittance compared to how much money the VCs got.
What's sad about it is that there's no entrepreneurial spark in the founders. They're not hungry for success. They're paying themselves way too much and working with no effect. The company will fail, and they'll go on to whatever nice lifestyle awaits them.
(edit: Note that I'm not saying that this is typical, just that there are examples of this "insider" activity.)
Yeah, I was surprised to see the article start from a clearly true starting point and then veer way off into left field talking about not having enough talent or coordination (the founder's problem) instead of the actual issue of VC expectations.
I always find it crazy when I see people more worried/excited about VC funding and their current valuation, rather than the actual product/service being created. Why even be an entrepreneur in that case. I have a hard time seeing how the founder doesn't feel like an employee of VCs at some point.
When a founder becomes a VC, his interests in the company he invests in are different than the founders interests. That difference in interest should be obvious but since they portray themselves as founders first, which they were before, instead as VC, which they are now, it confuses that distinction. Agree that it was written a bit too strongly as an attack since I don’t think VCs are malicious when they do that (most at least).
If you don’t believe that, then see other comments that describe how founders in almost all other places other than Bay Area (Boston, NYC) prefer bootstrapping you VC.
Though one way I’m not convinced by the article, in my view what keeps the tension low and manageable in the Bay Area is the amount of money and small number of major firms, which makes treating founders well a key long term strategy, otherwise they’d get less deals (supply vs demand) rather than the power law distributions of this “phase” of tech firms. This long term strategy hasn’t evolved in Boston, NYC, Atlanta, etc, so VCs don’t play up their former founder roles, and the tension between VC and startup is easier to see.
Anyway, it’s not a bad thing, I would question the deal making abilities of founders who don’t see it, and just recognizing these tensions and finding win-win ways to resolve them is a woefully unrecognized part of growing a business.
Only slightly related to your point, but I find almost the entire VC community not one that I would want to be working with very closely with. It’s just not the kind of people I find interesting. Not that they’re not skilled or provide value, but the whole fundraising dance seems to be tiring and honestly pointless. Harkens back to an equally pointless endeavor I’ve been through before: the struggle to get good grades in college. Artificial struggles created by humans for other humans. I guess some people like that but it has an element of “rat race” that I find deeply disturbing.
If I had a wish to materialize an ideal VC firm, it would be a place with both business types and highly skilled engineers who are on top of their skills and continue to build things.
(again sorry for OT and the above may come from observation bias - I'm just bitter today I guess ;) )
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