Understanding VCs(avc.com)
avc.com
Understanding VCs
http://avc.com/2016/08/understanding-vcs/
67 comments
I don't necessarily disagree with you, but I'd look at the situation with a different lens. What value does this partner bring to my board?
The three I've heard of in concrete terms are (1) product decision making, (2) network and intros, and (3) operational focus.
1) is the partner who can help you figure out which features you'll need to go up market and hit the next stage of your growth.
2) is the partner who knows everyone and can open doors to sales counterpart and key hires.
3) is the partner who's a numbers guy through and through, and help you avoid operational pitfalls.
If it's not clear what a VC partner is bringing to the (board room) table, then it's worth seriously considering whether it's correct to take their money. Sometimes you have no choice. But if you have a choice between cheaper money and a great value add partner in the above mold, I've almost never been told to take the cheap money.
If you know of other "value add" archetypes, I would love to learn of them.
The three I've heard of in concrete terms are (1) product decision making, (2) network and intros, and (3) operational focus.
1) is the partner who can help you figure out which features you'll need to go up market and hit the next stage of your growth.
2) is the partner who knows everyone and can open doors to sales counterpart and key hires.
3) is the partner who's a numbers guy through and through, and help you avoid operational pitfalls.
If it's not clear what a VC partner is bringing to the (board room) table, then it's worth seriously considering whether it's correct to take their money. Sometimes you have no choice. But if you have a choice between cheaper money and a great value add partner in the above mold, I've almost never been told to take the cheap money.
If you know of other "value add" archetypes, I would love to learn of them.
Another value add archetype might be the "sounding board" partner. This is the person that listens to you vent, provides moral support, gives advice on non-product related issues like personnel, politics, power plays, helps with strategy and negotiation, etc
These are not the most common archetypes I've seen. Many (most?) VCs come from the finance/m&a/vc world. They have not run companies nor been on succesful product teams before. It is rare that a VC is an ex-operator, though founders want to work with them the most making them highly sought after.
This explained to me the disconnect I found between how I viewed the world as a founder, and how certain VCs viewed the world as finance people.
This explained to me the disconnect I found between how I viewed the world as a founder, and how certain VCs viewed the world as finance people.
Isn't most of "built great products" the combination of right timing, right connections, right team, product/market fit? What really is the difference between #1 and #2?
One obvious exception is the very VC whose blog post you're commenting on. Fred seems to have the same qualities of "The Product VC," but has developed them despite not having exited a company before becoming a VC.
Ahaha. I agree with one minor modification. There is a fourth type that is much more common outside of of SV, especially in New York: the "PE VC". These are guys that should've been private equity guys, and they don't have operating experience at startups, or tech companies. They have banking backgrounds.
They look at deals through the lens of like "how am I teeing this up to be acquired by who?"
They also retain a vestigial tendency to just look for deal volume, so they're always trying to get one little startup to acquire another one, way to early, in different businesses with different cultures and teams because of the crummiest whiteboard reasoning about strategy or synergy. Like 'this company makes speech-to-text IVR software, this company does food delivery...lets merge the two and have voice-based food delivery.' That's actually not even a bad enough example. But they seriously strongly prefer 'doing bad deals' to 'not doing deals' as if they were still living in a fee-based world.
These are the VCs you avoid.
They look at deals through the lens of like "how am I teeing this up to be acquired by who?"
They also retain a vestigial tendency to just look for deal volume, so they're always trying to get one little startup to acquire another one, way to early, in different businesses with different cultures and teams because of the crummiest whiteboard reasoning about strategy or synergy. Like 'this company makes speech-to-text IVR software, this company does food delivery...lets merge the two and have voice-based food delivery.' That's actually not even a bad enough example. But they seriously strongly prefer 'doing bad deals' to 'not doing deals' as if they were still living in a fee-based world.
These are the VCs you avoid.
I would add that these PE VCs tend to view the world with Zero Sum Game lenses. (If they win, I lose) They also tend to look harder at financial engineering methods for getting value. This isn't bad in many situations, but can be counterproductive when working through issues like product-market fit.
Indeed I forgot about the Wannabe VC :) All jokes aside you are absolutely right that these are the guys you want to avoid like the plague because they are not invested in your success or even your journey.
There is a real dearth of VC critical perspective. The VC blog posts are not just content marketing, but they are also self serving. This is natural as you're going to write about things from your perspective.
But VC and founders interests are not always aligned. In fact, in my experience, the number one cause of startup failure is that the VC isn't giving "advice" but orders. EG: not "you should do less email marketing" but "you will pivot away from this business into another one", and things of that nature. The number two cause of startup failures in my experience (over a couple decades) is fights between the founders, and a large portion of those are caused because one founder wants to do what the VC says and the other thinks its the wrong thing for the business. The number three cause of failure is being too early/not addressing the right part of the market/lack of customer development.
Things are a bit better these days with angels who seem to want to exert less control, and more participants in rounds.
But we really need a good blog that is critical of VC perspective, and arms founders so that they don't get screwed every time.
There's a book by Remus Sutten about buying a car called "don't get taken ever time". Yet IMNSHO Founders are still getting taken every time.
But VC and founders interests are not always aligned. In fact, in my experience, the number one cause of startup failure is that the VC isn't giving "advice" but orders. EG: not "you should do less email marketing" but "you will pivot away from this business into another one", and things of that nature. The number two cause of startup failures in my experience (over a couple decades) is fights between the founders, and a large portion of those are caused because one founder wants to do what the VC says and the other thinks its the wrong thing for the business. The number three cause of failure is being too early/not addressing the right part of the market/lack of customer development.
Things are a bit better these days with angels who seem to want to exert less control, and more participants in rounds.
But we really need a good blog that is critical of VC perspective, and arms founders so that they don't get screwed every time.
There's a book by Remus Sutten about buying a car called "don't get taken ever time". Yet IMNSHO Founders are still getting taken every time.
Fred is right, it's the entrepreneurs who are mythologized as heroes... and by consequence, the VC's are idolized as hero-makers.
This industry / culture feeds off everyone's desire to be the hero. Why do so many startups flag after raising money? Because the founders set themselves up to believe that raising money means they've succeeded, because VC's have opened the gates to them...
It's a perverse value-system similar to 20th century Hollywood and the music industry. Of course VC's are looking for real value, and want to support that with, as Fred describes, intelligent decision making, etc. But they are highly incentivized to maintain their position as gate-keepers. They certainly won't endorse the idolization, but they're not going to change the way the game works either.
This industry / culture feeds off everyone's desire to be the hero. Why do so many startups flag after raising money? Because the founders set themselves up to believe that raising money means they've succeeded, because VC's have opened the gates to them...
It's a perverse value-system similar to 20th century Hollywood and the music industry. Of course VC's are looking for real value, and want to support that with, as Fred describes, intelligent decision making, etc. But they are highly incentivized to maintain their position as gate-keepers. They certainly won't endorse the idolization, but they're not going to change the way the game works either.
> If you are at a board meeting and a VC says “you should do less email marketing and more content marketing”, would you go see your VP Marketing after the meeting and tell them to cut email and double down on content? I sure hope not. I hope you would treat that VC comment as a single data point, to be heard, but most likely not acted on unless you get a lot of similar feedback.
This is good general advice. The credibility of a person, VC or otherwise, does not suffice as proper consideration, let alone multiple data points.
This is good general advice. The credibility of a person, VC or otherwise, does not suffice as proper consideration, let alone multiple data points.
It's also very good specific advice.
Investor opinions are signals created by an active market.
Think of them as guesses about the number of jellybeans in the jar (by people trying to win a prize). The guesses in aggregate will be right, generally speaking.
Having professional jelly-bean-guessers doing it all day long makes their individual guesses a little bit more accurate but makes the aggregate guesses work pretty well.
(Source: raising angel and VC rounds, getting feedback some of which I didn't want to hear, and then watching it come true as I slogged through the issues that were not only foreseen but described to me ... albeit in aggregate from the investor market.)
Investor opinions are signals created by an active market.
Think of them as guesses about the number of jellybeans in the jar (by people trying to win a prize). The guesses in aggregate will be right, generally speaking.
Having professional jelly-bean-guessers doing it all day long makes their individual guesses a little bit more accurate but makes the aggregate guesses work pretty well.
(Source: raising angel and VC rounds, getting feedback some of which I didn't want to hear, and then watching it come true as I slogged through the issues that were not only foreseen but described to me ... albeit in aggregate from the investor market.)
I'm starting to think of what VCs do as providing a "product" to entrepreneurs.
Is it really qualitatively so different from getting a car loan (with banks competing to offer you the best terms?).
Shouldn't we all be asking, "do I really need a car loan (or an expensive new car)" rather than regarding financing as a goal in itself?
(Granted: it's nice that founders are able to support themselves and their companies by convincing others that what they're doing is valuable.)
Is it really qualitatively so different from getting a car loan (with banks competing to offer you the best terms?).
Shouldn't we all be asking, "do I really need a car loan (or an expensive new car)" rather than regarding financing as a goal in itself?
(Granted: it's nice that founders are able to support themselves and their companies by convincing others that what they're doing is valuable.)
The VC market overall is about 1% the size of the consumer credit market.
In consumer credit, those banks who compete to offer you car loan terms are relying on a big ecosystem.
There are credit bureaus to give you a FICO score. There are state laws about roads and traffic and licensure and insurance and repossession and collections to protect their downside. There is a governmental infrastructure of auto titles to prove your ownership claims. There is Kelly Blue Book or other sources to value your collateral, the nature of which changes slowly over the years. There is a dealer network (and e.g. Bankrate) to distribute your "product." There are millions of precedent transactions for use in modeling default rates, marking the collateral value over time, etc. And as a bank you are entirely passive, merely smoothing consumption of a depreciating asset over time.
In VC-land, the terms are almost the least of the problems. The ecosystem is absent (or radically less developed).
There is no "FICO score" or other agreed way to evaluate the entrepreneur.
There is no "Kelly Blue Book" to evaluate the collateral (underlying).
The collateral changes year by year, and (to stretch the car comparison) is often engineered to try and annihilate all of the prior collateral to which it was compared.
Nobody has a driver license. The roads aren't yet paved.
There are tens of thousands of precedent transactions, but the power-law distribution of outcomes means that they are basically incommensurable, since one out of 10,000 might end up being bigger returns than all the rest put together.
And most crucially, the VC cannot take a passive role: the default state of venture funded businesses is rapid change and need for continuous new and risky decisions about team, market, new financing, etc.
So. Maybe it would be better compared to lending money to demolition derby drivers who are expected to pay you back out of the prize money, which all goes to the winner of the derby.
(Source: 10 years in tech finance/investment roles. Self-serving biases acknowledged.)
In consumer credit, those banks who compete to offer you car loan terms are relying on a big ecosystem.
There are credit bureaus to give you a FICO score. There are state laws about roads and traffic and licensure and insurance and repossession and collections to protect their downside. There is a governmental infrastructure of auto titles to prove your ownership claims. There is Kelly Blue Book or other sources to value your collateral, the nature of which changes slowly over the years. There is a dealer network (and e.g. Bankrate) to distribute your "product." There are millions of precedent transactions for use in modeling default rates, marking the collateral value over time, etc. And as a bank you are entirely passive, merely smoothing consumption of a depreciating asset over time.
In VC-land, the terms are almost the least of the problems. The ecosystem is absent (or radically less developed).
There is no "FICO score" or other agreed way to evaluate the entrepreneur.
There is no "Kelly Blue Book" to evaluate the collateral (underlying).
The collateral changes year by year, and (to stretch the car comparison) is often engineered to try and annihilate all of the prior collateral to which it was compared.
Nobody has a driver license. The roads aren't yet paved.
There are tens of thousands of precedent transactions, but the power-law distribution of outcomes means that they are basically incommensurable, since one out of 10,000 might end up being bigger returns than all the rest put together.
And most crucially, the VC cannot take a passive role: the default state of venture funded businesses is rapid change and need for continuous new and risky decisions about team, market, new financing, etc.
So. Maybe it would be better compared to lending money to demolition derby drivers who are expected to pay you back out of the prize money, which all goes to the winner of the derby.
(Source: 10 years in tech finance/investment roles. Self-serving biases acknowledged.)
I mourn the days when it was nearly impossible to succeed in VC before first excelling as an operator.
I'm not sure when those days were. Maybe the 1980s? In the 1990s VC firms I interacted with were made up of partners whose background was non-tech and associates who were freshly minted MBAs. (Who had lots of opinions about what we should be doing which seemed to be totally buzzword driven.)
Certainly not the 1980s. John Doerr was rising then, and his operational background isn't much. Art Patterson at Accel was a big early hitter in software, and he'd never operated much. Hummer Winblad was one of the more successful startup VC in the 1980s, because of their software focus; Ann Winblad had started a company (and sold it pretty quickly), but John Hummer went straight from his sports career into the finance sector.
Even before the ones I named, Don Lucas was first guy in at Oracle; I don't think he operated much. Ditto Jacqui Morby and Henry McCance in Boston.
And Ben Rosen was a stock analyst, who trained the guy who trained me. He was one of the best VC of all, although he didn't bother doing it for long.
Even before the ones I named, Don Lucas was first guy in at Oracle; I don't think he operated much. Ditto Jacqui Morby and Henry McCance in Boston.
And Ben Rosen was a stock analyst, who trained the guy who trained me. He was one of the best VC of all, although he didn't bother doing it for long.
My anecdotal evidence is that VC is more a "operator turned VC" now than ever before. VC used to be all MBAs / finance types (e.g., head of tech research at an investment bank). But every year, it is harder and harder to become a VC partner without significant operating experience. I am not sure who has hard stats on this though.
Since the 50's, VC has been a blend of operators and finance people.
I agree with the post as I believe that VCs play tremendously important role in moving the tech forward. They have business knowhow to grow the companies. For that reason I am always looking for business ideas and thoughts in blog posts and books by VCs.
That said, I think that VC business is stacked up to optimize their returns and to sieve many entrepreneurs away. The whole business of "apply here" and "present to us" is somewhat demeaning to entrepreneurs, in my opinion.
Consider my recent experience with a "gold-tier ranked accelerator" with "concierge approach". They sent me an email and told me that they are very interested in my website, the website I've been running since 2004. (The website been profitable pretty much since day one.) So, what's the next step? Turns out I have to apply to them. Now, they came to me, not the other way around. I have not had any outside investors, and even though their expertise can propel my company, I existed without VCs, and technically I don't need them. I think they need to apply to me! So, I said no thank you, and that was the end of it.
Again, in my opinion, the system is somewhat upside down for smaller startups. Sure Google and Uber had enough of courtiers, but smaller startups are forced to beg, present and to apply.
That said, I think that VC business is stacked up to optimize their returns and to sieve many entrepreneurs away. The whole business of "apply here" and "present to us" is somewhat demeaning to entrepreneurs, in my opinion.
Consider my recent experience with a "gold-tier ranked accelerator" with "concierge approach". They sent me an email and told me that they are very interested in my website, the website I've been running since 2004. (The website been profitable pretty much since day one.) So, what's the next step? Turns out I have to apply to them. Now, they came to me, not the other way around. I have not had any outside investors, and even though their expertise can propel my company, I existed without VCs, and technically I don't need them. I think they need to apply to me! So, I said no thank you, and that was the end of it.
Again, in my opinion, the system is somewhat upside down for smaller startups. Sure Google and Uber had enough of courtiers, but smaller startups are forced to beg, present and to apply.
>What I recommend to entrepreneurs is to listen carefully but not act too quickly. Get multiple points of view on important issues and decisions. And then carefully consider what to do with all of that information, filter it with your values, your vision, and your gut instinct. That’s what we do in our business and that is what entrepreneurs should do in their businesses.
This is why the best advice isn't really even advice. It's anecdotes from someone who was in the trenches in an analogous or related situation, and what worked or didn't work and what happened for them. We can then take what we can from that data point, and apply it to our own situation, which will have both similarities and differences from the anecdote that this person graciously shared with us.
This is why the best advice isn't really even advice. It's anecdotes from someone who was in the trenches in an analogous or related situation, and what worked or didn't work and what happened for them. We can then take what we can from that data point, and apply it to our own situation, which will have both similarities and differences from the anecdote that this person graciously shared with us.
A little humility goes a long way.
The most controversial area -- which Fred Wilson doesn't touch -- involves VCs' "contributions" when startups are trying to sort out interpersonal issues. (Co-founders don't get along; top producers in sales or engineering are becoming hard to work with, etc.)
From what I've seen, about 10% of VCs are genuinely good at guiding everyone to a better outcome. About 40% are well-intentioned and intermittently effective. And the bottom half of VCs have a boardroom style that just makes things worse.
In any company, big or small, people issues usually involve some delicate stuff that isn't easily blogged about. So VCs either don't talk publicly about this part of their jobs, or else they present a very sanitized (and sometime misleading) version of what they do. There may also be a fundamental misalignment of priorities here. For founders, getting the people issues right is crucial. For VCs, it's a time sink that's best dealt with rapidly on any basis, so that more time can be created to go chase hot new deals.
The most controversial area -- which Fred Wilson doesn't touch -- involves VCs' "contributions" when startups are trying to sort out interpersonal issues. (Co-founders don't get along; top producers in sales or engineering are becoming hard to work with, etc.)
From what I've seen, about 10% of VCs are genuinely good at guiding everyone to a better outcome. About 40% are well-intentioned and intermittently effective. And the bottom half of VCs have a boardroom style that just makes things worse.
In any company, big or small, people issues usually involve some delicate stuff that isn't easily blogged about. So VCs either don't talk publicly about this part of their jobs, or else they present a very sanitized (and sometime misleading) version of what they do. There may also be a fundamental misalignment of priorities here. For founders, getting the people issues right is crucial. For VCs, it's a time sink that's best dealt with rapidly on any basis, so that more time can be created to go chase hot new deals.
It's surprising how much of being a good entrepreneur boils down to just applying solid critical thinking skills.
VCs' content marketing posts are the bleating edge of technology.
That said, there are some good ones. They are usually written by long-time operators who flipped to investing. Or from VCs with a real sense for data analysis, combined with real-world experience.
One problem VC posts have, for a founder audience, is their level of abstraction. Because VCs are exposed to so many startups, they do see patterns within and across sectors, but that point of view and level of generality aren't usually shared by people in the industry. Also, while the operators may not be exposed the same breadth of businesses, their understanding is much more granular and the VCs' broad theses can ring false, given their very specific conditions.
That said, there are some good ones. They are usually written by long-time operators who flipped to investing. Or from VCs with a real sense for data analysis, combined with real-world experience.
One problem VC posts have, for a founder audience, is their level of abstraction. Because VCs are exposed to so many startups, they do see patterns within and across sectors, but that point of view and level of generality aren't usually shared by people in the industry. Also, while the operators may not be exposed the same breadth of businesses, their understanding is much more granular and the VCs' broad theses can ring false, given their very specific conditions.
Can't wait till we've proliferated wealth back in far enough that we don't need VCs, maybe then the high st bank will become relevant again. Oh wait, pipe dream. Guess I'll go back to enjoying Fred Wilson then. :)
A question for HN: Is investing in public VCs a good idea? From casual observation it seems the good ones are usually private.
(Yes, I know an ACWI index fund is better, but I'm not investing big money and I'm willing to lose out a bit monetarily in exchange for fun and supporting companies I like)
(Yes, I know an ACWI index fund is better, but I'm not investing big money and I'm willing to lose out a bit monetarily in exchange for fun and supporting companies I like)
"VCs are not heroes. We are just one part of the startup ecosystem."
Funny, 'hero' never crossed my mind!
When you start with a statement like that, you're saying a lot about 'self awareness' within this group. Maybe saying more than the rest of the article.
Jesus H.
Funny, 'hero' never crossed my mind!
When you start with a statement like that, you're saying a lot about 'self awareness' within this group. Maybe saying more than the rest of the article.
Jesus H.
[deleted]
"If you are at a board meeting and a VC says “you should do less email marketing and more content marketing”, would you go see your VP Marketing after the meeting and tell them to cut email and double down on content? I sure hope not."
HAHAHAHAHAHAHA wheeeze
I've seen so many founders come back from board meetings pale faced and interpreting the gospel of VC as this exact next step
HAHAHAHAHAHAHA wheeeze
I've seen so many founders come back from board meetings pale faced and interpreting the gospel of VC as this exact next step
Yeah. It's odd how often otherwise-serious businesspeople have this weird "recency bias" for feedback, even from non-board members.
Have lived this first hand in a large startup and thought... wait, we know our business and customer better than the folks you chat with once a quarter over fizzy water, why are we moving market position exactly?? (I was livid)
The later stage your startup becomes, the more conversations you end up having with your board members. It's no longer once a quarter, but often once a week or sometimes daily. While their word should not be treated as gospel, I've found that our VC board members have become extremely well versed in our business and industry.
If you ignore advice and fail (always the more likely outcome no matter what you do) then you failed because you refused to take advice. If you take the advice and fail, you can't be blamed. This is oddly powerful pyschology
If you're the boss, you'll be blamed either way. This should not be part of the decision process. The loneliness of being the boss...
I've seen this very frequently as well, and when pushing back or pointing out that it's not a good idea, they respond with the argument that we have to do what they say because we will want to raise another round eventually, or just the general perspective that they must know better what they are doing than the engineering staff in the company.
I have long felt that one of the reason such young founders are funded is that they are possibly less likely to push back on onerous terms or instructions.
I have long felt that one of the reason such young founders are funded is that they are possibly less likely to push back on onerous terms or instructions.
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All you need to know about most VCs: they have money, end of story. Doesn't automatically mean that they have any particularly insight into business, competition, technology, etc. They may have some insider information and connections, primarily because of the money; but it doesn't mean that those will be played to your advantage.
Anybody can win a lottery and have money, but you don't immediately assume a lottery winner has any particular insight about money making or business. Just because the lottery is different doesn't change that property.
Anybody can win a lottery and have money, but you don't immediately assume a lottery winner has any particular insight about money making or business. Just because the lottery is different doesn't change that property.
> All you need to know about most VCs: they have money, end of story.
This is the sort of reductionist dismissal that we need less of on Hacker News, regardless of how one feels about VCs. That applies even if you're 100% correct that none of them know what they're doing.
Reflexive denunciations devoid of substance are incompatible with (indeed destructive of) the things we do want in HN threads—thoughtful critique and concrete experience—so it's important to inhibit the impulse to post like this.
This is the sort of reductionist dismissal that we need less of on Hacker News, regardless of how one feels about VCs. That applies even if you're 100% correct that none of them know what they're doing.
Reflexive denunciations devoid of substance are incompatible with (indeed destructive of) the things we do want in HN threads—thoughtful critique and concrete experience—so it's important to inhibit the impulse to post like this.
Many shoot an arrow and paint a bullseye around it.
There's a story Charlie Munger tells about the Shoe Button Prince. The Prince had cornered the market on shoe buttons in the 1920's. Shoe buttons were smallish ornaments one put on their shoes. From his success with the buttons, he extrapolated he could pontificate on any and all things--even those outside the realm of shoe buttons.
That's your typical VC.
There's a story Charlie Munger tells about the Shoe Button Prince. The Prince had cornered the market on shoe buttons in the 1920's. Shoe buttons were smallish ornaments one put on their shoes. From his success with the buttons, he extrapolated he could pontificate on any and all things--even those outside the realm of shoe buttons.
That's your typical VC.
In most investments (stocks, mutual funds, etc) winners in one period don't extend to another, and certainly not over the long term.
VCs are the exception. The best VCs do seem to outperform over time. (Most don't though) Some of it is self-fulfilling: they get the best deals, and are the least likely to get screwed over by short term thinkers. I believe that some of it is also to judgment.
Should you listen to someone just because they have capital? No.
Should you listen to someone because they've got an insanely high batting average guiding startups? Yes. If you have one of the All Stars, by all means take what they say seriously.
VCs are the exception. The best VCs do seem to outperform over time. (Most don't though) Some of it is self-fulfilling: they get the best deals, and are the least likely to get screwed over by short term thinkers. I believe that some of it is also to judgment.
Should you listen to someone just because they have capital? No.
Should you listen to someone because they've got an insanely high batting average guiding startups? Yes. If you have one of the All Stars, by all means take what they say seriously.
You're right it doesn't automatically mean they have any particular insight into business, competition or technology.
In my experience founders thinking they do is half the problem. Them thinking they do, and using the weight of their money, and signaling like "well, maybe we won't participate in the next round..." to influence the course of your business is the other half of the problem.
In my experience founders thinking they do is half the problem. Them thinking they do, and using the weight of their money, and signaling like "well, maybe we won't participate in the next round..." to influence the course of your business is the other half of the problem.
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Well, Fred is missing that not only he has seen thousand of pitches, but the more mature the industry gets (media plus ecosystem), everybody has more data at hand and an opinion.
Ironically his partner Albert Wenger is writing about it - Zero Marginal Cost Society etc. In other words: Compared to 5 years ago, the VC business model is about to see similiar effects the consulting industry experienced - they simply don't have any advantage anymore plus they are competing with much more and bigger (i.e. corporate) players.
One other misconception: To be honest, I think the only people that are regarding his and other VC's writing, are people from the industry that are maybe one "hierarchy level" (or magnitude of fund size) smaller then them. Associates in accelerators etc. that are praising his genius or create the social media buzz but are actually just trying to hitch hike on his credibility. It's like pedding on each other's back because they regard each other as insiders, but actually they have lost base with hardcore tech innovation a long time ago (since moving into their ivory tower of we know so so much more then average Joe)
Edit: ...especially since their bad gone bets become more and more obvious
Ironically his partner Albert Wenger is writing about it - Zero Marginal Cost Society etc. In other words: Compared to 5 years ago, the VC business model is about to see similiar effects the consulting industry experienced - they simply don't have any advantage anymore plus they are competing with much more and bigger (i.e. corporate) players.
One other misconception: To be honest, I think the only people that are regarding his and other VC's writing, are people from the industry that are maybe one "hierarchy level" (or magnitude of fund size) smaller then them. Associates in accelerators etc. that are praising his genius or create the social media buzz but are actually just trying to hitch hike on his credibility. It's like pedding on each other's back because they regard each other as insiders, but actually they have lost base with hardcore tech innovation a long time ago (since moving into their ivory tower of we know so so much more then average Joe)
Edit: ...especially since their bad gone bets become more and more obvious
While there is an abundance of information available about companies that allows those of us not sitting in pitch meetings every day to gain insight into their growth there is still a material amount of private information that VCs get to see.
I've been in meetings with our investors where they are able to throw out information about other companies CAC or other unit economic information as well as in the trenches information about customer acquisition/growth strategies. Those aren't the kinds of things a company is going to put on their blog. They definitely have privileged information.
I've been in meetings with our investors where they are able to throw out information about other companies CAC or other unit economic information as well as in the trenches information about customer acquisition/growth strategies. Those aren't the kinds of things a company is going to put on their blog. They definitely have privileged information.
Sure, sure, that´s why they are still in business -- but as more information are available for everybody, their competitive advantage is getting smaller and smaller.
Plus 1: If you are not poised to be provided with infos provided by somebody that wants to sell something, as instead much more crowdsourced channels, certainly you have a different, i.e. much more biased view, on the world. Think: People will only speak with them, once they are ready for funding. Whereas people at different points in the ecosystem have a much more direct access.
Plus 2: Humans are poised to a survivor bias. It´s in the human psych to perceive only what accommodates your own world view. You made 5 bets on a business model that becomes outdated, it will you take x times longer to change your opinion. Especially as you always will try to justify your decisions as VC towards their LPs.
Plus 1: If you are not poised to be provided with infos provided by somebody that wants to sell something, as instead much more crowdsourced channels, certainly you have a different, i.e. much more biased view, on the world. Think: People will only speak with them, once they are ready for funding. Whereas people at different points in the ecosystem have a much more direct access.
Plus 2: Humans are poised to a survivor bias. It´s in the human psych to perceive only what accommodates your own world view. You made 5 bets on a business model that becomes outdated, it will you take x times longer to change your opinion. Especially as you always will try to justify your decisions as VC towards their LPs.
Do you mean crowdsourced data as something on the level of business insider articles and amazon reviews or similar?
VCs invest in new small companies where there often isnt much public info at all to go on. As a potential investor you can demand a lot of info that even employees cant get that can help evaluate the business.
VCs invest in new small companies where there often isnt much public info at all to go on. As a potential investor you can demand a lot of info that even employees cant get that can help evaluate the business.
Mattermark / Crunchbase / evidence in their product itself ...
Thing is, eventually, that ventures are much faster in a public spotlight as tech gets easier..
I agree on everything re startups only shedding a positive light on their business - but if you are following a company disclosing x users in year 1 and y users in year 2 (especially as they start fundraising /PR), it is no rocket science anymore. Two more Google searches and you know the market size etc. --- VCs used to have proprietary infos, that´s why they were put onto stages to talk about their "magic" insights. But that has changed imho.
Thing is, eventually, that ventures are much faster in a public spotlight as tech gets easier..
I agree on everything re startups only shedding a positive light on their business - but if you are following a company disclosing x users in year 1 and y users in year 2 (especially as they start fundraising /PR), it is no rocket science anymore. Two more Google searches and you know the market size etc. --- VCs used to have proprietary infos, that´s why they were put onto stages to talk about their "magic" insights. But that has changed imho.
I'm a little skeptical of the accuracy of the info released to the public.
Thing is, companies lie when they talk to the press. Or they release a number with no context behind it, which will be interpreted differently by outsiders than insiders. Or the press makes up a number when the company refuses to release it. Or the company chooses not to get press coverage for an event that's pretty important.
When I've had inside information about a story that later breaks in the tech press, I'm always shocked at how differently it's perceived by readers of the article vs. how I experienced it. Among startups & major feature launches I've been party to, I've seen: executives that flat-out say that they're not working on a product category when there's been a whole department devoted to it for a year; startups that were founded 1.5 years before the dates listed in Crunchbase/Wikipedia; reporters that count the number of people they meet in a visit and report that as a the "team size", because the company refuses to release that info; funding rounds that never make it to the press; acquisitions that are reported as "for an undisclosed sum" but actually are less than the founders would've made if they'd taken a salaried job at the company; project start dates that are actually when the project was staffed up to its current size and ignore the year or so that a small team spent working on the problem (or the 3-4 years that other small teams spent working on the problem); and algorithms or other technologies that are widely reported as being the core of the company's success, but actually aren't even used by the company.
I figure that if such a high percentage of what I do know about is misreported, most of what I don't know about but hear from the tech media is probably wrong too. Ironically, the effect of having a little inside information isn't to make me feel well informed; it's to make me realize how uninformed everyone else is, often including top decision-makers at companies.
Thing is, companies lie when they talk to the press. Or they release a number with no context behind it, which will be interpreted differently by outsiders than insiders. Or the press makes up a number when the company refuses to release it. Or the company chooses not to get press coverage for an event that's pretty important.
When I've had inside information about a story that later breaks in the tech press, I'm always shocked at how differently it's perceived by readers of the article vs. how I experienced it. Among startups & major feature launches I've been party to, I've seen: executives that flat-out say that they're not working on a product category when there's been a whole department devoted to it for a year; startups that were founded 1.5 years before the dates listed in Crunchbase/Wikipedia; reporters that count the number of people they meet in a visit and report that as a the "team size", because the company refuses to release that info; funding rounds that never make it to the press; acquisitions that are reported as "for an undisclosed sum" but actually are less than the founders would've made if they'd taken a salaried job at the company; project start dates that are actually when the project was staffed up to its current size and ignore the year or so that a small team spent working on the problem (or the 3-4 years that other small teams spent working on the problem); and algorithms or other technologies that are widely reported as being the core of the company's success, but actually aren't even used by the company.
I figure that if such a high percentage of what I do know about is misreported, most of what I don't know about but hear from the tech media is probably wrong too. Ironically, the effect of having a little inside information isn't to make me feel well informed; it's to make me realize how uninformed everyone else is, often including top decision-makers at companies.
The insider stuff is definitely what's interesting, for example there are quick facts that help you calibrate your assumptions that are very hard to come by. They're usually the things that companies don't want to talk about. They write articles about the things they're doing well, it's not common to get real time "yeah these are the problems they're still figuring out, maybe you should avoid copying their strategy" info.
I think you missed the articles main point about how VCs use the information and experiences that they have. It's not just that they're better at picking good investments, they are somewhat better but as you correctly point out information is becoming more and more available so others will be able to catch up. The real value of their experiences is that after they invest they continue to help the company succeed with advice, introductions and a million other things. As an entrepreneur that's the value I'm looking for when selecting an investor. Even if you've read everything online and know with 100% certainty which companies are going to succeed you've still got to get them to take your money or your information is worthless. Entrepreneurs will only ever take money from a person like that if they're desperate, if they can get money from a "real" investor who'll bring value beyond just the money.
In short, I think you're claim that we're going to see an evening of the playing field is wrong. If anything I think we'll see even more concentrated results as more and more people decide that anyone can be a VC and fail.
In short, I think you're claim that we're going to see an evening of the playing field is wrong. If anything I think we'll see even more concentrated results as more and more people decide that anyone can be a VC and fail.
Well, two things:
1. It is also about the money, not just the data. A regular person may not have $300 million to put into Uber.
2. It is one thing to say that many people have access to data, but it is another to know which ones use that data effectively. The point of the VC is that they are trained to do so. Sure there might be a college kid at UT Austin who has great insight but how would I know which one it is without talking to all of them?
1. It is also about the money, not just the data. A regular person may not have $300 million to put into Uber.
2. It is one thing to say that many people have access to data, but it is another to know which ones use that data effectively. The point of the VC is that they are trained to do so. Sure there might be a college kid at UT Austin who has great insight but how would I know which one it is without talking to all of them?
1)
USV last found has $175m under management - their average ticket will be around $1-5m Series A and $5-15m in follow-up rounds. ($300m is what PE does...)
The reason they are still getting money is the image they are upholding together with their echoing fanbase.
2) Sure they are trained, but similar does the UT Austin kid find out about business models and applies to YC then, to go go right away to the A players.
Don´t get me wrong -- nothing against content marketing or USV. But the market tectonics have changed. If you are a relatively small fund like USV, you technically cannot afford anymore to preach from the high horse. On one hand-side the VC whales are eating you lunch and on the other hand-side corporate investors can invest much more than you.
Put to simple terms: USV didn't grow fast enough and are now stuck in the middle. They cannot do enough (small) deals to leverage an average of their bets and on the other hand side, entrepreneurs are much smarter.
How many people are at USV, 8 maybe? By all science, they have no chance to be smarter than the (much more connected) market anymore.
Edit: typos
The reason they are still getting money is the image they are upholding together with their echoing fanbase.
2) Sure they are trained, but similar does the UT Austin kid find out about business models and applies to YC then, to go go right away to the A players.
Don´t get me wrong -- nothing against content marketing or USV. But the market tectonics have changed. If you are a relatively small fund like USV, you technically cannot afford anymore to preach from the high horse. On one hand-side the VC whales are eating you lunch and on the other hand-side corporate investors can invest much more than you.
Put to simple terms: USV didn't grow fast enough and are now stuck in the middle. They cannot do enough (small) deals to leverage an average of their bets and on the other hand side, entrepreneurs are much smarter.
How many people are at USV, 8 maybe? By all science, they have no chance to be smarter than the (much more connected) market anymore.
Edit: typos
> Put to simple terms: USV didn't grow fast enough and are now stuck in the middle. They cannot do enough (small) deals to leverage an average of their bets and on the other hand side, entrepreneurs are much smarter.
You're making it sound like USV is struggling or becoming extinct, but my impression is that they're actually doing incredibly well.
First, they're considered one of the best Series A firms in terms of financial returns. See: http://fortune.com/2011/06/06/venture-capital-returns-the-be...
Second, they have an amazing reputation among founders. Check out the following survey, where USV was ranked 2nd out of 64 Series A firms in terms of who people wanted in their Series A round: https://www.cbinsights.com/research-venture-capital-series-a...
Finally, I'm pretty sure I've read this in several places, but USV is not "stuck" in the middle. I'm positive that if they went to the market and tried to raise $500m, the market would oblige happily. It's more that they've found their fund size sweet spot -- their product/market fit, if you will -- and have little desire to raise a lot more money and become a larger firm. A lot of funds do this: they raise larger and larger funds for a while, then stabilize once they find a fund size that works well for them.
You're making it sound like USV is struggling or becoming extinct, but my impression is that they're actually doing incredibly well.
First, they're considered one of the best Series A firms in terms of financial returns. See: http://fortune.com/2011/06/06/venture-capital-returns-the-be...
Second, they have an amazing reputation among founders. Check out the following survey, where USV was ranked 2nd out of 64 Series A firms in terms of who people wanted in their Series A round: https://www.cbinsights.com/research-venture-capital-series-a...
Finally, I'm pretty sure I've read this in several places, but USV is not "stuck" in the middle. I'm positive that if they went to the market and tried to raise $500m, the market would oblige happily. It's more that they've found their fund size sweet spot -- their product/market fit, if you will -- and have little desire to raise a lot more money and become a larger firm. A lot of funds do this: they raise larger and larger funds for a while, then stabilize once they find a fund size that works well for them.
Well, the discussion moved to the performance of USV from a much more general POV on the rhetorics of their industry.
> First, they're considered one of the best Series A firms in terms of financial returns. See: http://fortune.com/2011/06/06/venture-capital-returns-the-be....
This one is interesting as well / much more recent: https://www.cbinsights.com/blog/union-square-ventures-exits-...
> Second, they have an amazing reputation among founders. Check out the following survey, where USV was ranked 2nd out of 64 Series A firms in terms of who people wanted in their Series A round: https://www.cbinsights.com/research-venture-capital-series-a....
To be honest, I wouldn't much count on surveys of this sorts. People always refer to what they know....
My general sentiment shouldn´t be USV in in struggle - still, I would stick to the point that Series A VCs have problem, if they are not top in class (in terms of fund size). It´s a matter of probabilities and USV can just do less of deals...
> First, they're considered one of the best Series A firms in terms of financial returns. See: http://fortune.com/2011/06/06/venture-capital-returns-the-be....
This one is interesting as well / much more recent: https://www.cbinsights.com/blog/union-square-ventures-exits-...
> Second, they have an amazing reputation among founders. Check out the following survey, where USV was ranked 2nd out of 64 Series A firms in terms of who people wanted in their Series A round: https://www.cbinsights.com/research-venture-capital-series-a....
To be honest, I wouldn't much count on surveys of this sorts. People always refer to what they know....
My general sentiment shouldn´t be USV in in struggle - still, I would stick to the point that Series A VCs have problem, if they are not top in class (in terms of fund size). It´s a matter of probabilities and USV can just do less of deals...
Yeah, I agree with you on the challenges of being a Series A VC. If you are in the top 5-10 funds and have a great brand then you're set -- at least for the next 5-10 years. If you're #15 or #30 then it's a struggle and you starting experiencing a lot more adverse selection.
> You're making it sound like USV is struggling or becoming extinct, but my impression is that they're actually doing incredibly well.
No venture fund is doing "incredibly well" unless they return an IRR of at least 20-30% per annum. For a $175m fund, that means turning the initial $175m in approx. $455m. over 8 years (i.e. 3x, at 20% IRR). Frankly, almost no fund succeeds in doing that.
In the case of USV, doing it once doesn't mean they'll be able to do it again. I'm curious to see if their next fund will be able to do as well as their first. Respect if they can they keep making those kinds of returns by investing in startups though. It is incredibly hard, there are much easier ways to make money.
No venture fund is doing "incredibly well" unless they return an IRR of at least 20-30% per annum. For a $175m fund, that means turning the initial $175m in approx. $455m. over 8 years (i.e. 3x, at 20% IRR). Frankly, almost no fund succeeds in doing that.
In the case of USV, doing it once doesn't mean they'll be able to do it again. I'm curious to see if their next fund will be able to do as well as their first. Respect if they can they keep making those kinds of returns by investing in startups though. It is incredibly hard, there are much easier ways to make money.
Here's a public doc that shows returns for a few USV funds: https://www.oregon.gov/treasury/Divisions/Investment/Documen... (search for "union square" in the PDF)
Union Square Ventures 2004 -- 67% IRR
Union Square Ventures 2008 -- 28% IRR
Union Square Ventures 2012 -- 42% IRR
('04 is particularly impressive because it was 14x fund at the time that the linked PDF was written)
Union Square Ventures 2004 -- 67% IRR
Union Square Ventures 2008 -- 28% IRR
Union Square Ventures 2012 -- 42% IRR
('04 is particularly impressive because it was 14x fund at the time that the linked PDF was written)
The people who decide what is "incredibly well" are the institutional investment consultants, e.g. Cambridge Associates, who advise the actual investors in venture (and every other asset class) what is going on in reality.
The yardstick is not absolute. It's not even relative to numbers that consumers / the public (you?) generally see.
It's relative to all the other venture funds (typically grouped by vintage year) and relative to the other asset classes to which an investor might allocate -- modified by the historical and projected covariances among them.
To make it concrete: 20% IRR might be "incredibly well" in some vintage years (say, 2000?) but it might be "median" in some other vintage years (say, 1995?).
And (despite everyone saying they only want top quartile managers for everything, just like Lake Woebegon's children) a rational institutional investor might well look at venture in a period where it's been lagging the public markets, and decide it's quite rational and profit-maximizing to keep allocating to it, precisely because it doesn't march in lockstep with the other asset classes.
(And, agreed: there are much easier money games to play and venture is decidedly a "get rich slow" scheme.)
The yardstick is not absolute. It's not even relative to numbers that consumers / the public (you?) generally see.
It's relative to all the other venture funds (typically grouped by vintage year) and relative to the other asset classes to which an investor might allocate -- modified by the historical and projected covariances among them.
To make it concrete: 20% IRR might be "incredibly well" in some vintage years (say, 2000?) but it might be "median" in some other vintage years (say, 1995?).
And (despite everyone saying they only want top quartile managers for everything, just like Lake Woebegon's children) a rational institutional investor might well look at venture in a period where it's been lagging the public markets, and decide it's quite rational and profit-maximizing to keep allocating to it, precisely because it doesn't march in lockstep with the other asset classes.
(And, agreed: there are much easier money games to play and venture is decidedly a "get rich slow" scheme.)
1) I was thinking of GV's investment in Uber as an example. (Not a PE firm). But the point still stands, the Austin kid isn't going to swing $1-5m. Even if they were brilliant.
2)You missed the point about the training. The point isn't that they are trained. The point is that we know that they are trained. There might be dozens of people better than the traditional VCs at identifying the right opportunity but who are they and how do we find them?
The last half of your response makes me think I may have missed the original point. I thought the original point was that the VC skill set is being democratized because data is more freely available. My two points were meant to be reasons why that may not be the case.
This point about being in the middle between very large and small players might be right. I have to think on it, but it was not what I thought I was commenting on.
2)You missed the point about the training. The point isn't that they are trained. The point is that we know that they are trained. There might be dozens of people better than the traditional VCs at identifying the right opportunity but who are they and how do we find them?
The last half of your response makes me think I may have missed the original point. I thought the original point was that the VC skill set is being democratized because data is more freely available. My two points were meant to be reasons why that may not be the case.
This point about being in the middle between very large and small players might be right. I have to think on it, but it was not what I thought I was commenting on.
1) GV has $2bn under management, plus it is a corporate VC.
2) No, no or yes, yes - totally agree about training, it is still a USP. But as markets are much more public, it´s easy to follow the development even without being invested. Most of the data can be assumed from what´s publicly available (app store ranks, alexa ranks, disclosures of competitors, headcount etc.)
Admittedly I worked in VC myself - so certainly I look as well differently at news and have maybe a different analytical tool belt.
Interesting is your remark / question, about “how do we find them?” - will think about that part :-)
2) No, no or yes, yes - totally agree about training, it is still a USP. But as markets are much more public, it´s easy to follow the development even without being invested. Most of the data can be assumed from what´s publicly available (app store ranks, alexa ranks, disclosures of competitors, headcount etc.)
Admittedly I worked in VC myself - so certainly I look as well differently at news and have maybe a different analytical tool belt.
Interesting is your remark / question, about “how do we find them?” - will think about that part :-)
> 1) USV last found has $175m under management - their average ticket will be around $1-5m Series A and $5-15m in follow-up rounds. ($300m is what PE does...)
$300M is not what PE does. PE can do anything from $500k to $10B+. PE also take a majority stake typically...it's a different beast.
> The reason they are still getting money is the image they are upholding together with their echoing fanbase.
The reason they are getting money is because their LP's are getting a return. Most of their LP's are pension funds. They continue to put money in USV because it returns them money. It's that simple.
> How many people are at USV, 8 maybe? By all science, they have no chance to be smarter than the (much more connected) market anymore.
12 if you include EA's. A PE fund I work with has 25 employees, $3B AUM and very profitable. What's your point?
$300M is not what PE does. PE can do anything from $500k to $10B+. PE also take a majority stake typically...it's a different beast.
> The reason they are still getting money is the image they are upholding together with their echoing fanbase.
The reason they are getting money is because their LP's are getting a return. Most of their LP's are pension funds. They continue to put money in USV because it returns them money. It's that simple.
> How many people are at USV, 8 maybe? By all science, they have no chance to be smarter than the (much more connected) market anymore.
12 if you include EA's. A PE fund I work with has 25 employees, $3B AUM and very profitable. What's your point?
The point was, that with PE you are at a later stage of business (for startups usually pre IPO).
USV basically tries to do what MIT does with a fraction of the staff: Identify experiments worthwhile to pursue at earliest stages...judging by the quality of their "content marketing", I just doubt this ability. They are 1 generation VC with some lucky bets (prior to a market that matured) -- looking at their current portfolio, I wouldn´t be that bullish
USV basically tries to do what MIT does with a fraction of the staff: Identify experiments worthwhile to pursue at earliest stages...judging by the quality of their "content marketing", I just doubt this ability. They are 1 generation VC with some lucky bets (prior to a market that matured) -- looking at their current portfolio, I wouldn´t be that bullish
Good thoughts. That's exactly what I thought when I saw the tweet as well. VCs are pontificating on SnapChat about what kind of team you should build at the seed stage because they are doing content marketing. Like all content marketing it is a mix of useful insight and a strategy to get you to pay attention based on interest/entertainment/etc. Don't take it too rigidly.
It would be interesting to an analysis of the composition of the VC fanbase.
I suspect a lot of people -- not experienced people, but lay persons -- think that if they get an idea, convince a VC to fund it, they will magically become rich.
So a VC seems magical to them. Like a film producer or an editor at a big house that can make their dreams come true. Of course they want to be around them, talk to them, come in contact with them and so forth.
I suspect a lot of people -- not experienced people, but lay persons -- think that if they get an idea, convince a VC to fund it, they will magically become rich.
So a VC seems magical to them. Like a film producer or an editor at a big house that can make their dreams come true. Of course they want to be around them, talk to them, come in contact with them and so forth.
A great example of this from the music business is Macklemore's Jimmy Iovine[0].
0: http://genius.com/Macklemore-and-ryan-lewis-jimmy-iovine-lyr...
0: http://genius.com/Macklemore-and-ryan-lewis-jimmy-iovine-lyr...
1. The Product VC
These are people who built a great product(s) and exited and became VCs. They know the roller coaster of making a product successful. They can provide great advice. They can identify with the struggle and provide support. They are informed about the industry because they are inherently curious people and like to know about products. They also know what kind of person will most probably succeed in navigating the turbulent waters of a start up and bring a great product to market. These are the VCs to listen to.
2. The "I won a lottery VC" These guys made a product that for some reason (right timing, right connections, right team, product/market fit) became hugely successful quickly and they exited. They had an idea for solving a single pain point and it was the right pain point to solve. With their new found wealth they behave like @johnwheeler's Shoe Button prince. Suddenly they feel like they can pontificate on any industry. Unless your product is in the same industry that the VC exited from take what these guys say with a grain of salt.
3. The Herd VC
These guys are the spray and pray variety or follow the herd variety. Both these strategies will lead them to seem like they have the Midas touch because a few of their investments will hit the blockbuster league. If you ask them what made them invest in the blockbuster they will spew the generic things. These are the guys whose money you take and ignore their advice because they really don't know what they are talking about. Their well of knowledge is shallow and wide so in your industry it won't be deep and narrow.