25. June 2013–
Recently, well-known VC Fred Wilson, Managing Partner of Union Square Ventures, fervently said that he would "never ever ever ever ever" invest with corporate VCs again. Why not? "They suck," he responded. "They're not interested in the company's success or the entrepreneur's success. Corporations exist to maximise their interest." He has since apologised for the remark.
Though the latter statement has some truth to it, doesn't there also exist a conflict of interests between "normal" VCs and entrepreneurs? To delve deeper into the topic, we've uncovered some opinions of industry insiders – such as Paul Graham, Steve Blank and Dave McClure – to gauge the "VC problem"....
1) Steve Blank – retired serial entrepreneur, professor
Named one of The Most Influential People in Tech this year by Forbes, Blank has founded or worked within eight tech companies. Currently, he teaches engineering and entrepreneurship at Stanford University, UC Berkeley and Columbia Business School. Last week, the New York Times did a Q&A with him on the topics of entrepreneurship, bootstrapping and VC funding...
Your interest and your VC’s interest in liquidity may not be the same. Those who take big VC money have signed up for, 'We’re going to be a home run or we’re going home'. That’s the interest of the VCs. They have a portfolio of 10 or 15 investments, and they’re going to swing for the fences on all of them. That’s their business strategy. But you might not have realised what you signed up for.
2) Jon Oringer – Founder and CEO of Shutterstock
After being frequently asked the question: When is the right time to take venture capital? The founder of the stock photo marketplace took to LinkedIn to write "Entrepreneurs: Go as long as possible without taking venture capital" about his experience...
When I founded Shutterstock in 2003, I decided to take a different route than most entrepreneurs. Way too typically, one would put together a business plan and find funding. If you can figure out how to avoid an angel or venture round, you will have much more control in the long run. This isn’t always possible – but I would recommend trying everything you can to remain independent.
3) Andy Dunn – cofounder of Bonobos
Dunn, cofounder of luxury apparel startup Bonobos, wrote a brutal open letter in May ripping apart the VC industry. The letter, unsurprisingly, sparked a debate and prompted notable entrepreneur and investor Marc Suster to write a counterargument. Here's the beginning of the "seven-minute long" scathing letter to "dumb" VCs...
Dear Dumb VC,
You don’t realise you are going out of business
I don’t know the exact math, but I hear it again and again: the top 2 per cent of firms generate 98 per cent of the returns in venture capital. Once you’ve raised a fund or two, you are in business for a while.
It’s an industry where it takes fifteen years for a firm to die. What the data says (let’s look at the data Dumb VC!) is unless you work at a very small handful of places, your business isn’t viable much longer than that.
It reminds me of walking down the street, looking at retail stores. Many won’t be there in the long term, it just takes ten years for the leases to come up, so it creates a false perception of who is actually going to make it.
4) Dave McClure – founder of 500 Startups
McClure – who has worked at Founders Fund, PayPal, Mint.com and now heads seed accelerator 500 Startups – wrote a rant on his blog last year about why VCs "suck" and "can do better"...
I’m kind of embarrassed to call myself a Venture Capitalist. In fact, most of us who call ourselves VCs should be too. Why? Because MOST of us are hypocrites, and have NO idea what we’re doing.
Because we SUCK at EXACTLY the thing we’re supposed to help entrepreneurs do — build BIG, SCALABLE companies. Because MOST of us aren’t engineers. Because MOST of us aren’t designers. Because MOST of us aren’t internet marketers. Because MOST of us haven’t built a customer support team or run 24x7x365 network operations centers.
And yet… MOST venture capitalists seem to think we know EXACTLY what we’re doing when we tell our founders who ARE engineers, designers, and marketers what to do.
5) Fred Destin – partner in tech at Atlas Venture
After a compelling report was released in May 2012 by the Ewing Marion Kauffman Foundation about how, over the past decade, VC funds have failed to provide significant long-term return to investors, Destin – who has invested in DailyMotion, Seatwave and Seedcamp – wrote a response to the hoopla surrounding the results...
If you think about it in simple terms, VCs are trying to reconcile two seemingly contradictory objectives.
- Find the 'Glimmer of Greatness': VCs want to fund risky, extremely high upside opportunities that can turn into fund returners.
- Control Capital Intensity: VCs want (or should want) to limit the amount of capital they put at risk before risk is reduced or a company is in scaling mode.
They want to back great 'world-changing' entrepreneurs who will build 'awesome' companies. They also (rationally) want to cut their losses in companies that are not working out and focus all of their energy on the ones that have the potential to deliver big. They want to love entrepreneurs, but they may have to fire them one day.
6) Paul Graham – cofounder of Y Combinator
The notable programmer, writer and investor sold a company to Yahoo in 1998, started an immensely popular blog and founded Y Combinator – the successful seed accelerator that has funded reddit, Airbnb, Dropbox and Disquis. In 2005, he wrote an essay about the problems of VC funds and called it "The Unified Theory of VC Suckage"...
VCs don't invest $x million because that's the amount you need, but because that's the amount the structure of their business requires them to invest. Like steroids, these sudden huge investments can do more harm than good. Google survived enormous VC funding because it could legitimately absorb large amounts of money. They had to buy a lot of servers and a lot of bandwidth to crawl the whole Web. Less fortunate startups just end up hiring armies of people to sit around having meetings.
7) Brad Svrluga – Partner at High Peak Ventures
Svrluga has been investing in ventures since the 90s and is now focusing on the areas of mobile, SaaS and web-based services at High Peak Ventures. During his recent search for a new partner, he learned some unsettling lessons about the "very, very screwed up VC industry"...
My previously held belief that the venture industry is in need of some rather fundamental change was far too mild. I think it needs a full-on reboot.
As an industry, we are still by and large entrenched in a structure and set of firm dynamics that were established or reinforced in the bubble years. Yes, we may be slowly beginning a transformation, but my partner search brought me face to face with dynamics that continue to damage industry returns and retard the pace of change.
8) Gabriel Matuschka – Berlin's Senior Associate at Partech Ventures
Matuschka has been on both sides of the table – pitching as the founder of Triphunter and now VC at Partech. In an interview with VentureVillage last year, he told us about why "the VC model needs to be improved"...
A lot of VCs in Europe and continental Europe and Germany are actually dying – the performance of VCs is actually really bad. The kinds of questions we ask entrepreneurs about being numbers-driven and all that, we should probably be that too right? I mean, we are, but as a whole industry – for the risks you take, you have to return significant amounts of money.
The 20 per cent IRR (internal rate of return) that you’re aiming for, where you have to be, this is just not what the funds on average return. So it’s something that has to change. The funds that do not change, they disappear, and it’s happening right now… We need more successful VCs to back more successful companies
What are your thoughts? Do you think the VC model works? Does the model need to be overhauled, and if so, how? Let us know in the comments section below...
featured image – flickr user BangEmSmurf
Steve Blank – flickr user Eva Blue
Dave McClure – flickr user Joi
Fred Destin – flickr user Plugg Conference
Paul Graham – flickr user Robert Scoble
For related posts, check out:
The Top 10 investor blogs you need to follow… now
The startup founder’s bible: 12 golden commandments to get VC funding
“VCs are a major pain in the ass” – top European VCs on when startups should seek investment