As a former investor, an entrepreneur that thinks he/she understands my business better than I do is a big red flag.
and I replied:
As an entrepreneur, an investor that thinks he/she understands my business better than I do is a big red flag.
To me, this gets to (or near) the heart of the thing. If you're a VC / angel, you're probably fairly smart, probably well connected, and probably have a modest amount of interesting experience in many things. But if you're not one of the VC / angel types who came from a background as an entrepreneur, why should I believe that you have much knowledge that will be specifically relevant to my business. And why should I think you are particularly well suited to judge my business?
msuster, sgblank, pg, and a few others, I would put a lot of faith in, based on their backgrounds... but most other VCs, I really wouldn't be looking to them for much besides: A. money and B. introductions / referrals. I almost certainly wouldn't be looking for product advice or marketing strategy, etc. from them (unless they had some proven background in that area).
One reason is because, operational experience or not, VC partners all sit on the boards of companies, most of which fail, and so have a front-row seat for their implosions.
I still have my doubts about how much the gain from that experience, that will lend value to any specific future potential investment, unless the firm that failed was in a very similar business. And you also have to consider that VCs frequently sit on multiple boards, and have routine "vc firm dealflow" stuff to deal with, so their attention gets spread around a lot.
Anyway, I don't mean to say that they don't have anything of value to add. But I will stand by saying "you claiming to be an expert in my business is a red-flag", barring some specific evidence to the contrary.
Benchmark is almost all non operators, and is one of the most ballerest of VC funds.
Instinctively I think "should be operators", but when I look at the backgrounds of the VCs I like the best, a lot of them were not operators, or were operators of pretty bullshit businesses in comparison to their VC careers.
1) The 2% who make most of the returns is not consistent from year to year.
2) A VC who underperforms the market isn't a loser, because he's still collecting his paycheck (maybe with a smaller bonus than otherwise).
The combination of 1 and 2 is why the "98%" can keep raising capital, and is the open secret of the professional investment management industry. You can see the same trends in say hedge funds or other actively managed investment funds.
In VC there are 5-10 funds, universally known, who are the winners, and who continue to win. They get the best dealflow, meddle the least, and generally are on top.
The crazy thing is that KPCB used to be in that set and then essentially voluntarily abdicated to do cleantech crap.
A16Z came from nowhere to join that set pretty much as they launched.
The others (greylock, sequoia, benchmark, accel, etc) are pretty static.
Note the distinction between some funds being consistent winners, and the whole set of winners being consistent over time. The 5-10 funds who are consistent performers: 1) aren't the whole of the "2%" who manage to make above-market returns over some time frame; 2) can't absorb all the money investors want to put into the venture capital as an asset class. That keeps the other VC firms who aren't Sequoia, etc, in business, even if the generated returns are less than stellar. That does not mean, however, that the other VCs are "losers." They still get their 2 and 20, and as long as everyone is consistently mediocre and the top VC funds can't absorb all the capital the big institutional investors have sloshing around, they'll keep being able to raise capital.
The mediocre return of VCs also says something about Silicon Valley. The idea of venture-capital funded startups as some exceptional economic engine is probably a myth. There is a lot of economic activity in Silicon Valley, no doubt, but you have to distinguish between expenditure of capital and return on capital. $20 million spent on a startup that never ends up making much revenue is not a net gain to the economy even if it shows up as economic activity. It's just expenditure of capital. So the success of specific VCs aside, the way to measure the economic contribution of VC-funded startups is by looking at the return on investment of the sector as a whole. And since that return isn't great, relative to blue-chip companies, that tells us one of two things about the sector:
Either:
1) VCs aren't great at the job of allocating capital to the right places; or
2) VCs are doing the best job they can, and its just inherently difficult to separate the winners from the losers when it comes to startups.
My gut feeling is that the answer is (2), which implies that the nature of the industry is such that it's so hard to separate the winners from the losers that the gain from the exceptional success of the winners is largely offset by the cost of funding the losers, which makes the economic returns from the industry as a whole unexceptional compared to the returns from traditional blue chip companies.
Presumably part of the low return of VC is due to declining marginal returns due to too much money.
If SF VC funding were somehow constrained to $1b/yr, you'd get crazy percentage returns, since either only the top deals would get funded, or they'd be funded at super-favorable valuations (allowing more deals on the same money).
Well that's true in any sector. Returns go up when capital is scarce. But SF with $1b/year in VC funding would be economically insignificant, even if the returns were great.
I guess my real point is that if my choice as an LP were a16z or some other asset class, I'd maybe even slightly overweight vc as an asset class. If I were an LP who could get into YC (maybe they would take a non profit like Watsi if they raise an endowment?), obviously overweight. But if you couldn't get into a top fund, and didn't personally know the founders of a 30-50mm fund which you thought would do exceptionally well (500 Startups?), I'd underweight or just avoid the asset class.
I don't disagree with you. If I were CALPERS and needed to throw around money $5 billion at a time for it to be worthwhile, I might avoid VC entirely. My point is more about what it says about the industry as a whole. Total Silicon Valley VC investment is in the neighborhood of $11-12 billion/year. If the rate of return on that relatively small investment is, on the whole, less than the S&P 500, then that really calls into question the whole narrative about how much economic value is really being generated from VC-funded startups. Blue-chip companies might not be able to yield Facebook-like returns, but they can apparently yield VC fund-like returns, and do so while absorbing far more capital.
I'd like to see the IPO market re-open, and companies IPO around when they'd be doing large Series B today, or certainly anything after a B.
Seed and maybe A are not capital intensive, and are probably constrained by great ideas, founding teams, and early entrepreneurial employees. But I don't think VC is the right way to finance lower risk later stage stuff; the public markets could do a good job, and it would be a lot easier for risk-seeking investors (individuals or institutions) to get in and out of investments vs. being LPs in funds, and with lower overhead.
I don't think any analysis of post-SarBox VC returns can be useful without examining the effects of the closing of the IPO exit. Sure, a very few, very exceptional companies can take this route, but it has otherwise been shut after a good 4 decade or so run.
In addition to lowering returns, it unfairly prevents smart but non-rich individual investors from investing in awesome opportunities like Tesla or SpaceX in 2008.
Hmmm? The Dodd-Frank Act as of July 21, 2010 excluded an accredited investor's primary residence in counting their wealth (although for many I'm sure that was closing the barn door after the house's value plummeted), but I don't remember anything like that in SarBox (the accredited investor restriction goes back to 1933, thank you FDR).
I meant that SarBox defers IPOs until stupidly late, so "normal" investors, reliant on the protections of the public market, don't get to invest early enough to make real money.
I'd adver that "stupidly late" really is now "never", with rare exceptions that prove the rule like Facebook---which was mispriced but otherwise doesn't deserve its bad reputation (their IPO, not the company), and that's going to further dampen tech IPOs going forward for some time. Why was it mispriced??
Turn it around, to cash out, is your objective an IPO or acquisition by another company?
Further, the sharp decrease in VC returns means less in the pockets of founders and early employees, and therefore less smart money in the game. Heck, you mentioned Elon Musk's Tesla and SpaceX, his money to get them going comes from PayPal, which was bought by eBay in 2002 (by then it was already getting very bad---granted, that was when the dot.com and post/911 crash was playing out---but SarBox is generally viewed as the last nail in the coffin).
Yes. I suspect the next 5-10 years will see one of:
1) Big non-US market growing up (probably in Asia, but possibly in cypherspace), with more rational regulations
2) Massive slowdown in tech progress (which one might argue is underway, but not as obvious; if it accelerates, it will be obvious)
3) Some way for PE to take over from public markets. Content to sit on revenue-generating companies throwing off cash. This already seems to be happening; I'm not sure what the tax consequences are, but I suspect they're smart/powerful enough to either financial engineer or politically engineer a solution.
All of them suck for different seasons. #2 is probably the worst for me personally.
Considering that climate change already kills 150,000 people per year [1], and that this rate will continue to (dramatically) increase, I think it's pretty rude for you to belittle the few good people who choose to fund cleantech (putting their fellow man above short-term economic "rationality").
The low hanging fruit in the space is energy. Big companies do their own incremental efficiency improvements in their own processes for other kinds of "cleantech" -- using waste products as feedstock, etc. Capital intensive, fairly proprietary, close to monopsony, etc. Horrible as investments.
Cleantech/greentech was originally defined as "non-energy", because energy had a long history of being investable. Energy efficiency and generation is a great sector for investment (I am so excited about Bloom Energy and Lightsail and FLiBe). I'm not at all excited about most of the ex-energy investments, and it appears most of those have failed to the extent that people consider energy part of cleantech now.
They were crap as investments, and most of the non-energy investments had bad science too, as well as being badly managed.
I'm totally pro-environment and pro-efficiency.
In the specific case of KPCB, they did a pretty horrible job with a lot of their portfolio. Missing Tesla and taking Fiskar was a great example. They did get Bloom. But I don't think they were approaching the sector with the kind of scientific and business rigor they used in the past for their other investments, and they were punished for it.
Dear dumb entrepreneurs who want to raise VC: bootstrap instead. VC forces you into a 'go big or go home' strategy. There's nothing wrong with going big, but just do it the patient, more sustainable way. And then you never need to worry about the points made in these articles. You just get to sit back and laugh at them while you're owning and running your own business.
P.s. there is a time and place where big time capital is necessary to start but most of those businesses aren't reading HN.
There's nothing wrong with going big, but just do it the patient, more sustainable way. And then you never need to worry about the points made in these articles. You just get to sit back and laugh at them while you're owning and running your own business.
This is our mindset. We definitely plan to be big (real big) but we're patient and we don't have to paint ourselves into a corner or take any bad deals by trying to do it all at once.
That's not to say that it wouldn't be nice to have more capital to work with, and that's not even to say that we won't ever take VC money. But if we do take VC money, the goal is to do it when we are well positioned to get more favorable terms.
This is the first article I've read that mentioned what the typical return on a fund is. I have had educated guesses, but why don't we see this broadcast more broadly. Is it that only LPs care?
I'd generally prefer to get investment from people whose judgement has proven they know how to get a good return on an investment, because founders typically get the same "return" from that stage on.
"All hedge funds are smart. Period. End of story. Whenever you can gamble with other people's money and get paid on the wins and eat none of the losses, that's the real win. Anything after that is gravy."
For me, the 98% of VCs are all like Gandalf the Grey. They have kind of an idea what they are doing, they maybe actually understand 98% of investment, but they just can't get the last 2%. The thing is, they are all followers: Never would they be able to recognize the next Facebook, because it doesn't fit their pattern, whereas their pattern matching has to look out for startups that don't fit their pattern.
How do you become a 2% VC? You have to have been a successful startup founder before. Otherwise, you just don't have the understanding of building the future. The 98% VCs got there from studying business to working at McKinsey, to being an Investment Analyist. Yeah they can do fine by investing in proven startups, that have been done before, but they'll never get their 50x-100x, because they can't predict the future.
So if you haven't been a founder before and you want to be a VC, please quit your job, stop wasting everybody's time and money, start a company, and come back as Gandalf the White.
The problem with VCs is not that they're dumb. I'm a pretty severe VC-istan critic and I would never say that lack of IQ is their problem.
Their problem is that they're ill-equipped to make the judgments necessary to solve half the problem. They know business and acquisition structures and legal pitfalls, but in order to really get signal on the judgment of people-- I'm ignoring the judgment of ideas because I don't think anyone has that down-- they need to hire someone like me to vet technical choices, talent strategy, culture, etc. because an iPhone app is not going to give them that kind of data.
How do you find that kind of person if you're not that kind of person? I think it's almost impossible. How are they going to tell the people like me from the many who claim they are? Likewise, I'd be incapable of vetting them for whether they're good at their jobs for the exact same reason. I'm not superior to them in any way; we just excel at different things and it's very hard for one side to judge the other.
Perhaps the best way to start a venture fund is to have the selection made not by permanent VCs judging "the team" but by top-notch programmers who do the vetting part-time (no more than 10 hours per week). That way, they don't lose their technical touch and can tell based on technical choices whether a company has a future. (How would a VC know that a company running a typical enterprise Java stack is doomed? It's not his job.)
By the way, the reason VC-istan sucks is not that VCs are evil or stupid people, because they're not. It's that humans are bad judges of character and VCs are no exception. When you can't judge expertise (and they can't evaluate technical expertise) you miss out on the associated proof-of-work and default to social polish, which means that you're going from a slightly positive correlation to what really matters (character) to a slightly negative one. VC-istan generates some awful startups, but not because VCs are bad people.
0) VCs with technical/operating background. I'd put a lot of faith in e.g. pmarca's evaluation of a team.
1) EIRs
2) Outside advisors
3) Portfolio companies (you do some pre-screening, then have your existing portfolio CEOs meet with the founders of non-competitive new ventures. It's win/win, because the portfolio companies may have some useful business relationship, or if the founders can't raise, might be a good hire.
They pick advisors who know how to do what they already know how to do, to validate their decisions. That leads to some improvement in the process, but they're not picking people who complement their skill sets. They're picking less shiny versions of themselves.
The funds where I know EIRs and VPs with tech experience don't really fall into that; there are absolutely funds which are horrible and have horrible portfolio execs, eirs, and advisors, but I think if you talk to the really top ones, you'd be surprised by the quality of talent. The weakness is that a lot of funds can't/don't hyper-specialize in specific technology, but for instance there's a VC who has made a lot of security investments who has l0pht people on the team.
Are you suggesting that someone like me should become EIR?
I've seen the quality of people who get EIR roles. They're not slouches, but I could do better than most of them, and that includes the ones at top firms. I can actually detect things like what kind of programmers your tech stack will attract; non-technical executives are better with general-purpose marketing, but the 10X factor with regard to programming talent is black-magic to them.
Even rarer than 10X programmers are people with enough experience and insight to know what brings "10X" into being and what smothers it. It's not just about the people; conditions and configuration play a gigantic role.
I've avoided exploring the VC route (as in, becoming one) because I want to keep my technical skills intact. Also, I'd be +5 sigma great at one part of it (evaluating technical choices and judging talent) but I have no idea if I'd be any good at the other (also critical) aspects of the business. I also feel like if I committed full-time to nontechnical stuff, I'd lose that +5 sigma edge. Right now, I know that if you're using Clojure and your competition is setting up the Java/Maven/IDE environment, you'll almost certainly win. I might not be able to pick that sort of thing out, in 20 years, if I step away from using technology on a day-to-day basis.
Right now, I could grep a codebase and tell you better than almost anyone out there if a company has the technical mettle it needs. ("Visitor" or "AbstractFactory" = bad, "mapcat" or "flatMap" = good.) I wouldn't have that if I sat out of the technical game for 20 years, because the signs and terms would be different.
Honestly, I think you're too bitter/pessimistic, even if more than sufficiently technically competent, to be an effective EIR (or VC/angel, or founder of a VC-funded company), at least now. But you probably recognize that :)
But yes, a less-bitter version of you might be a good EIR, although I think it usually comes from "founder of a company funded by the firm has a midsize exit", not out of the blue.
Three of my friends were EIRs, and two are now founders of great companies (although not hardcore tech companies). The other has run off to Spain for a while, after ~15 years of doing startups, for something of a sabbatical. They're all at the "code for days straight", graduated from top engineering programs (in contexts like being in India or ~20 years ago where that mattered, unlike the US today), etc.
The whole point of EIR is that it's revolving door -- you do it for a year or two, then go back to startups. It's both a way to take a break, and get exposed to new stuff. You still use some of your tech skills, and often end up working on side projects, so I don't think a year off is going to kill your technical competence.
As for the quality of portfolio company review/advice: one top one sent me to do an interview/etc. with probably the best operating executive in the security industry, one of their portfolio companies. I learned a lot, and decided we should hold off on raising as a result (this was ~2 years ago, about a month after I finished YC).
Being an actual full-time VC probably does hurt your technical skills, and I don't think having just fairly narrow programming or programming tech skills is a useful background for a VC, although "ability to pick winning teams" is essentially the definition of a successful accelerator or seed stage investor (but, on more axes than just "can program well"). Something a bit broader and maybe less deep is good, although in cleantech having postdoc level expertise might make sense. I think I have more than enough security industry experience to be an effective security vc, but not enough in the programming tools space, and somewhere in the middle on deployment/automation/networking tools.
I've talked to VC Principals/Venture Partners who are what I'd consider top-50 domain experts in specific things (payment regulations), and some Partners who are top-500 on networking or certain parts of security.
The other thing is it's usually better to have domain expertise in the founding team than implementation perfection, so at seed, a PHP hacked together piece of crap that works is probably fine, as long as what they're doing 1) has a market 2) is possible. At Series A, they should probably have some competence in the team, and after, sure.
Honestly, I think you're too bitter/pessimistic, even if more than sufficiently technically competent, to be an effective EIR (or VC/angel, or founder of a VC-funded company), at least now.
I actually think that a bit of so-called "depressive realism" is in order. Sure, it needs to be tempered with some optimism, but you need at least one guy with the winter-traveler insight and the courage to say, "Groupon for cat food sounds like a terrible idea!" Sadly, people like us are not well-received because we tend to haul out the truth when it's not wanted.
But yes, a less-bitter version of you might be a good EIR, although I think it usually comes from "founder of a company funded by the firm has a midsize exit", not out of the blue.
So you have to be born into the club to have that option? Not surprising.
Like I said, the future's not going to come from the people born into VC connections. I don't know where it's going to start and when, but I'm optimistic enough to believe that Real Technology is coming back. I see it already, but not in the high cost-of-living areas.
"Pay your dues", perhaps, but competent person -> funded (or employee at funded company, or just someone known for doing something awesome) -> EIR, could be 2-4 years.
VCs are probably less stupid about credentials than e.g. Google under Mayer with the "core schools" crap. Maybe less stupid than "core schools" in admittance. I suspect being a Thiel fellowship person, a core developer on a really popular open source project (nginx dude for sure, probably Ver if he wanted to do something in bitcoin on his own, etc.) would be more than adequate. Or YC/500 Startups/etc.
I don't think that being an employee at a funded company gets a person anything. Companies don't just let engineers have investor contact. The one case I saw where an engineer got investor contact was someone who was so unethical and incompetent that he got his mentor (the CTO) fired. (This was that startup from hell that I worked at in the winter of 2011-12. Initials TSS.)
You basically have to play degenerate political games to get investor contact as an employee of a funded startup. It really is a two-class world these days.
My experience is based on what I've seen in New York, but everything I've heard about the Valley is that it's the same. Well-connected douches will always have a competitive advantage over real people. We get our shot when tech becomes uncool/nerdy again and those assholes go back to whatever douche Valhalla they return to.
That's different from my experience in Silicon Valley, although I've never worked in NYC. As an employee at a post-Series A company in an industry I knew approximately fuck-all about (Internet advertising for Facebook), the CEO introduced me (and other engineers) to VC partners and press whenever they visited, and if I'd had anything interesting to talk to them at the time, could have (and that same guy is happy to introduce me to people now, years later). This was at a ~25 person company. I could see it being less common at a 400 person company, but probably more common at a 5-10 person company.
I've seen other companies with a variety of weirdly dysfunctional ways of treating employees, but what's the Tolstoy quote? "Happy families are all alike; every unhappy family is unhappy in its own way." If you have a decent network in Silicon Valley, and/or are willing/able to bounce once a situation seems bad, it's pretty easy to stay in "Happy families" only.
It sounds like you met a lot of good people. Unfortunately, the bad kind seem more common, at least from where I'm standing.
I don't think Silicon Valley vs. New York has a lot to do with it.
The problem is that when you run into bad people and they ruin your career or steal your future, then good people don't want anything to do with you (or, at least, have you at arms' length, and that gets annoying) so you get a string of more bad people (who are always happy to take advantage of your weakened position).
Maybe the good people would be a bit less likely to keep you at arm's length if you didn't come off as assuming by default that founders and VCs are out to get you, which is pretty annoying and self destructive.
Somebody said:
As a former investor, an entrepreneur that thinks he/she understands my business better than I do is a big red flag.
and I replied:
As an entrepreneur, an investor that thinks he/she understands my business better than I do is a big red flag.
To me, this gets to (or near) the heart of the thing. If you're a VC / angel, you're probably fairly smart, probably well connected, and probably have a modest amount of interesting experience in many things. But if you're not one of the VC / angel types who came from a background as an entrepreneur, why should I believe that you have much knowledge that will be specifically relevant to my business. And why should I think you are particularly well suited to judge my business?
msuster, sgblank, pg, and a few others, I would put a lot of faith in, based on their backgrounds... but most other VCs, I really wouldn't be looking to them for much besides: A. money and B. introductions / referrals. I almost certainly wouldn't be looking for product advice or marketing strategy, etc. from them (unless they had some proven background in that area).