Understanding VCs
avc.com
avc.com
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.
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.
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.
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.
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
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.
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.
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.
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, 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.
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?
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
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) 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 :-)
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.
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.
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 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.)
> 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...
$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?
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
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.
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.
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 is good general advice. The credibility of a person, VC or otherwise, does not suffice as proper consideration, let alone multiple data points.
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.)
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.)
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 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.
0: http://genius.com/Macklemore-and-ryan-lewis-jimmy-iovine-lyr...
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.
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.
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.
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.
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.
(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)
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.
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
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.
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.
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.
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.
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.
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.