VCs using scouts means founders get the short end of the stick (2021) | Hacker News Reader

VCs using scouts means founders get the short end of the stick (2021)

sifted.eu

69 pointsAnhTho_FR29 comments

I'm not sure this is true?

Scout funds always have generic names. So do the funds that founders actually run through things like AngelList. In my experience, no one actually cares what fund put a $10-50k check in to the seed round.

I buy that there's signaling risk from having Sequoia have a $500k check in the seed round, then not do the A. But everyone knows that means a partner at Sequoia chose to invest. Even if someone notices a scout fund name, they're not going to mistake that for a partner at Sequoia.

Scout funds are, however, a neat way to let non liquid founders do some investing. I don't think I've ever regretted taking "scout fund" money.

Founders get the short end regardless, as a rule, with prominent exceptions.

A VC firm is handed a billion dollars they must invest by quarter end, somewhere. They get a zillion proposals, mostly trash. The number of obvious winners is much smaller than needed to absorb the $1B, so they have to fund a lot of less attractive choices.

Dumping all that money on losing propositions is fine with the investors, but the VCs hate to waste it. So, they have ways to milk the losers. In the old days they would make them buy Oracle or other licenses, for kickbacks from sales people. They have a stable of people owed favors they may appoint to C-suites of startups, at inflated salaries. HR departments are good for bleeding; startups rarely have an HR VP in mind.

The experience with VCs will vary enormously depending on whether yours is one of the few picked to succeed, instead of being milked.

Insightful.

> They have a stable of people owed favors they may appoint to C-suites of startups, at inflated salaries. HR departments are good for bleeding; startups rarely have an HR VP in mind.

In my limited experience I've seen this happen even at ostensibly successful firms that raised big VC amounts. I've also seen it in smaller places. Curious if this basically happens everywhere, or if it really is just signaling that the VCs know it's going nowhere even after they just paid in big $.

I think that often it's less about repaying a favor, and more about bringing in a ringer to take a stagnant/failing investment to a soft landing (acquihire or similar).

Well, that's when they boot the CEO/COO. For HR VPs, who knows.

Those would be completely different exercises though, one with fiduciary rationality (bringing in a fixer), the other definitely not (placing friends in high places for rewards).

It is generally a very strong bet that any HR director will be deeply on the take. Companies know this, but need to have HR directors, and have to take who they can get. Nobody makes a career in HR for love of it.

If C-suite can't tell what HR's grift is, it might be much worse than the usual, so they accept the usual. This is often kickbacks from outsource, insurance, and training companies, but there is plenty of scope for creativity. HR conferences are mainly for after-hours scheming.

Facilities managers are also often grifters, but not so reliably.

This is wildly inaccurate. I know plenty of HR folks (directors and otherwise) who are perfectly ethical and enjoy their job.

I acknowledge exceptions.

> They have a stable of people owed favors they may appoint to C-suites of startups

Too true - I've lived through that one! The better VCs at least don't become indebted to incapable people - or they know better than to repay those favors with operation roles in their own investments :)

Your proposition of 'bad for founders' and 'they have too much money' and 'slipping in overpaid staff' don't very well correlate to each other.

Also - I don't see any evidence in the article for how the 'Scout' class of Angel has any specific downside vis-a-vis regular Angels.

$20-30K is far to small for any fund to worry about otherwise.

If the money is highly speculative and therefore easier to give out, I don't see how it's negative.

If this has never taken place in my experience across a dozen or so startups, does it indicate I'm skilled at selecting startups chosen to succeed?

Did an above-average percentage of them succeed?

(I suppose it's possible that selected to succeed and succeeding are not the same thing)

The results are all over the place, from outright failed, to nice acquisition exits, to doing hundreds and even 10's of billions in revenue 7+ years and counting.

In hindsight, none of them fit in the "groomed to fail" bucket.

> A VC firm is handed a billion dollars they must invest by quarter end

Is “by quarter end” accurate?

I thought VC were typically given 2-years to invest their fund.

Can someone confirm.

I think it was a poetic way to say they have quarterly targets to meet. Pretend it's an $8 Billon fund

This.

More like 6 years is the standard US investment term on a 10 fund life with 2x 1-year extensions taking it to 12. Investment term can end early if they raise a new fund but need to be 70% invested and committed. Original comment…not entirely credible…tbh

> Founders get the short end regardless, as a rule, with prominent exceptions.

Only when they don't have a business generating real value and are never operating on their own terms even far down the road.

> The experience with VCs will vary enormously depending on whether yours is one of the few picked to succeed,

If your business depends heavily on the additional resources that VCs provide (connections, advice, prestige, guaranteed follow on rounds, etc), rather than merely being an additionally booster, otherwise you shouldn't take the money.

VC is rocket fuel for a company with a plan, it’s rarely the base ingredient to having a plan at all.

This would have rung true to me in 2004. It does not ring true today. It's worth noting that if your direct experiences were drawn largely from pre-YC VC, the world has changed radically.

(The "by quarter end" thing doesn't ring true at all.)

hm I don't know which VC funds you've been dealing with, but most professional funds are measured by their returns (not milking), the funds of funds' guys I've talked to said for them its a math equation: if a fund doesn't bring returns, it will not be funded for the next round. So maybe look for funds on their second+ round to avoid kickbacks and scammers?

The people working at VC firms have motivations not exactly aligned with their employers or their employers' investors. It is hard to find and keep skilled help.

Founders are in the driver's seat. That's what y-combinator was originally all about. Get ramen profitable, then you have a long runway and can pick and choose what - if any - additional investment makes sense for you. Unfortunately there has been a shift from empowering founders to exploiting them.

> Founders are in the driver's seat.

In my experience this was never true. They always got screwed unless they managed to stay past IPO with some position. I have no idea whether this was the ideology behind ycombinator. I always saw them as a mix of investment and business school that focused on tech.

They originally focused on founders who were supposed to build their MVP at ycombinator - themselves. But no I see solicitations to hire key technical people for startups that only have an idea and some motivation but not the skills to make it happen themself.

I get automated emails asking if I'm looking for funding for a startup I had 10 years ago.

VCs means founders get the short end of the stick.

Sure, but its still a stick they never would have had at all without vc.

Serious question though, is -- should I care?

I have trouble believing that VC money makes for a lot of stuff that helps the world. Not that it has to be pure charity or anything like that, but -- how worse off would be with only non-VC companies (e.g. capital raised by other methods, or just not at all?)

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