VCs aren’t your friends

It was only after Steve Jobs exploited their preferential attachment & tendency of VC to succumb to herding effects that he was given investment.

Tesla might have been more likely to focus on having the tech working at the expense of everything else.

[1]: https://en.wikipedia.org/wiki/Wardenclyffe_Tower

So much that playing videogames during a VC meeting can swing them the "right way" if you fit the structure enough

a) they had been raising for a while now

b) the recipient was not their first choice (ouch, you can hear the ego taking a glancing hit)

So ”the market” did not consider the startup investable, and they did not think about their sales pitch strategically enough … this VC would have liked to be sold to, not just a source of funds.

The implied peer signaling is the key thing here IMO.

Not saying that most of the cases are not hard work from the startup team but saying that if I would have to raise funds I will put laser focus in the people I know instead of trying to reach VCs that are not in my network.

I will repeat this a little bit differently: I see many yes that are related to the team links, not their product or market.

Finally, when I talk about the team, I don't talk about their real capacity to execute but to sell to a VC like selling to an important customer.

My "favorite" "test" is the one more for soft studies (think law or public policy) rather than STEM: for example UN internships typically have no compensation and they often require you to relocate to extremely expensive CoL areas, meaning there is an automatic filter built in where only children of very well-off parents can do these kinds of internships and segue into the jobs connected to them.

If you do stuff like that 100 hours a week, it kind of becomes ingrained.

“Smart” and “brilliant” are all highly subjective.

Pride and ego lead to an amazing amount of bias when you start to think you know “smart” when you see it.

There are no “tests” for legacy admissions and for students whose parents have donated millions.

VCs manage risk differently than bankers, but they still need some form of assurance that their investment will bear fruit. They are not as rigid as bankers but they are still in the same position of having to rely on proxy signals to predict the future.

They can catch more non-conformist value builders† but not every single one.

†For a VC, innovation is a means to building value, not an end to itself. Often the 2 are used interchangeably but only the finances matter in the end.

A VC has to live of management fees for the fund, which are a tiny fraction, typically half a percent, and that needs to cover both the initial investment process and all management of the portfolio, and it's not a lot.

You can't afford to spend a lot of time scrutinizing every pitch deck, because you'll be inundated by them, so you look for quick filters. Many of which will be bad, because they're wild guesses. Yes, that means they'll miss amazing opportunities. But they're gambling what will be left will at least not be worse.

Upside is, VC's wildly disagree on which things make decent quick filters, so what will get you binned one place will often interest another, or at least not annoy them.

1. Legacies: this is the single biggest group of admitted students (eg ~36% of Harvard's undergraduate class). This by itself destroys any merit argument;

2. Athletes: people forget or don't know that the Ivy League is an athletics conference, despite the academic prestige and social proof. Ivy League schools don't offer true atheltics scholarships like you might get for D1 football recruits at, say, UAlabama or USC, but it is an important part of the admissions process;

3. The nebulous idea of "diversity". I don't mean in the DEI sense because it's much broader than that, like you can have better odds of getting an acceptance from an Ivy League school by simply coming from a low-population (and thus low applicant) state like Wyoming or Montana rather than Texas, California or New York;

4. Extra-curriculars, many of which are a proxy for wealth and privilege. For example, not everyone can do an unpaid internship living in NYC or LA or take unpaid opportunities requiring international travel;

5. Other random factors like filling out an orchestra. There's an old cliche that you should study the viola instead of the violin if you want to get into Harvard because there are fewer viola players.

6. Whether admissions believe you will enhance the reputation they've so carefully cultivated. An Ivy League degree is a powerful form of social proof. Being a Harvard grad will help you get into any graduate program. The prestige of your medical school greatly affects your ability to get a residency in a competitive specialty. The point is that social proof diminishes if the perception of your graduates turns sour so admissions will absolutely look at how may reflect on them in future.

The only commonality with VC funding seems to be the power of social proof. That is, MIT and Stanford grads will have an easier time. VC firms will go and do presentations and recruiting at those schools.

That doesn't mean you can't get funded if you went to an unremarkable state school. It just means it's a more difficult road. Stanford or MIT will make it easier to get an internship and thus a returning offer at a prestigious Big Tech company. You'll potentially know more of the people in the VC and startup spaces because you went to school with them or someone they know. There's a real network effect here.

But the point is the similarity to Ivy League recruiting seems to be fairly superficial.

Its the same for the entire education system as Chomsky explains: It seeks to educate people smart enough to do what they are told, but dumb enough to not question it.

Try imagining harder. (Or just google :-)

Sequoia was their first VC. Got the Apple II off the ground.

Sure. But from experience it takes 3x as long.

After a long day of coding it’s not fun to come home and do another 8 hours.

Customers today expect polish and few bugs right out of the gate. I spent months on polish alone. If you don't, your product is going to be savaged like this:

"Former Yahoo CEO Marissa Mayer’s New Photo-Sharing App Has a Design From the Stone Age"

https://gizmodo.com/marissa-mayer-new-app-shine-photo-sharin...

It may well be that far better arrangements exist, but how would a slumdog or a small time farmer or a stay at home parent ever get the ball rolling? Who would play ball with them?

It would pretty much require that an existing VC or an empowered member of their ecosystem have the idea and see a path to it enriching themselves in order for them to spend time on it.

This is a major issue with pure market maximalism like the above: not everyone has agency within and access to every market, and no agent within a market would just let it change unless they personally stand to gain. Many potential solutions pass through empowerment or enrichment of different groups than those currently holding the reins, and this may mean those solutions are impossible to explore.

Meta-comment: What a creative and effective word picture. In just 3 words there's so much information that instantly comes across.

I have worked with bigger vc firms such as matrix partners and they genuinely care about you and want your startup to succeed if they are interested.

Trick is to make something which is genuinely cool and matches with the thesis and talk to vcs who are respectable.

Yc is a great help in this regard. They help you understand which vcs are respectable and which vcs you should treat like mushrooms: feed them shit and keep them in the dark.

Lemkins seems like a mushroom.

I guess "VC was wrong and nobody really gave a shit" doesn't have the same ring to it.

Only if you give them board control.

It's either: only allow companies that are already big to do new things, which they often aren't geared for in various ways, or have a mechanism to allow capital into new businesses from outside, that comes with certain expectations. You're free to decline both the capital and the expectations, of course, because this is a free agreement made between two parties.

There is maybe some people who raise money "because it is cool", but I would think it is in the minority. If you have a business that is profitable, you are happy with the growth, etc, there is little sense in going to the investors begging for money. The couple bootstrapped businesses I have seen didn't have much interest in raisin.

That's not to diss local artists, though. Some are incredibly talented, and I loved the scene I was in it. Just, if we're talking about investing, making music looked like 9 times out of 10 a money sink you do for the love of it, not an investment opportunity.

And there was recently a guy who did 400 investor meeting to get a single yes.

> I think that, if you had only five minutes with a world-class trader, and you asked her “teach me the essentials of trading,” probably she would spend the five minutes on adverse selection. The essential lesson is that, if you are being offered a trade, that probably means it’s a bad trade; your job is to understand that thoroughly so you can figure out the exceptions.

I worked in hedge funds, even there the management fee (2%) covers the fixed costs (legal, trading operations, treasury, IT operations, etc.) whereas the performance fee (20%) incentivises the alpha.

In VC it's even worse, because at least hedge funds are liquid. VC investments don't realize their value for 5-10 years! Are they supposed to work for free for 10 years? Even the support staff?

VCs have a whole staff of people needed to do business and a ton of costs. There's a legal team, marketing/events, human resources, finance, some executive assistants. Screening, meeting founders, traveling to meet founders, takes up a TON of time and obviously most of the time, no investments are made! Also don't forget, VCs have an office, usually not in a cheap place, so lease costs, cleaning costs etc.

If VCs had to work for free, where would you be meeting them? Ok it's all virtual now, let's say. But the truth is, meeting people face to face when you're going to write them a cheque for 10-20M is generally a good idea. So VCs and founders will almost always need to travel. You're also always going to need lawyers and finance people, since you're dealing with term sheets and large amounts of money.

As others have said, VC investments are not liquid at all and the timeline is 10 years for any returns. So a VC investor in your world has to travel around the US, Europe or India meeting founders, has to work with lawyers, financial folks for free, gets zero benefits in terms of healthcare, etc. All for the chance at 40% of something in 10+ years, that might not work out anyway?

If run this way, the industry would simply not exist and the founders would not get any investment. And the truth is this, there are many founders out there who want and actively seek VC investment and "shock" actually are happy with the relationship with their investors because they understand a good relationship benefits both parties in the deal.

I will also add, most employees in VC firms get no percentage of the profits of the fund (i.e. the carry). Most VC employees just get a regular salary (which is often far less than tech company salaries). So if there were no fee associated, these people would never get paid, since even when the fund finishes, they wouldn't get any of the 20% carry.

This makes no sense. Companies have fees, junior associates have student loans, buldings require rent to be paid.

This is a foolish sentiment, unless you would apply it to all employees everywhere. If startup employees truly believe in their company they would also take no salary at all and just live on ramen noodles.

But if you think this through you realize that employees also have costs in their lives that they need money for.

> Once you get this it’s all a lot easier: the job of a VC is not to invest in winners, that’s a bonus.

> The job of a VC is to look respectable while losing other people’s money at the roulette wheel, and taking a margin for doing so.

This really makes me question which VC firm you work at as you don't seem to understand how they work. If VC firms had no alpha then they wouldn't be able to raise a second fund at all. And you'd never see VC funds stick around.

They fact that Y combinator exists for all these years and A16Z, sequoia, etc are all around for so long indicates that they are good at their job and their job is to make returns for the LPs.

I work at a firm, i'd be happy to help you understand how these firms work as you seem to have a very outsiders view on it, i can help clear up alot of your blind spots if you want to talk!!

So if you believed in something, you need to get rid of the concept of hedging and financial responsibility?

This kind of "believing" is what a religious zealot does. No wonder people say SV is a cult.

> "The two most important things to understand about startup investing, as a business, are (1) that effectively all the returns are concentrated in a few big winners, and (2) that the best ideas look initially like bad ideas."

_initially look like bad ideas_ meaning "we can't pick them out of the crowd of other bad ideas"

> "there is probably at most one company in each YC batch that will have a significant effect on our returns, and the rest are just a cost of doing business"

> "For that reason one of my most valuable memories is how lame Facebook sounded to me when I first heard about it."

> "We'll probably never be able to bring ourselves to take risks proportionate to the returns in this business."

So it's not like this model is alien to Our Kind Hosts at YC. They understand that this is a crap shoot with a slightly tilted table, but they're optimising for staying out of the zones where everybody else is betting and not that much more.

To be remembered: if you're having a hard time getting funded, the VCs are also having a hard time funding you, because the huge returns go to things that look odd, lame, and weird.

For the most part.

Not all VCs from the Bay Area are good, but the good ones are far more common there than anywhere else. One reason "move to SF" is such common advice.

Will be raising on an idea that makes me look at least a little bit like a lunatic in four weeks’ time, so keen to see how this is born out!

They aren't interested in your measly 5%

The advice is never just send deck to a VC. Same as just applying to a company. Private organizations have no need for any kind controlled process, you're always better having or building of personal relationships and convincing people directly first. It's often even about the pitch or pitching skills. It's more like relationship or case you build, then the pitching is just formal step to close the deal.

I think the cold approach only works start the relationship if you have proven business, great potential and can tell that story well. But also by then VCs might already know about you and come to you.

Otherwise it's always about building some level of personal connection first. Essentially you're asking to someone personally believe and bet their internal and external reputation on. They are not going to hand you the money after one hasty email and deck.

The anti-VC crowd often try paint this as some kind of exclusive country club, but it's not true. So many new founders raise capital all the time. VCs are always looking for new founders and companies.

But it's also true that if you just crawl out of the woods one day and go meet a VC and ask them for $2M is likely not going to happen. If you don't get a single person in the world with some kind of VC connection to make a warm introduction to you, it often considered as a filter that you're not serious enough about your business.

But for the first time founders out there please don't sweat it if you can't get funded for a long time, you may just be early. I gave up on a great idea (that my partner later worked into a great product within an existing company) because we were unable to get funded for 3 months. And later got VC funded after working on a worse idea for a year. It can take time, It may require you to get customers first, but if you get along with your partners and can see business progression don't worry to much about VCs, they are mostly capricious up until the point you can show that its a good business. Then they are, as OP said, just bankers.

Also, for every other "evil VC" story, there are other stories where founders are really happy with their VC board members, have a strong and positive relationship with their VC partners, and end up getting some kind of positive exit which wouldn't have happened at all without the investment.

Sure, some VC companies may be shitty, some others may be amazing, but this is basically like everything in life. Some schools are shitty, some cops are shitty, some cars, tech companies, managers etc, are shitty. But some of all these things can also be great and awesome too. Thats life.

I read this as “10% are hot”—probably the author meant “like a team out of OAI” but maybe they meant “like recent rounds of OAI have been”.

In any case this post read as sophisticated, reasonable, and helpful, to me.

Then the number of deals is also hilarious. These people don't have unlimited money, even in the good old days, you'd be lucky to be doing a deal a week out of the pool the associates approved.

So basically there are a hundred times as many decks as what the OP thinks there are for each deal. And the successful ones aren't open AI, the majority of the time a successful exit is getting sold for $10m to the incumbents in the field.

VCs do have a helpful role to play in funding many types of startups, but the role of investor is very different from the role of friend.

> If shit hits the fan, they are entitled to the payout of up to their original investment, so all of the company's assets, when liquidated, fund those proceeds.

I thought all loans are structured that way? I am not sure why this should not be the case here.