VCs don't care if you're nice, they want founders who take risks
businessinsider.com
businessinsider.com
The weird undertone that permeates the debate around VCs is that they are somehow the embodiment of some deeper wisdom – that others should pay attention for some universal reason – that they sit on the key to success. It’s just a particular type of player in a market economy. There’s absolutely nothing special about them. Of course they have something to say, like any other profession. But when the thought leading leather jacket comes on, and hot takes start to replace actual semantic sentences, it’s time to tune out.
Obviously, not every funding case is like this. But when young founders lead more with who has funded them than what they’re building or done, I have to wonder.
Exactly. They know it is a giant ponzi scheme as we have seen with SVB collapsing right in front of their faces, throwing millions on unprofitable startups which 90% of them will never make it to the finish line and it was never sustainable and they knew it. A perfect example of a ZIRP (zero interest rate phenomenon) with decades long cheap money fuelling it.
To them, they see your startup as a vehicle for an IPO to dump all over retail investors at an inflated price, which is why they need to keep raising money every month.
If it works out, on to the next one. If it doesn't then either they force you out of your own company an drive an acquisition to prevent the loss of their own money or accept the loss and never to meet the founders again.
Yes, they were THE bank for startups, but shitty startups did not cause the bank to collapse.
This system isn't really great, so your snark is justified, and the reason I know that is true is: pension funds are starting to experiment with cutting out the VC funnel and spinning up venture studios instead (Koru).
This, in turn, probably led directly to FTX. They did laughably bad diligence on FTX because they needed to do bad diligence in order to retain plausible deniability.
But I wonder if the nature of the industry is such that it attracts some moneyed folks who lack ethics and talent for business. To make up for that lack, they effectively "scam" investors.
Surely, there are some great VC partners who can identify unique talent and business opportunities. But there are probably more individuals who happened into the position from wealth (e.g. Ivy education, wealthy families) who lack both sufficient real world experience and business context.
Meanwhile for example AH has made investments also to legit startups.
In my experience with some top tier VC's none of the above is true. At least none of the VC partners I work with has ever even suggested "lying to customers", "making up numbers" or anything like that.
Sure, looking bigger than you are is useful. Not airing dirty laundry. Also aggressively going after customers is normal. But this is normal for any business.
A ponzi scheme is a way of stealing from investors, but it only works if the perpetrator can actually take cash out - in vc, I’ve never heard of a vc firm being able to take cash “off the table” in a later financing round, other than what is meant to be the terminal event for a vc investment, IPO / acquisition.
As for my take on VCs in general, of course I don't have any actual data to support my rant, it's purely anecdotal based of my personal experiences and should be treated as such.
[1] https://en.m.wikipedia.org/wiki/Private-equity_secondary_mar...
Was this ever addressed by anyone at YC directly? I've heard Andreeson talk about it but never answer the simple question: this guy was extremely irresponsible and unethical, why would you trust him again?
I can't help but feel it worsened their reputation, at least to the normie. Just makes it look like VC is just a big game where if you're in, it doesn't matter much what you do.
Anyway, I don't blame you for being skeptical, the Flow Monorail is really more of a Shelbyville idea...
Its a very indirect link to Neumann though.
Why? YC never invested in Adam Neumann's companies.
At this time, I'd like to ask all the VCs to form an orderly line in front of my desk, and to have their checkbooks ready.
I wondered originally if it was a small thing, but as I've dug in over month and months, I've noticed it's both a very real thing and a very wide spread thing.
Sorry, just to be clear -- is the very real thing the fact that Canadian Funds believe Canadians aren't ambitious enough or is the real thing (in your opinion) that Canadians aren't ambitious enough.
It's a self fulfilling prophecy, there aren't NOT ambitious founders in Canada, it's just "obnoxiously ambitious"* Canadians move to SF.
*(whatever that means, but not said in a negative way, I'd put myself in that bucket, as a Canadian who moved to NYC and built DigitalOcean etc.)
Funny, when I was trying to formulate a theory in my mind I was thinking of the phrase "vicious cycle". I was close enough, I think:)
I'm wondering if it's because Canadians and other countries with similar environments have been conditioned to exercise a different muscle: getting and retaining public funding. The incentive there is to under-promise and deliver/over-deliver, or at least appear to be delivering or over-delivering on paper. It's like that because the public judges are often much less knowledgeable and are forced to judge you on what you said you were going to do on your initial proposal and you're often times forced to start working before any money is deposited in your bank account.
Perhaps Canadians have a similar word? I can't really think of an equivalent in the US, which is perhaps telling.
We don't have a word for it that I'm aware of, but I would say that is at least 40-60% of the undertone I notice. Even when I myself was getting into startup stuff 20+ years ago, I very very very vividly recall my father looking at me and saying with real distain "why do you think you have to be better than everyone else?".
At companies I see something similar I guess, but it's more defeatist than anything else.
I hear this sentence a lot: "We can't compete with X so let's only do Y".
It's the inferiority complex that comes from living so close to America. Companies and individuals that stay here are mostly focused on becoming the best Canadian version of the thing.
The ones who want more just move to America.
I've seen the same behavior from freshly minted American millionaires who want to take a swing at this "angel investor" thing due to FOMO.
The best Canadian companies and founders typical raise from US VCs, full stop. They "escape the ghetto". The US VCs give them better terms, more aggressive, more knowledgable, just overall a higher class of investors. Plus far more choice. At each round I've fundraised, the Canadian VCs were at least 20% lower on important terms like valuation and generally much harder to work with. Yes, there are great Canadian VCs too. But the speed, optimism and 'knowledge of the game' that good US VCs typically bring is much higher.
So what happens? If the best Canadian startups fundraise primarily from US investors, what are Canadian VCs left with? The more conservative, slower growing, less ambitious ones. So the VCs approach that with caution. Which furthers the cycle.
Canadians are more conservative in general, and that conservatism bleeds over into startups and VCs too (not to mention B2B / B2G markets). However, the real issue is that when a company appears to break that stereotype, they just raise from US VCs.
At least this is how it's been for the last 10+ years. Now in the 'new normal' after the frothy period, it's anyone's guess how things will play out. Perhaps the conservatism of Canadian VCs and startups will help them produce more viable long-term businesses in this environment vs. what worked best in the cheap-capital era.
So there's an interesting dynamic change between pre-seed and early seed angel climate and proper serious institutional VCs in Canada.
No matter which new market the founders are working on proving, if and once the founders find PMF, first mover advantage provides a very narrow window of opportunity before second-mover advantage competitors enter the market, many of them either incumbent players with large GTM operations or simply foreigners (e.g. Chinese) willing to steal IP and undercut on cost. Exploiting the new market sufficiently quickly to develop into a major player that is capable of providing VC-acceptable returns requires the founders to have, shall we say, a certain kind of cut-throat character.
It has never been more feasible to avoid VC funding. Initial server costs are cheap. Social media makes it free (even profitable) to develop a following to sell to. Why waste your time chasing VC funds?
It’s downright cancerous.
In normal tech hiring (eg Google), they're not necessarily looking for high variance individuals. They're often looking for people who can slot into existing roles. That means the interview process by design should cut off the tails of the distribution.
Venture investing is different because you really want the tail of the distribution (in terms of success). Variance reduction is a bad idea! You want higher variance. In the words of Matt Levine:
> And then [Neumann] met SoftBank Group Corp.’s Masayoshi Son, who “ appreciated how he was crazy—but thought that he needed to be crazier,”
Yes! This exemplifies what an investor might do to increase the variance of the returns of the founder/fund!
As it turns out, Neumann paid himself handsomely and none of this made any money for investors, but the article sort of explains why they would invest in him for WeWork and again for Flow
I have a very strong feeling the words "basically" and "upper-middle-class" are doing a ton of work in this sentence.
To see this, just look at what each founder was doing immediately prior to going all-in on their startup. It was typically something that set them up to fail gracefully if necessary. Bezos had plenty of connections at D.E. Shaw by the time he decided to drive to Washington and could have easily returned to the finance industry at any point. If Facebook had failed, Zuckerberg would have at least been able to secure a high-level role at an existing tech company. And it may only be a rumor, but I believe Elon Musk had a certain window of time to resume pursuing his PhD at Stanford if he desired.
This isn’t a criticism of these founders not being “risk takers”, but rather just an observation to serve as a counterpoint to the article. The decisions I have made in my own career so far are based on laying the groundwork for the same strategy—set things up so I can attempt a startup at some point, and if it fails, my previous work history plus a decent amount of savings should minimize downside risk. And the additional experience of leading a failing startup isn’t worthless; I once worked at one where many employees jumped ship to better jobs than the ones they were at prior to joining the startup.
That is what those founders did, a person who is happy with 1 million dollars is not the kind of founder these people are looking for. Most people would stop after 1 million dollars, you need to find some very crazy risk takers to continue after that.
On the contrary, jumping straight into bootstrapping a startup with a state school background and a small amount of inheritance money would be taking on a huge amount of downside risk. None of these founders did that, which is why they were comfortable with making what looks like an insane gamble to someone who does not have such a safety net in place.
Note how the successful founders weren't rich, they had educated parents and went to good schools, but they didn't inherent millions so they had to work through life.
It’s a mindset. You’re almost born with it.
The kind of person who only bets 1 million when they have 15 is exactly the kind of risk averse person they don't want as a founder.
But that’s still not that big of a loss when it doesn’t entail the loss of personal market value. A VP at Google can quit their job, bet their entire life savings on the roulette wheel, lose it all, and still not worry about starving four months later. For most people with at least $1.01M net worth (roughly 1 in 10 Americans), this is absolutely not the case.
what a useless categorization to rely on
So the best way to raise VC funding is to leverage FOMO or sell traction.
This isn’t just VCs, it’s capitalism. It shouldn’t be a shock
Just so everyone understands how VC works, when a company announces a round of VC funding what they are really saying is they just sold a percentage of their company for the number in the announcement. You know the capital funding number, you don’t always (often?) know the valuation or the percentage.
If you are any sort of entrepreneur, you’ll understand how difficult this is , it can feel like a deal with the devil for a percentage of your soul.
But again, more risk = more reward
Remember , it’s an old game, startups predated modern VCs, tech, Silicon Valley, all of it. Think outside your current bubble, well written business books back to the 1920s exist. Sometimes simpler examples help, never engage with what you don’t understand.
VCs don’t even care about risk. They just want founders to make them a lot of money. It’s just that their portfolio strategy involves trading on tail distributions of risk. :P
The whole article is trying to ask: if you want to capture the far right tail of founders, how do you do that?
"Probably don't fund the trust fund kid" is part of the answer