Comment by mbesto | Hacker News Reader

Comment by mbesto | Hacker News Reader

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> rather than call an industry that has been pretty damn successful creating companies over the last century a bunch of idiots.

Is this actually true? (note - I don't know) My understanding is most VC firms aren't successful. Just a few are.

I've thought about writing a post almost identical to the OP and came to your same conclusion: "At the end of the day they have the money". The other harsh reality is that VCs are no different than the enterprise companies of today's world...they are all about reducing risks at scale. One of their scariest risks is failing to instill confidence in their clients. For example, if the market dictates that the hottest thing right now is photo sharing, you better be damn sure that a VC is going to invest in a photo sharing app. The VC is going to say "Dear client, we aren't going to invest in the next big photo sharing app, even though all of the analyst say its the next big thing. Instead we're investing in 21st century pig farms!" The client will say "but what about Instagram!" No matter how risky you personally believe it is (for example - photo sharing apps have no revenues) the market still is throwing money at it (i.e. Instagram).

So, conclusion - I blame media hyperbole and people's natural biases, not VCs on the amount of funding put into "good" startups.

Oh its true that VCs come and go, its almost apocryphal the stories of some guy who joins company A and gets rich, leaves and becomes a VC and then becomes poor. (well not poor but significantly less wealthy :-) But like any market those things auto-correct. And its a small enough industry that its hard, perhaps impossible, to hide the failures. The partner who seems to always make the wrong call on companies eventually ends up not a partner any more.

So at any given time, there is a chance you'll get a brand spankin' new VC who doesn't have a clue and he'll fund anything that strokes his ego or makes him look cool, but those folks flicker in and out of existence quickly :-)

But by and large the question of whether or not its worth handing over someone else's money to make your business happen boils down to really basic things, like "Who are your customers?" "How do you find them?" "What does it cost to reach them? Capture them?" "How do they compensate you and for how much over what timespan?" and "How does that money you get feed back into the business to grow it?"

You need to know those things, and know them with certainty. Sure you can say "I have the secret knowledge of the ancients and can make a perfect bra for any woman!"

And even if it is completely true and provable it is only one half of the picture. What if the cost to make them is $150, and their specialness fades in 3 months? Suddenly it doesn't matter that they are perfect, very few people will invest a couple thousand a year to keep a stock of perfect bras on hand. Or these bras are so well made they are indestructible! How cool is that, except if it costs $100 to 'fit' the person, and they buy one bra over their lifetime. Well that doesn't work either. So you really need to have a model for what the revenue is, what the costs are, and how you'll go from 0% market share to x% (where x represents actual profitability).

Something I'm fond of is the quote "All startup ideas are risky but funded ones are not random." There is very little randomness in the initial funding of a company, it has a strategy to take an investment and turn it into a large return in 3 - 5 years. It may not succeed in doing that, and there may several alternate paths that don't work, but the paths are there.

Media hyperbole? A lot of tech blogs pander to VCs.

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