The Cost of VC Money: Loss of Control
blog.besnappy.com
blog.besnappy.com
It's a choice, and founders should be aware of the trade-offs. No one answer will be right for every situation.
To provider some balance, the advantages of VC money:
- Someone to call bullshit. It's pretty tempting as a startup CEO to drink your own kool-aid. Sometimes founders do make bad decisions and need to be called out on it. Sometimes, they're so bad that they need replacing. Experienced VCs can provide perspective here, and generally do seem to err on the side of retaining founder-CEOs. http://www.bhorowitz.com/why_we_prefer_founding_ceos .
- Let you start capital-intensive businesses and take huge risks. To me, it's amazing that investors are willing to put tens of millions of dollars in the hands of a bunch of 25 year olds. But, empirically, it works. I've been that 25-year old founder. I don't want to grind away in an industry for 40 years. At this stage of my life, I'm not particularly excited by running a lifestyle business that returns a steady income. I can do that later, if I have a wife and kids. Right now, I have the energy and desire to work very hard, and I'd prefer to swing for the fences in an attempt to make an impact on the world. VC funding lets me do that with the potential for incredible responsibility and outsized returns, especially compared to friends who are working 80 hours a week in banks and law firms.
You only live once. Decide what makes you happy and pursue it.
The evil of VC is that there are people (passive capitalists) who want their money intelligently invested, without desiring to explicitly manage it. If they could have their risk diversified/averaged out in the same way that VC does, they'd be happy to have it that way. You could connect young talent and passive capital in a way that doesn't involve so much onerous interference.
VCs are an unnecessary and mostly counterproductive middleman between passive capital and young, poor talent. They take a huge cut, almost no real risk, and make enormous sums of money while others do the work.
VCs who gave their founders more autonomy would have better performance on the market. The problem is that they'd have fewer executive jobs to give out to their friends. The purpose of the forced fast growth (beyond the obvious) is to create needs in the company for executives under extreme time pressure. "Oh, you need a VP of X? I've got one for you. Now, just let me see which of my less successful friends I owe a favor..."
Passive capital and young/poor talent need to find each other and VC is about the worst system for making that happen. It leads to abuse of the talent and to crappy returns for those with the passive capital. But the VCs get their 2-and-20 and a bunch of executive-level positions to hand out to underachieving friends from MBA school, so the system persists.
There are many VCs out there that provide a tremendous amount of value outside of their capital. They can help with signing large deals and partnerships, make the right introductions, and provide a lot of credibility to the company. Partners that previously started a successful company are incredibly valuable in almost every aspect of the business.
It seems you are referring to angel investing which is biting a chunk out of the tradition VC market at the early stage. Some could argue that these large angel "party rounds", provide more freedom, but don't provide as much value as some VCs or larger angels can bring. Just handing money to young/poor talent typically wouldn't generate a return.
There are good VC firms and there are bad ones, if one is hiring "underachieving friends from MBA school", they are likely not performing and will cease to exist soon. This isn't the norm amongst firms generating a return for their LPs. VCs don't solely exist to hand out executive jobs at their portfolio companies.
We're at a point where so many folks have such a gross misunderstanding of venture capital. Even people that have raised it.
Well said. Raising capital is something that should be considered in the context of the current business. From a wealth creation perspective, selling a business for $10m with 100% ownership is exactly the same as building a $100m business with 10% ownership.
> Some businesses are not possible without a large capital injection.
Absolutely. Plus, some businesses will be substantially smaller without outside capital.
Conversely, some businesses will grow into nice size businesses without outside capital, but will spend themselves into oblivion if they raise a round.
A lot of thought should go into whether or not the current business is the high growth, large market business that's a good fit for venture capital.
That's about the only reason to raise VC money. If it's a high-growth rocket ship, it's better to take money from expansion stage investors that don't look for control.
> There are many VCs out there that provide a tremendous amount of value outside of their capital.
This is simply not true. If you're a high-flying company, you can do much of this on your own anyway. If you're not, good luck getting your calls returned from your investor. I have seen a HBS survey that said only about 11% of founders said their investors provided more value than the money.
> Just handing money to young/poor talent typically wouldn't generate a return.
On the contrary, the data (Microsoft, Google, Facebook,…) demonstrate that inexperienced talent makes the outliers if they can stay in control. Poor talent won't build a company to a fundable milestone anyways. This surfaces the absolutely incorrect condescension at the heart of the VC mindset.
> VCs don't solely exist to hand out executive jobs at their portfolio companies.
True, but they do place their buddies in positions of control so that they can exit a company when they want to. This is likely the predominant reason they generally change CEOs, though the partly line is less self-serving. Note that this excludes the better firms like AH, etc.
> We're at a point where so many folks have such a gross misunderstanding of venture capital. Even people that have raised it.
No, we're at a point where everyone has better information about the value of VCs. People who have raised used to talk about this privately, but now it's public knowledge. It's a new era.
Larry and Sergey were both thoroughly inexperienced in business when they founded Google. However, as someone who worked under both Eric Schmidt and Larry Page and was a Google employee during the CEO transition of 2011 - Google would've flown apart as an organization if Larry had been in charge during its high-growth period. He made - and occasionally continues to make - several rookie management mistakes that come from never having to deal with a corporate hierarchy from a position other than the top. Now, he learns pretty quickly from them and makes up for it by having a very good understanding of the industry dynamics, but the VC's condition of forcing him to hire "adult supervision" was absolutely the right thing to do, and Google was very lucky to find a CEO that could manage the founders while still keeping them involved in the business and giving them enough leeway to make crazy bets like GMail, Android, and Chrome.
https://news.ycombinator.com/item?id=7733775
As a side note, I think Eric Schmidt handles most of the legal stuff, right? That probably didn't help.
"Investors are not in the same business you are"
And if so, why are those entrepreneurs surprised? What are their expectations?
Plenty of examples of founders that have control.