7 ms·

A unified theory of VC suckage (2005)

111 points by simonebrunozzi 5y ago

eyphka 5y ago
Still just as relevant.
- deleted 5y ago
  [deleted]
sharmin123 5y ago
Kalanos 5y ago
they make steep lines steeper
JohnJamesRambo 5y ago
> In principle you could take a huge VC investment, put it in treasury bills, and continue to operate frugally. You just try it. I’d really rather see this I think.
- m_ke 5y ago
  When we got our seed round check in 2016 my cofounder joked that we should put it in bitcoin, would have worked out way better for everyone involved if we did...
- anonu 5y ago
  This is risky I think. First, you sold a business plan and a pro-forma for growth. I would bet that "investing in T-bills" was not in your business plan. Second, you need growth. If you don't deploy your capital to seek that growth, your VC will want to get out sooner rather than later. You dont want a down round...
  - ojbyrne 5y ago
    I think the point of investing and continuing to be frugal is to not have another round.
- montenegrohugo 5y ago
  It's not just in principle, I personally know some startups that do this. Crypto certainly helps them make this easy. It is borderline scammy though.
anonu 5y ago
Everything PG says is true here. I would add: once you sell an iota of your company to a VC, your company is no longer yours. The VC will want to ensure they maintain control over every aspect of your business - and of course the valuation, how you sell and when you sell. There is no concept of building a sustainable long-lasting business: you need to build fast and grow fast.
- sjtgraham 5y ago
  How many times have you raised venture capital?
- fairity 5y ago
  > There is no concept of building a sustainable long-lasting business: you need to build fast and grow fast This is actually incorrect. You're, more or less, in full control of your business until you give up control of the board. Founder-controlled boards are common place after a series A and even series B (if you're in a strong negotiating position).
- boringg 5y ago
  This doesn't resonate as accurate at all to me. VC certainly would have an strong interest in protecting their investment and helping it grow. Unless you've given up a significant amount of your company they don't have ownership control and you also have a board (which I would assume you haven't handed over control of). Again depends on the structure of your deal(s).
hnthrowaway0315 5y ago
Taking a peek into the VC world in China back in 2013~2016 gave me the same outlook of the industry. Of course I'm not close enough to give an accurate description as PG did, but the outlook is almost the same. And for many times I think that modern funding is kinda broken. There is just too much $$ chasing around so few good companies and everyone is paranoid.
- pototo666 5y ago
  Do you still have contact with VC in China now? Is it still like this?
  - contingencies 5y ago
    As a (funded) foreigner in China I'd say it's really difficult for outsiders. However, if you are a so-called "haigui" (海龟) or overseas returnee Chinese, then obtaining funding and government support appears to be much easier. The whole HK thing hasn't helped.
    - hnthrowaway0315 5y ago
      I'm actually surprised to see funded foreigner in China. Basically it depends on how many connections you have, the more the easier. But I remember after the year 2016/2017 the funding starts to die down quite a bit comparing to previous years.
cercatrova 5y ago
I wonder if PG started YC after writing this and thinking, I can do better.
- ganeshkrishnan 5y ago
  You can't. YC is a VC with a different coat. Unfortunately when time and money is limited there will always be fat cats and starving dogs. There will always be worthy startups left behind and unworthy startups getting money. The successful ones are only successful because of the immense money they get.
dmitriid 5y ago
> And of course giant investments mean giant valuations. They have to This reads like satire these days because so many of YC's top companies are exactly that: companies losing hundreds of millions, or even billions of investor money every year, but all having insane valuations [1] https://www.ycombinator.com/topcompanies/ https://www.ycombinator.com/topcompanies/
- forgingahead 5y ago
  You either die a hero, or live long enough to (join) the villains.
yashap 5y ago
> The huge investments themselves are something founders would dislike, if they realized how damaging they can be. VCs don't invest $x million because that's the amount you need, but because that's the amount the structure of their business requires them to invest. Like steroids, these sudden huge investments can do more harm than good. Google survived enormous VC funding because it could legitimately absorb large amounts of money. They had to buy a lot of servers and a lot of bandwidth to crawl the whole Web. Less fortunate startups just end up hiring armies of people to sit around having meetings. I really saw this at the first startup I worked at. We did a massive VC round (I think the largest in Canadian tech history?), hired like absolute crazy after it. The company got bureaucratic and bloated, lost the ability to move quickly and efficiently, and never got it back. I still loved working there for the coworkers, management and interesting problems, but I don’t think the investment was good for the company long term. A company of ~150 people grew to ~1000 in a year, but I think the 1000 people got less done, with a lot less agility, than the 150. Not out of laziness, just too many people for the size of the business problem, which led to a lot of unnecessary communication/coordination overhead. Even disregarding the salary costs, I think had we stayed a lot smaller/leaner, we would have been able to move a lot faster, be more innovative, and ultimately become a larger/more successful company.
- ganeshkrishnan 5y ago
  element.ai?
  - yashap 5y ago
    Hootsuite, though I’m sure many startups have similar stories.
    - ido 5y ago
      I've worked in a bunch of companies that experienced similar (in %) growth & similar results.
    - altdataseller 5y ago
      Not sure if you still have shares but heard they are doing an IPO so you might get a small windfall?
panabee 5y ago
most VCs are soccer stars. startups are basketball. soccer and basketball are conceptually similar. both involve teams of players dribbling, passing, and shooting into goals. both require agility, teamwork, and endurance to succeed. yet they differ in key dimensions to the point where no one assumes skill in one translates to the other. similarly, investing and entrepreneurship share much in common but diverge in key areas. two cardinal rules of investing are: (1) diversify and (2) don't lose money. in entrepreneurship, these are cardinal sins. because of limited resources, startups fail when their bets aren't concentrated. startups also fail when prematurely optimizing costs because innovation is inherently wasteful. to be clear, many VCs offer immense value and are instrumental to startup success. most are extremely intelligent and business savvy. the best ones adopt advisory roles, not managerial ones, providing insights and guidance that alter company trajectories, recognizing that it is your vision and drive, not their capital, that produces lucrative exits and world-changing companies. if you have an opportunity to partner with talented and trustworthy VCs, strongly consider the option. the simplest heuristic for evaluating VCs is this: if you removed capital from the equation, would you still hire them as your boss?
- pototo666 5y ago
  > In entrepreneurship, these are cardinal sins. because of limited resources, startups fail when their bets aren't concentrated. startups also fail when prematurely optimizing costs because innovation is inherently wasteful. As a founder who strugglews with concentration, I found that your insight is gold.
supernova87a 5y ago
I personally have seen this, as a manager at a major company involved in obtaining certain data services from VC-backed startups (by now, medium-sized several-year-old companies). I completely agree with the idea -- the VC-backed startup is completely incentivized to inflate deals to hit dumb revenue targets, regardless of how much it hurts (and they know it), really hurts them operationally to deliver. And when this happens at some point (usually quite soon), their priorities about the product take a back seat to simply pulling in as much revenue as possible. At least we get to rake them over the coals and extract some ridiculously good prices for the product we buy while we do it, but man it's painful for both us and them at the same time. All for some valuation. I see the CEO putting himself through a total hell to do this, and I ask "why are you doing this"? It's too late. They sold themselves to that world, and now have to live with the consequences. edit to note: in the OP article, it points to a further essay written by Phil Greenspun in 2001 on his experience with VCs. It's funny and really interesting on its own. One small thing I noticed at the bottom is that the first comment is written by Aaron Swartz.
- chrischapman 5y ago
  Wow - he would have been 14 years old. Also, the second comment is from Dave Winer.
_xnmw 5y ago
VC money can be incredibly damaging to a startup because it increases your options. In finance, optionality is good, in entrepreneurship it is a distraction. To achieve focus and speed, you want fewer options, not more. Even simply parking your money in treasury bills and focusing on your mission is not easy, because the option exists. Necessity is the mother of invention. As Steve Jobs said, you want to "stay hungry, stay foolish" [1], because nothing drives human beings like sheer pain and neediness. [1] https://english.stackexchange.com/questions/44538/what-does-the-phrase-stay-hungry-stay-foolish-mean https://english.stackexchange.com/questions/44538/what-does-...
- yesimahuman 5y ago
  VC $ decreases your options considerably in my experience. But perhaps we’re talking about different kinds of optionality
notRobot 5y ago
> [1] After Greylock booted founder Philip Greenspun out of ArsDigita, he wrote a hilarious but also very informative essay about it. Anyone have a link to this essay? I performed a few web searches but couldn't find it
- acrump 5y ago
  https://random.waxy.org/arsdigita/ https://random.waxy.org/arsdigita/
  - notRobot 5y ago
    Thanks!
zby 5y ago
>The huge investments themselves are something founders would dislike, if they realized how damaging they can be. VCs don't invest $x million because that's the amount you need, but because that's the amount the structure of their business requires them to invest. It is a pity that the whole essay does not go a bit deeper and explain what are these business requirements here. Imho the main reason VCs (and angels too - if they are not from the 'family and friends' group) want bigger investments is to align the founder and the investor incentives. VCs want a binary option - big success or total failure and want to eliminate the third option of 'life style business' - that is a perpetual small business. In a 'life style business' there are too many avenues for continuously extracting small amounts of value from it so making it a fair game would require too much control from the investors.
evancoop 5y ago
The strongest argument in favor of VC would be the ability to deliver capital where otherwise none would be available, the ability to generate above-market returns (at least circumstantial evidence of offering value), and the experience/insights that emerge from experience with other startups. The counter-argument would be, as PG alludes, the best VCs don't act like most of the others, the massive capital their business model requires them to invest causes misaligned incentives with respect to founders (e.g. the founder is happy to sell for $15M, but the VC folks are not), and there's a fair bit of IP security concern. The bottom-line suggests a revisiting of incentives from both parties. Founders need some access to the VCs broader returns (possibly even offering their insight into OTHER businesses under the VC's flag) and VCs need to assess their returns over much larger temporal horizons than most funds will consider.
phkahler 5y ago
So why has PG allowed YC to become so VC focused and less about founders bootstrapping?
phgn 5y ago
> lately I've been learning more about how the VC world works PG started YCombinator the same year this was written. Did he state somewhere how he planned to address the VC incentive issues pointed out here?

eyphka 5y ago

Still just as relevant.

deleted 5y ago
[deleted]

sharmin123 5y ago

Kalanos 5y ago

they make steep lines steeper

JohnJamesRambo 5y ago

> In principle you could take a huge VC investment, put it in treasury bills, and continue to operate frugally. You just try it. I’d really rather see this I think.

m_ke 5y ago
When we got our seed round check in 2016 my cofounder joked that we should put it in bitcoin, would have worked out way better for everyone involved if we did...
anonu 5y ago
This is risky I think. First, you sold a business plan and a pro-forma for growth. I would bet that "investing in T-bills" was not in your business plan. Second, you need growth. If you don't deploy your capital to seek that growth, your VC will want to get out sooner rather than later. You dont want a down round...
- ojbyrne 5y ago
  I think the point of investing and continuing to be frugal is to not have another round.
montenegrohugo 5y ago
It's not just in principle, I personally know some startups that do this. Crypto certainly helps them make this easy. It is borderline scammy though.

anonu 5y ago

Everything PG says is true here. I would add: once you sell an iota of your company to a VC, your company is no longer yours. The VC will want to ensure they maintain control over every aspect of your business - and of course the valuation, how you sell and when you sell. There is no concept of building a sustainable long-lasting business: you need to build fast and grow fast.

sjtgraham 5y ago
How many times have you raised venture capital?
fairity 5y ago
> There is no concept of building a sustainable long-lasting business: you need to build fast and grow fast This is actually incorrect. You're, more or less, in full control of your business until you give up control of the board. Founder-controlled boards are common place after a series A and even series B (if you're in a strong negotiating position).
boringg 5y ago
This doesn't resonate as accurate at all to me. VC certainly would have an strong interest in protecting their investment and helping it grow. Unless you've given up a significant amount of your company they don't have ownership control and you also have a board (which I would assume you haven't handed over control of). Again depends on the structure of your deal(s).

hnthrowaway0315 5y ago

Taking a peek into the VC world in China back in 2013~2016 gave me the same outlook of the industry. Of course I'm not close enough to give an accurate description as PG did, but the outlook is almost the same. And for many times I think that modern funding is kinda broken. There is just too much $$ chasing around so few good companies and everyone is paranoid.

pototo666 5y ago
Do you still have contact with VC in China now? Is it still like this?
- contingencies 5y ago
  As a (funded) foreigner in China I'd say it's really difficult for outsiders. However, if you are a so-called "haigui" (海龟) or overseas returnee Chinese, then obtaining funding and government support appears to be much easier. The whole HK thing hasn't helped.
  - hnthrowaway0315 5y ago
    I'm actually surprised to see funded foreigner in China. Basically it depends on how many connections you have, the more the easier. But I remember after the year 2016/2017 the funding starts to die down quite a bit comparing to previous years.

cercatrova 5y ago

I wonder if PG started YC after writing this and thinking, I can do better.

ganeshkrishnan 5y ago
You can't. YC is a VC with a different coat. Unfortunately when time and money is limited there will always be fat cats and starving dogs. There will always be worthy startups left behind and unworthy startups getting money. The successful ones are only successful because of the immense money they get.

dmitriid 5y ago

> And of course giant investments mean giant valuations. They have to This reads like satire these days because so many of YC's top companies are exactly that: companies losing hundreds of millions, or even billions of investor money every year, but all having insane valuations [1] https://www.ycombinator.com/topcompanies/ https://www.ycombinator.com/topcompanies/

forgingahead 5y ago
You either die a hero, or live long enough to (join) the villains.

yashap 5y ago

> The huge investments themselves are something founders would dislike, if they realized how damaging they can be. VCs don't invest $x million because that's the amount you need, but because that's the amount the structure of their business requires them to invest. Like steroids, these sudden huge investments can do more harm than good. Google survived enormous VC funding because it could legitimately absorb large amounts of money. They had to buy a lot of servers and a lot of bandwidth to crawl the whole Web. Less fortunate startups just end up hiring armies of people to sit around having meetings. I really saw this at the first startup I worked at. We did a massive VC round (I think the largest in Canadian tech history?), hired like absolute crazy after it. The company got bureaucratic and bloated, lost the ability to move quickly and efficiently, and never got it back. I still loved working there for the coworkers, management and interesting problems, but I don’t think the investment was good for the company long term. A company of ~150 people grew to ~1000 in a year, but I think the 1000 people got less done, with a lot less agility, than the 150. Not out of laziness, just too many people for the size of the business problem, which led to a lot of unnecessary communication/coordination overhead. Even disregarding the salary costs, I think had we stayed a lot smaller/leaner, we would have been able to move a lot faster, be more innovative, and ultimately become a larger/more successful company.

ganeshkrishnan 5y ago
element.ai?
- yashap 5y ago
  Hootsuite, though I’m sure many startups have similar stories.
  - ido 5y ago
    I've worked in a bunch of companies that experienced similar (in %) growth & similar results.
  - altdataseller 5y ago
    Not sure if you still have shares but heard they are doing an IPO so you might get a small windfall?

panabee 5y ago

most VCs are soccer stars. startups are basketball. soccer and basketball are conceptually similar. both involve teams of players dribbling, passing, and shooting into goals. both require agility, teamwork, and endurance to succeed. yet they differ in key dimensions to the point where no one assumes skill in one translates to the other. similarly, investing and entrepreneurship share much in common but diverge in key areas. two cardinal rules of investing are: (1) diversify and (2) don't lose money. in entrepreneurship, these are cardinal sins. because of limited resources, startups fail when their bets aren't concentrated. startups also fail when prematurely optimizing costs because innovation is inherently wasteful. to be clear, many VCs offer immense value and are instrumental to startup success. most are extremely intelligent and business savvy. the best ones adopt advisory roles, not managerial ones, providing insights and guidance that alter company trajectories, recognizing that it is your vision and drive, not their capital, that produces lucrative exits and world-changing companies. if you have an opportunity to partner with talented and trustworthy VCs, strongly consider the option. the simplest heuristic for evaluating VCs is this: if you removed capital from the equation, would you still hire them as your boss?

pototo666 5y ago
> In entrepreneurship, these are cardinal sins. because of limited resources, startups fail when their bets aren't concentrated. startups also fail when prematurely optimizing costs because innovation is inherently wasteful. As a founder who strugglews with concentration, I found that your insight is gold.

supernova87a 5y ago

I personally have seen this, as a manager at a major company involved in obtaining certain data services from VC-backed startups (by now, medium-sized several-year-old companies). I completely agree with the idea -- the VC-backed startup is completely incentivized to inflate deals to hit dumb revenue targets, regardless of how much it hurts (and they know it), really hurts them operationally to deliver. And when this happens at some point (usually quite soon), their priorities about the product take a back seat to simply pulling in as much revenue as possible. At least we get to rake them over the coals and extract some ridiculously good prices for the product we buy while we do it, but man it's painful for both us and them at the same time. All for some valuation. I see the CEO putting himself through a total hell to do this, and I ask "why are you doing this"? It's too late. They sold themselves to that world, and now have to live with the consequences. edit to note: in the OP article, it points to a further essay written by Phil Greenspun in 2001 on his experience with VCs. It's funny and really interesting on its own. One small thing I noticed at the bottom is that the first comment is written by Aaron Swartz.

chrischapman 5y ago
Wow - he would have been 14 years old. Also, the second comment is from Dave Winer.

_xnmw 5y ago

VC money can be incredibly damaging to a startup because it increases your options. In finance, optionality is good, in entrepreneurship it is a distraction. To achieve focus and speed, you want fewer options, not more. Even simply parking your money in treasury bills and focusing on your mission is not easy, because the option exists. Necessity is the mother of invention. As Steve Jobs said, you want to "stay hungry, stay foolish" [1], because nothing drives human beings like sheer pain and neediness. [1] https://english.stackexchange.com/questions/44538/what-does-the-phrase-stay-hungry-stay-foolish-mean https://english.stackexchange.com/questions/44538/what-does-...

yesimahuman 5y ago
VC $ decreases your options considerably in my experience. But perhaps we’re talking about different kinds of optionality

notRobot 5y ago

> [1] After Greylock booted founder Philip Greenspun out of ArsDigita, he wrote a hilarious but also very informative essay about it. Anyone have a link to this essay? I performed a few web searches but couldn't find it

acrump 5y ago
https://random.waxy.org/arsdigita/ https://random.waxy.org/arsdigita/
- notRobot 5y ago
  Thanks!

zby 5y ago

evancoop 5y ago

The strongest argument in favor of VC would be the ability to deliver capital where otherwise none would be available, the ability to generate above-market returns (at least circumstantial evidence of offering value), and the experience/insights that emerge from experience with other startups. The counter-argument would be, as PG alludes, the best VCs don't act like most of the others, the massive capital their business model requires them to invest causes misaligned incentives with respect to founders (e.g. the founder is happy to sell for $15M, but the VC folks are not), and there's a fair bit of IP security concern. The bottom-line suggests a revisiting of incentives from both parties. Founders need some access to the VCs broader returns (possibly even offering their insight into OTHER businesses under the VC's flag) and VCs need to assess their returns over much larger temporal horizons than most funds will consider.

phkahler 5y ago

So why has PG allowed YC to become so VC focused and less about founders bootstrapping?

phgn 5y ago

> lately I've been learning more about how the VC world works PG started YCombinator the same year this was written. Did he state somewhere how he planned to address the VC incentive issues pointed out here?