8 ms·

An Engineer's View of Venture Capitalists (2001)

175 points by dandrewsen 13y ago

simplekoala 13y ago
There is a treasure trove of wisdom in this article for all starry-eyed engineers coming to valley with dreams to eventually start a company someday. I realize that starting a company by itself is a poor goal and slightly narcissistic but I am intentionally using it as I have heard many engineers say, "I want to start a company one day" instead of saying "I want to solve a problem because I am passionate about it, and my solution will solve a real-problem in the world today or make the world a slightly better place or makes it suck less"
beachstartup 13y ago
in summary, these people are sharks. watch out. if possible, fund yourself. why should anyone else believe in you, if you don't believe in yourself?
rthomas6 13y ago
So what happened with the idea to use programmable logic for firewalls? That idea still seems really doable. Has anything happened with that?
- vickiku88 13y ago
  that was my first thought too :)
- vinceguidry 13y ago
  Another thing I don't understand is why didn't they just slap a microprocessor and a simple interface on it and call it a day. Seems like that would be an easy value-add.
ganeumann 13y ago
The article is interesting. More interesting is that it was written 12 years ago and about a period of time starting in 1987. It could have been (and probably a clone was) written this year. Despite pretty much everything about how a startup is financed changing, the dynamic between the founders and funders has not. I think that means that it is more than an educational issue, it must be a structural one.
- simplekoala 13y ago
  The structural and core part of the issue gets muddled due to poor education/know-how among engineers (partly due to excellent marketing by VCs). See below an excerpt from Alex Payne's article at https://al3x.net/2013/05/23/letter-to-a-young-programmer.html https://al3x.net/2013/05/23/letter-to-a-young-programmer.htm... " ... As a VC at a top-tier Sand Hill Road firm told me during a pitch several years ago when describing a conceptual feature in Simple that would let users easily and regularly donate a portion of their savings to charity, “let’s not waste time on that stuff; we’re here to make money” ... ". There are a breed of VC's who project themselves as if their sole purpose in life is to help entrepreneurs realize their dreams and that there is a higher purpose for their VC avatar. Some believe it and mean it, and some pretend (It is important to keep up the pretenses in this business lest you get shunned by all starry-eyed entrepreneurs who come to valley to change the world). VC's exist to help their investors make money. They have a fiduciary duty to do so. When you are giving away a good part of your life (sleep, money) in pursuit of a dream, and getting into a financial transaction with VCs to do so; It is vital for you to understand how they operate, how they make decisions, are incentivized to behave, and also be cognizant of their true (ulterior?) motives. VC's are a vital part of the startup eco-system. I am not against them or how they operate. They are smart enough to be politically right and make themselves desirable to entrepreneurs. All I am trying to say there is usually information/knowledge/expectation asymmetry (as pointed out in the article) when engineers are getting into financial transactions with VCs, and that they need to be cognizant and work on ways to mitigate this. [Edits for typos/grammer. Added two sentences at the end]
  - deleted 13y ago
    [deleted]
  - ganeumann 13y ago
    Well, funny you used that example because I was the first venture investor in Simple. I invested because of the founders' passion to change the world and rid us of the evil banks. But I knew that if they even made the slightest progress towards this worthy goal we would all make money. Making money and making customers' lives better go hand-in-hand, in the long run. Anyway, that digression aside, I am not sure if the information asymmetry is the whole story here. These articles (and books and talks and etc.) meant to educate founders so that VCs don't screw another generation of them have been written since, at least, the 70s. Either nobody reads them or it just doesn't matter when they do. If the latter, maybe we need a better understanding of the problem so we can solve it.
applecore 13y ago
Paul Graham has said that any company that hires you is, economically, acting as a proxy for the customer. The rate at which they value you (salary + equity + bonus) is an attempt to estimate your value to their customers. As an engineer starting your own company, you're appealing their judgement and opting to be valued directly by users. But wait! The venture capitalist that invests in you is also acting as a proxy, only for the limited partners. Can you appeal the venture capitalist's judgement and opt to be valued directly by investors, angels or otherwise?
- derefr 13y ago
  > Can you appeal the venture capitalist's judgement and opt to be valued directly by investors, angels or otherwise? This is what IPOs were supposed to be for, until Sarbanes-Oxley. They were like Kickstarters where the backer-rewards were equity! ;)
spiritplumber 13y ago
This engineer's view of venture capitalists (2013): They are a valid source of protein.
- untog 13y ago
  Oh, what a charmingly naive view. VCs will still chew up your dreams when you're not looking.
unono 13y ago
Crowdfunding will replace venture capital, and investing itself to a large extent. You don't need investment, you make the case to customers directly and they prepay you.
- gallerytungsten 13y ago
  It would be nice if this were true. But it seems rather unlikely, as even the biggest hits of crowdfunding have been on the low side of VC funding amounts. Crowdfunding might eventually yield 100M rounds, but that doesn't seem likely to happen anytime soon.
- asenna 13y ago
  A good VC brings a lot more to the table than just money. Crowdfunding cannot replace that.
  - dragonwriter 13y ago
    > A good VC brings a lot more to the table than just money. Crowdfunding cannot replace that. Crowdfunding replaces the money piece. The other bits are knowledge which the startup might need to purchase separately. Whether that will be more or less efficient than purchasing them together for startups that need both is, perhaps, unclear, but at least some startups will really only need the money (which, obviously, won't necessarily be the same ones that think they only need the money, but that's life.)
thebokehwokeh2 13y ago
VCs are like the house in Las Vegas - they try to make lots of bets and take a disproportionate share of equity, so they usually make money (but not always). Most just follow the lead of VCs who do know what they are doing (in picking good companies).
fowkswe 13y ago
Everyone wanting to start a company should read this book. Then proceed. http://www.slicingpie.com/ http://www.slicingpie.com/
ChuckMcM 13y ago
I've talked with Nick (the author) on several occasions, he was regular contributor at Microprocessor Forum. He is a really awesome guy. That said, he's also got a lot of scars from the dot com era (many of us do) and I suspect if he rewrote this piece today, he might see it differently (or not). I've been told that it is easier to accumulate a lot of money if you are soulless. That allows you to take advantage of things that cause emotional stress and financial harm to others who are unable or unwilling to prevent you from taking their money in a "perfectly legal"[1] way. So when select randomly from the population of people who are very wealthy, your chance of picking someone who has your interests second to theirs is better than 50/50. It may by 3:1 (if you believe Vinod's comments at TechCrunch). To survive you have to not take it personally, and expect it to occur. Generally even the 'nice' VCs understand that it makes sense to take this position. You always have to compartmentalize dealing with people in "business" and dealing with them "socially." [1] This phrase was often code for taking money from someone that may or may not have wanted to give you that money, and yet did not involve fraud or violating any laws. In the 90's it was "perfectly legal" to create a company and take it public to 'retail investors' where the first round cashes out the founders and VCs to the tune of several million while knowing the people reading the prospectus didn't "get it."
- sliverstorm 13y ago
  Is the Microprocessor Report still a worthwhile mag?
  - sliverstorm 13y ago
    *note: it's of course not a magazine, but I wasn't sure what to call it... "publication"?
- simonebrunozzi 13y ago
  "it is easier to accumulate a lot of money if you are soulless" Interesting point. I believe it to be true, but haven't found any proof or good evidence. Any help?
  - 13y ago
yesimahuman 13y ago
> The VC connects wealthy investors to nerds. There are few alternatives. You can self-fund by consulting and by setting aside money for your venture. That doesn't work. Not to blow the bootstrap whistle, but 2001 was a different time for starting companies. I'm seeing a lot of nerds just making money and self-funding, and I think the costs of starting have come dramatically down. It's an interesting change.
- malandrew 13y ago
  The costs have come down in many ways but one, labor, which is now going up. For the last 5 years or so, we've seen a proliferation of startups that provide SaaS, PaaS and IaaS services to startups and other small businesses. However this ease of creating a startup has greatly increased the amount of competition in the market. As a result, you will end up paying more per engineer per year and you will probably end up needing more roles than 2 founders can fill on their own. Gone are the days when a hacker and a hustler were all that were needed. Today, for many types of startups, you are also expected to have a solid designer, who either needs to be one of the founders or you need to hire.
  - yesimahuman 13y ago
    Good point. I remember being told as a kid to not become a programmer. That was before kids out of college were pulling $120k building apps :)
asenna 13y ago
> You can self-fund by consulting and by setting aside money for your venture. That doesn't work. Why does this not work?
- vickiku88 13y ago
  I think he is speaking of the opportunity cost. it is the conservative way to generate funds, but not the most efficient in the end.
  - alwold 13y ago
    It probably also depends on what you are trying to build. His initial example of building chips would probably be nearly impossible without a pretty big up front investment. If you are building something with software, it is a lot more likely that you could self fund.
- jessedhillon 13y ago
  This was in 2001 where just a single server colo would cost ~$300/mo. Other costs have come down as well, while technologies have developed to make a full stack web app development possible for a single person to do. The average dev is easily 10x more capable today than 12 years ago.
diziet 13y ago
This whole essay is from a pre-incubator era. Going through YC/Angelpad, etc and having the benefit of the structure and demo day dynamics changes the early part of the investor/founder dynamics greatly, where things aren't 'so' bad.
auctiontheory 13y ago
It's financial; it's not technical or personal. To the VC, the engineer and the ideas are commodities. I believe this is the key. I'm not sure what the alternative might be. If engineers joined forces to raise a venture fund, I don't see why this fund would be any different. The engineer-managers would be subject to the same pressures that other VCs are - pretty soon they would operate just the same. (Why wouldn't they?)
not_that_noob 13y ago
What an amazingly true piece! I speak as one who has been an executive in several startups, and have seen the VC animal up close and personal. I think if you are doing software (web or mobile apps - even enterprise if you do it carefully) today, and are reasonably smart, you have more leverage over the VC than ever before. Take the Google guys or Zuck - or any number of founders who understand how to win at that game. Smart founders take money on their terms, deal with VCs who respect them and stay in control of their destiny. Old school VC firms are falling away (albeit slowly) on Sand Hill, while the new breed (YC, AH, etc.) are dominating deal flow and results. Things have changed for the better.
mathattack 13y ago
My impression is that some of this has changed. The VCs I know are either domain experts or ex-engineers. Some are both. There also isn't a dearth of angel funding any more. Many angels are ex-entrepreneurs. This doesn't solve some of the principal-agent problems, but it's not as dire as the dot-bomb bust.
spullara 13y ago
As an engineer, founder and now a VC I can see his side, especially from the lens of 2001. My hope though is that most see that some of the worst things he has to say are just not true anymore in the industry.
paul_f 13y ago
Prospective starlets used to go to Hollywood and get literally screwed. Engineers now go to the Valley and only get metaphorically screwed. I guess that's progress.
- avn2109 13y ago
  What on earth makes you think prospective starlets have stopped getting literally screwed?
GalacticDomin8r 13y ago
I've viewed the Angel/VC infrastructure as the modern form of slavery once I understood the details.
michaelochurch 13y ago
That kind of nonsense is why I left VC-istan. Amazing how little has changed (in terms of VC behavior) over the past 12 years. VC is in danger of becoming a second-tier avenue. As soon as a credible, scalable alternative comes in, no one's going to deal with that nonsense. The collusion, aggressive management, age discrimination (in a field where you don't know what you're doing until 10-15 years in at least), insistence on locating in an extremely expensive place, and disproportionate reward for degenerate risk-seeking (with others' money and careers) are going to doom them eventually-- although I have no idea when "eventually" will be. Whatever happened to passive investors who were happy to let smart people work magic? I feel like most of the world is people injecting noise into already-working processes just to have it be their noise.
- yuhong 13y ago
  I hope you also have read https://news.ycombinator.com/item?id=6369626 https://news.ycombinator.com/item?id=6369626

175 points by dandrewsen 13y ago

There is a treasure trove of wisdom in this article for all starry-eyed engineers coming to valley with dreams to eventually start a company someday. I realize that starting a company by itself is a poor goal and slightly narcissistic but I am intentionally using it as I have heard many engineers say, "I want to start a company one day" instead of saying "I want to solve a problem because I am passionate about it, and my solution will solve a real-problem in the world today or make the world a slightly better place or makes it suck less"

beachstartup 13y ago

in summary, these people are sharks. watch out. if possible, fund yourself. why should anyone else believe in you, if you don't believe in yourself?

rthomas6 13y ago

So what happened with the idea to use programmable logic for firewalls? That idea still seems really doable. Has anything happened with that?

vickiku88 13y ago
that was my first thought too :)
vinceguidry 13y ago
Another thing I don't understand is why didn't they just slap a microprocessor and a simple interface on it and call it a day. Seems like that would be an easy value-add.

ganeumann 13y ago

The article is interesting. More interesting is that it was written 12 years ago and about a period of time starting in 1987. It could have been (and probably a clone was) written this year. Despite pretty much everything about how a startup is financed changing, the dynamic between the founders and funders has not. I think that means that it is more than an educational issue, it must be a structural one.

simplekoala 13y ago
The structural and core part of the issue gets muddled due to poor education/know-how among engineers (partly due to excellent marketing by VCs). See below an excerpt from Alex Payne's article at https://al3x.net/2013/05/23/letter-to-a-young-programmer.html https://al3x.net/2013/05/23/letter-to-a-young-programmer.htm... " ... As a VC at a top-tier Sand Hill Road firm told me during a pitch several years ago when describing a conceptual feature in Simple that would let users easily and regularly donate a portion of their savings to charity, “let’s not waste time on that stuff; we’re here to make money” ... ". There are a breed of VC's who project themselves as if their sole purpose in life is to help entrepreneurs realize their dreams and that there is a higher purpose for their VC avatar. Some believe it and mean it, and some pretend (It is important to keep up the pretenses in this business lest you get shunned by all starry-eyed entrepreneurs who come to valley to change the world). VC's exist to help their investors make money. They have a fiduciary duty to do so. When you are giving away a good part of your life (sleep, money) in pursuit of a dream, and getting into a financial transaction with VCs to do so; It is vital for you to understand how they operate, how they make decisions, are incentivized to behave, and also be cognizant of their true (ulterior?) motives. VC's are a vital part of the startup eco-system. I am not against them or how they operate. They are smart enough to be politically right and make themselves desirable to entrepreneurs. All I am trying to say there is usually information/knowledge/expectation asymmetry (as pointed out in the article) when engineers are getting into financial transactions with VCs, and that they need to be cognizant and work on ways to mitigate this. [Edits for typos/grammer. Added two sentences at the end]
- deleted 13y ago
  [deleted]
- ganeumann 13y ago
  Well, funny you used that example because I was the first venture investor in Simple. I invested because of the founders' passion to change the world and rid us of the evil banks. But I knew that if they even made the slightest progress towards this worthy goal we would all make money. Making money and making customers' lives better go hand-in-hand, in the long run. Anyway, that digression aside, I am not sure if the information asymmetry is the whole story here. These articles (and books and talks and etc.) meant to educate founders so that VCs don't screw another generation of them have been written since, at least, the 70s. Either nobody reads them or it just doesn't matter when they do. If the latter, maybe we need a better understanding of the problem so we can solve it.

applecore 13y ago

Paul Graham has said that any company that hires you is, economically, acting as a proxy for the customer. The rate at which they value you (salary + equity + bonus) is an attempt to estimate your value to their customers. As an engineer starting your own company, you're appealing their judgement and opting to be valued directly by users. But wait! The venture capitalist that invests in you is also acting as a proxy, only for the limited partners. Can you appeal the venture capitalist's judgement and opt to be valued directly by investors, angels or otherwise?

derefr 13y ago
> Can you appeal the venture capitalist's judgement and opt to be valued directly by investors, angels or otherwise? This is what IPOs were supposed to be for, until Sarbanes-Oxley. They were like Kickstarters where the backer-rewards were equity! ;)

spiritplumber 13y ago

This engineer's view of venture capitalists (2013): They are a valid source of protein.

untog 13y ago
Oh, what a charmingly naive view. VCs will still chew up your dreams when you're not looking.

unono 13y ago

Crowdfunding will replace venture capital, and investing itself to a large extent. You don't need investment, you make the case to customers directly and they prepay you.

gallerytungsten 13y ago
It would be nice if this were true. But it seems rather unlikely, as even the biggest hits of crowdfunding have been on the low side of VC funding amounts. Crowdfunding might eventually yield 100M rounds, but that doesn't seem likely to happen anytime soon.
asenna 13y ago
A good VC brings a lot more to the table than just money. Crowdfunding cannot replace that.
- dragonwriter 13y ago
  > A good VC brings a lot more to the table than just money. Crowdfunding cannot replace that. Crowdfunding replaces the money piece. The other bits are knowledge which the startup might need to purchase separately. Whether that will be more or less efficient than purchasing them together for startups that need both is, perhaps, unclear, but at least some startups will really only need the money (which, obviously, won't necessarily be the same ones that think they only need the money, but that's life.)

thebokehwokeh2 13y ago

VCs are like the house in Las Vegas - they try to make lots of bets and take a disproportionate share of equity, so they usually make money (but not always). Most just follow the lead of VCs who do know what they are doing (in picking good companies).

fowkswe 13y ago

Everyone wanting to start a company should read this book. Then proceed. http://www.slicingpie.com/ http://www.slicingpie.com/

ChuckMcM 13y ago

I've talked with Nick (the author) on several occasions, he was regular contributor at Microprocessor Forum. He is a really awesome guy. That said, he's also got a lot of scars from the dot com era (many of us do) and I suspect if he rewrote this piece today, he might see it differently (or not). I've been told that it is easier to accumulate a lot of money if you are soulless. That allows you to take advantage of things that cause emotional stress and financial harm to others who are unable or unwilling to prevent you from taking their money in a "perfectly legal"[1] way. So when select randomly from the population of people who are very wealthy, your chance of picking someone who has your interests second to theirs is better than 50/50. It may by 3:1 (if you believe Vinod's comments at TechCrunch). To survive you have to not take it personally, and expect it to occur. Generally even the 'nice' VCs understand that it makes sense to take this position. You always have to compartmentalize dealing with people in "business" and dealing with them "socially." [1] This phrase was often code for taking money from someone that may or may not have wanted to give you that money, and yet did not involve fraud or violating any laws. In the 90's it was "perfectly legal" to create a company and take it public to 'retail investors' where the first round cashes out the founders and VCs to the tune of several million while knowing the people reading the prospectus didn't "get it."

sliverstorm 13y ago
Is the Microprocessor Report still a worthwhile mag?
- sliverstorm 13y ago
  *note: it's of course not a magazine, but I wasn't sure what to call it... "publication"?
simonebrunozzi 13y ago
"it is easier to accumulate a lot of money if you are soulless" Interesting point. I believe it to be true, but haven't found any proof or good evidence. Any help?
- 13y ago

yesimahuman 13y ago

> The VC connects wealthy investors to nerds. There are few alternatives. You can self-fund by consulting and by setting aside money for your venture. That doesn't work. Not to blow the bootstrap whistle, but 2001 was a different time for starting companies. I'm seeing a lot of nerds just making money and self-funding, and I think the costs of starting have come dramatically down. It's an interesting change.

malandrew 13y ago
The costs have come down in many ways but one, labor, which is now going up. For the last 5 years or so, we've seen a proliferation of startups that provide SaaS, PaaS and IaaS services to startups and other small businesses. However this ease of creating a startup has greatly increased the amount of competition in the market. As a result, you will end up paying more per engineer per year and you will probably end up needing more roles than 2 founders can fill on their own. Gone are the days when a hacker and a hustler were all that were needed. Today, for many types of startups, you are also expected to have a solid designer, who either needs to be one of the founders or you need to hire.
- yesimahuman 13y ago
  Good point. I remember being told as a kid to not become a programmer. That was before kids out of college were pulling $120k building apps :)

asenna 13y ago

> You can self-fund by consulting and by setting aside money for your venture. That doesn't work. Why does this not work?

vickiku88 13y ago
I think he is speaking of the opportunity cost. it is the conservative way to generate funds, but not the most efficient in the end.
- alwold 13y ago
  It probably also depends on what you are trying to build. His initial example of building chips would probably be nearly impossible without a pretty big up front investment. If you are building something with software, it is a lot more likely that you could self fund.
jessedhillon 13y ago
This was in 2001 where just a single server colo would cost ~$300/mo. Other costs have come down as well, while technologies have developed to make a full stack web app development possible for a single person to do. The average dev is easily 10x more capable today than 12 years ago.

diziet 13y ago

This whole essay is from a pre-incubator era. Going through YC/Angelpad, etc and having the benefit of the structure and demo day dynamics changes the early part of the investor/founder dynamics greatly, where things aren't 'so' bad.

auctiontheory 13y ago

It's financial; it's not technical or personal. To the VC, the engineer and the ideas are commodities. I believe this is the key. I'm not sure what the alternative might be. If engineers joined forces to raise a venture fund, I don't see why this fund would be any different. The engineer-managers would be subject to the same pressures that other VCs are - pretty soon they would operate just the same. (Why wouldn't they?)

not_that_noob 13y ago

What an amazingly true piece! I speak as one who has been an executive in several startups, and have seen the VC animal up close and personal. I think if you are doing software (web or mobile apps - even enterprise if you do it carefully) today, and are reasonably smart, you have more leverage over the VC than ever before. Take the Google guys or Zuck - or any number of founders who understand how to win at that game. Smart founders take money on their terms, deal with VCs who respect them and stay in control of their destiny. Old school VC firms are falling away (albeit slowly) on Sand Hill, while the new breed (YC, AH, etc.) are dominating deal flow and results. Things have changed for the better.

mathattack 13y ago

My impression is that some of this has changed. The VCs I know are either domain experts or ex-engineers. Some are both. There also isn't a dearth of angel funding any more. Many angels are ex-entrepreneurs. This doesn't solve some of the principal-agent problems, but it's not as dire as the dot-bomb bust.

spullara 13y ago

As an engineer, founder and now a VC I can see his side, especially from the lens of 2001. My hope though is that most see that some of the worst things he has to say are just not true anymore in the industry.

paul_f 13y ago

Prospective starlets used to go to Hollywood and get literally screwed. Engineers now go to the Valley and only get metaphorically screwed. I guess that's progress.

avn2109 13y ago
What on earth makes you think prospective starlets have stopped getting literally screwed?

GalacticDomin8r 13y ago

I've viewed the Angel/VC infrastructure as the modern form of slavery once I understood the details.

michaelochurch 13y ago

That kind of nonsense is why I left VC-istan. Amazing how little has changed (in terms of VC behavior) over the past 12 years. VC is in danger of becoming a second-tier avenue. As soon as a credible, scalable alternative comes in, no one's going to deal with that nonsense. The collusion, aggressive management, age discrimination (in a field where you don't know what you're doing until 10-15 years in at least), insistence on locating in an extremely expensive place, and disproportionate reward for degenerate risk-seeking (with others' money and careers) are going to doom them eventually-- although I have no idea when "eventually" will be. Whatever happened to passive investors who were happy to let smart people work magic? I feel like most of the world is people injecting noise into already-working processes just to have it be their noise.

yuhong 13y ago
I hope you also have read https://news.ycombinator.com/item?id=6369626 https://news.ycombinator.com/item?id=6369626