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VCs have some sort of superstar economics going. The highest potentials hit the superstars VCs first, and get picked up. Second tier goes to second tier VCs and

by wjnc 11y ago

VCs have some sort of superstar economics going. The highest potentials hit the superstars VCs first, and get picked up. Second tier goes to second tier VCs and so on. The market sorts itself out. So when a first tier VC disses lower tiers for 'not adding value', he is probably stating the truth, but sadly there is no alternative. The superstars can't scale up without lowering the bars somewhere, so they don't. The companies looking for VC can't be too picky since no capital is no chance of traction. So in the end, you'll settle for the capital you can get and take the reduced value as a given. Remember that the outside option (no VC) gives no value, and the negative value is relative.

curiouscats 11y ago
His criticism isn't that 2nd tier VCs have lower returns. It seems to me your point would make sense if his criticism was of 2nd tier VCs for lower returns. Since that isn't a fair comparison if they don't get a shot at the best deals. I think his criticism is pretty obviously that VC often don't add value (no matter what tier they are at). The things mentioned in the article seem be criticisms of business as usually (not of some performers getting lower rates of return). It strikes me he realizes some VCs provide great help. And sure the cash is often helpful in growing though the growing quickly may well not really be good for the business when it distorts the companies focus to making huge financial bets to get huge returns. @dhh provides lots of good criticism of VC funding, in my opinion. Watching his activity or going through his history would provide more details on the problems created by accepting VC funding. Of course, lots of people with lots of money don't see things the same way he does.
gjm11 11y ago
This dynamic will tend to make "superstar" VCs look as if they're better (relative to other VCs) than they actually are. (Because every startup will want to be funded by them, so they get to pick the most promising ones, and if VCs have any ability to distinguish good prospects from bad then the superstars will tend to get better results than their rivals who funded the startups rejected by the superstars.)
mpdehaan2 11y ago
I liked the part about making sure those that joined the company left to get startup experience for a while.
s73v3r 11y ago
Wait, why is VC the only option? What happened to the old fashioned way of getting money, taking a business loan?
- pge 11y ago
  It depends on your business model. For companies that require capital to build product before being able to sell, and thus don't have near term positive cash flow to pay off loans, debt is usually impossible to find. Only equity capital (i.e. VC or angel money) is willing to take that risk.

by wjnc 11y ago

curiouscats 11y ago

His criticism isn't that 2nd tier VCs have lower returns. It seems to me your point would make sense if his criticism was of 2nd tier VCs for lower returns. Since that isn't a fair comparison if they don't get a shot at the best deals. I think his criticism is pretty obviously that VC often don't add value (no matter what tier they are at). The things mentioned in the article seem be criticisms of business as usually (not of some performers getting lower rates of return). It strikes me he realizes some VCs provide great help. And sure the cash is often helpful in growing though the growing quickly may well not really be good for the business when it distorts the companies focus to making huge financial bets to get huge returns. @dhh provides lots of good criticism of VC funding, in my opinion. Watching his activity or going through his history would provide more details on the problems created by accepting VC funding. Of course, lots of people with lots of money don't see things the same way he does.

gjm11 11y ago

This dynamic will tend to make "superstar" VCs look as if they're better (relative to other VCs) than they actually are. (Because every startup will want to be funded by them, so they get to pick the most promising ones, and if VCs have any ability to distinguish good prospects from bad then the superstars will tend to get better results than their rivals who funded the startups rejected by the superstars.)

mpdehaan2 11y ago

I liked the part about making sure those that joined the company left to get startup experience for a while.

s73v3r 11y ago

Wait, why is VC the only option? What happened to the old fashioned way of getting money, taking a business loan?

pge 11y ago
It depends on your business model. For companies that require capital to build product before being able to sell, and thus don't have near term positive cash flow to pay off loans, debt is usually impossible to find. Only equity capital (i.e. VC or angel money) is willing to take that risk.