Venture Capital and the Modern Startup – Building a Company is a Team Sport August 28, 2008Posted by John in social media, Technology.
Tags: Scott Rafer, startups, venture capital
A post today called Fuck the VCs caught my attention. I’ve been a full time entrepreneurs for over 10 years now and have tons of experience with VCs. Heck alot of my friends are VCs – “not that there is anything wrong wit that”.
The fact is that VCs have lost their abiity to do early stage deals at scale. My good friend Scott Rafer makes a great point – their behavior is more around the market. VCs are institutional investors – they aren’t a hands on mgt consulting firm. Some firms act like they are mgt consulting firms and that they know better than the founders – stay away from those. My advice on VC firms is to stay away from partners that can’t remember what was discussed at the last board meeting. Then unilaterally run the company from the board. VCs playing entrepreneur is not their job. So stay away from those.
My advice for entrepreneurs is try to own >51% of your company for as long as you can. Scott Rafer had a strong comment on the F VCs post – Scott says.. “This is good advice packaged but packaged in a terribly destructive way. I certainly try and design my startups to work well on bootstrapping or angel money, delaying institutional VC indefinitely. That MO tends to be much better for founder equity and employee returns, user-responsive product design, growing at a speed that is good for the company, etc.
On the other hand, WTF? Take a cold shower or something. The level of anger being displayed here has no place in this discussion or this community. Every market segment has its bad actors, both at the individual and corporate granularities. VC doesn’t have a greater share of bad actors than the ecommerce or gaming sectors. Large-scale, software VC is simply a formerly great business in decline, and there are a lot of good, smart people who haven’t made in VC yet who are worried about their (and their families’) economic futures. It’s not evil — it’s their job and they may not feel they can switch. This is a group of very smart people who are fighting for ever-fewer capital-intensive deals, and it’s getting ugly. Their economics are clear, and the bigger the fund the worse the problem.
Fred Wilson’s been publishing a good series of posts on VC economics. In the latest one [link below], he inadvertently outs one of the main problems with running a VC-backed startup. When your business is doing well, the VCs have have every incentive to push you to take more money you may not need — it’s the only way they can be as profitable as they need to be. Fred’s got a relatively small fund, great empathy with entrepreneurs, and is near the top of the heap for any number of reasons. However, he has that same problem — the interests of the Common Stock held by the founders/employees and the interests of the Preferred Stock held by the VCs is divergent in many, many more cases than the Conventional Wisdom suggests. It’s the reason why the VC asked about 100 iPhone apps, et al.
The software VCs are in a different business than we are, but one that is largely dependent on us. It’s a business that used to overlap with ours heavily but where the overlap is decreasing more quickly than capital could ever leave the sector. That leads to market consolidation, market share fights, and VCs requesting startups perform unnatural acts — all of which are ugly, and none of which are evil…
As Scott points out that might be through a series b round. My goals for companies is to bootstrap them to own at least 51% after a b-round. The only way to do that is to bootstrap the seed portion to increase the early value. Then taking money on the business and founders terms makes sense.
VCs are not the problem it’s more of the market. Building companies is a team sport and in some cases you need VCs on the team – some cases you don’t.
Scott Rafer has it correct above – certainly try and design my startups to work well on bootstrapping or angel money, delaying institutional VC indefinitely. That MO tends to be much better for founder equity and employee returns, user-responsive product design, growing at a speed that is good for the company, etc.
Building a company is a team sport and sometimes VCs are on the team – and there is nothing wrong with taht – just pick the right guys/gals. When you don’t pick the right teammates everything goes south.