
The Cost of VC Money: Loss of Control - djug
http://blog.besnappy.com/2014/05/cost-vc-money-loss-control/
======
tomblomfield
This article seems to reflect a trend in the last few years of hating on VCs &
high-growth startups in favor of bootstrapped lifestyle businesses.

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](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.

------
michaelochurch
_the simple fact remains that when your company is funded by other people’s
money, you are no longer your own boss._

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.

~~~
seanmccann
There are businesses that should raise VC and those that should not. Odds are
most people's business are not high growth, VC fueled rocket ships that fit in
that model. Some businesses are not possible without a large capital
injection.

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.

~~~
not_that_noob
> Some businesses are not possible without a large capital injection.

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.

~~~
nostrademons
I'm not sure I would call either Bill Gates or Mark Zuckerburg inexperienced.
Microsoft was Gates's second startup (the first was Traf-O-Data), he'd also
done several successful consulting projects, his mom was a board member on
United Way, and his grandfather was a national bank president. Facebook was
Mark Zuckerburg's third startup - the second, Synapse Media Player, had
received a $M+ buyout offer from Microsoft while Zuck was still in high
school. And even then he hired Sheryl Sandburg to ensure that all the daily
operations of a major company were covered.

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.

~~~
yuhong
On the no poach agreement scandal this comment suggest that Eric Schmidt
should apologize (yea, I know "Jonathan Rosemberg" has already resigned from
Google):

[https://news.ycombinator.com/item?id=7733775](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.

------
gmisra
Honest question: is this idea really something people courting investment are
unaware of:

"Investors are not in the same business you are"

And if so, why are those entrepreneurs surprised? What are their expectations?

------
coreymgilmore
VC money is like debt and when you are in debt, you have to answer to someone
else. Even if you have a majority stake, the person who is funding you
ultimately has a pretty significant say in the operations of the business.
And, as always, investing is about making money and investors hate losing.

------
puppetmaster3
To say that it is inevitable is silly.

Plenty of examples of founders that have control.

