
Understanding VCs - ikeboy
http://avc.com/2016/08/understanding-vcs/
======
palakchokshi
From my experience I've found there are 3 types of VCs:

1\. The Product VC

These are people who built a great product(s) and exited and became VCs. They
know the roller coaster of making a product successful. They can provide great
advice. They can identify with the struggle and provide support. They are
informed about the industry because they are inherently curious people and
like to know about products. They also know what kind of person will most
probably succeed in navigating the turbulent waters of a start up and bring a
great product to market. These are the VCs to listen to.

2\. The "I won a lottery VC" These guys made a product that for some reason
(right timing, right connections, right team, product/market fit) became
hugely successful quickly and they exited. They had an idea for solving a
single pain point and it was the right pain point to solve. With their new
found wealth they behave like @johnwheeler's Shoe Button prince. Suddenly they
feel like they can pontificate on any industry. Unless your product is in the
same industry that the VC exited from take what these guys say with a grain of
salt.

3\. The Herd VC

These guys are the spray and pray variety or follow the herd variety. Both
these strategies will lead them to seem like they have the Midas touch because
a few of their investments will hit the blockbuster league. If you ask them
what made them invest in the blockbuster they will spew the generic things.
These are the guys whose money you take and ignore their advice because they
really don't know what they are talking about. Their well of knowledge is
shallow and wide so in your industry it won't be deep and narrow.

~~~
sickpostman
Ahaha. I agree with one minor modification. There is a fourth type that is
much more common outside of of SV, especially in New York: the "PE VC". These
are guys that should've been private equity guys, and they don't have
operating experience at startups, or tech companies. They have banking
backgrounds.

They look at deals through the lens of like "how am I teeing this up to be
acquired by who?"

They also retain a vestigial tendency to just look for deal volume, so they're
always trying to get one little startup to acquire another one, way to early,
in different businesses with different cultures and teams because of the
crummiest whiteboard reasoning about strategy or synergy. Like 'this company
makes speech-to-text IVR software, this company does food delivery...lets
merge the two and have voice-based food delivery.' That's actually not even a
bad enough example. But they seriously strongly prefer 'doing bad deals' to
'not doing deals' as if they were still living in a fee-based world.

These are the VCs you avoid.

~~~
mathattack
I would add that these PE VCs tend to view the world with Zero Sum Game
lenses. (If they win, I lose) They also tend to look harder at financial
engineering methods for getting value. This isn't bad in many situations, but
can be counterproductive when working through issues like product-market fit.

------
randomnames
Well, Fred is missing that not only he has seen thousand of pitches, but the
more mature the industry gets (media plus ecosystem), everybody has more data
at hand and an opinion.

Ironically his partner Albert Wenger is writing about it - Zero Marginal Cost
Society etc. In other words: Compared to 5 years ago, the VC business model is
about to see similiar effects the consulting industry experienced - they
simply don't have any advantage anymore plus they are competing with much more
and bigger (i.e. corporate) players.

One other misconception: To be honest, I think the only people that are
regarding his and other VC's writing, are people from the industry that are
maybe one "hierarchy level" (or magnitude of fund size) smaller then them.
Associates in accelerators etc. that are praising his genius or create the
social media buzz but are actually just trying to hitch hike on his
credibility. It's like pedding on each other's back because they regard each
other as insiders, but actually they have lost base with hardcore tech
innovation a long time ago (since moving into their ivory tower of we know so
so much more then average Joe)

Edit: ...especially since their bad gone bets become more and more obvious

~~~
haney
While there is an abundance of information available about companies that
allows those of us not sitting in pitch meetings every day to gain insight
into their growth there is still a material amount of private information that
VCs get to see.

I've been in meetings with our investors where they are able to throw out
information about other companies CAC or other unit economic information as
well as in the trenches information about customer acquisition/growth
strategies. Those aren't the kinds of things a company is going to put on
their blog. They definitely have privileged information.

~~~
randomnames
Sure, sure, that´s why they are still in business -- but as more information
are available for everybody, their competitive advantage is getting smaller
and smaller.

Plus 1: If you are not poised to be provided with infos provided by somebody
that wants to sell something, as instead much more crowdsourced channels,
certainly you have a different, i.e. much more biased view, on the world.
Think: People will only speak with them, once they are ready for funding.
Whereas people at different points in the ecosystem have a much more direct
access.

Plus 2: Humans are poised to a survivor bias. It´s in the human psych to
perceive only what accommodates your own world view. You made 5 bets on a
business model that becomes outdated, it will you take x times longer to
change your opinion. Especially as you always will try to justify your
decisions as VC towards their LPs.

~~~
mahyarm
Do you mean crowdsourced data as something on the level of business insider
articles and amazon reviews or similar?

VCs invest in new small companies where there often isnt much public info at
all to go on. As a potential investor you can demand a lot of info that even
employees cant get that can help evaluate the business.

~~~
randomnames
Mattermark / Crunchbase / evidence in their product itself ...

Thing is, eventually, that ventures are much faster in a public spotlight as
tech gets easier..

I agree on everything re startups only shedding a positive light on their
business - but if you are following a company disclosing x users in year 1 and
y users in year 2 (especially as they start fundraising /PR), it is no rocket
science anymore. Two more Google searches and you know the market size etc.
--- VCs used to have proprietary infos, that´s why they were put onto stages
to talk about their "magic" insights. But that has changed imho.

~~~
nostrademons
I'm a little skeptical of the accuracy of the info released to the public.

Thing is, companies lie when they talk to the press. Or they release a number
with no context behind it, which will be interpreted differently by outsiders
than insiders. Or the press _makes up_ a number when the company refuses to
release it. Or the company chooses not to get press coverage for an event
that's pretty important.

When I've had inside information about a story that later breaks in the tech
press, I'm always shocked at how differently it's perceived by readers of the
article vs. how I experienced it. Among startups & major feature launches I've
been party to, I've seen: executives that flat-out say that they're not
working on a product category when there's been a whole department devoted to
it for a year; startups that were founded 1.5 years before the dates listed in
Crunchbase/Wikipedia; reporters that count the number of people they meet in a
visit and report that as a the "team size", because the company refuses to
release that info; funding rounds that never make it to the press;
acquisitions that are reported as "for an undisclosed sum" but actually are
less than the founders would've made if they'd taken a salaried job at the
company; project start dates that are actually when the project was staffed up
to its current size and ignore the year or so that a small team spent working
on the problem (or the 3-4 years that _other_ small teams spent working on the
problem); and algorithms or other technologies that are widely reported as
being the core of the company's success, but actually aren't even used by the
company.

I figure that if such a high percentage of what I _do_ know about is
misreported, most of what I _don 't_ know about but hear from the tech media
is probably wrong too. Ironically, the effect of having a little inside
information isn't to make me feel well informed; it's to make me realize how
_uninformed_ everyone else is, often including top decision-makers at
companies.

------
20yrs_no_equity
There is a real dearth of VC critical perspective. The VC blog posts are not
just content marketing, but they are also self serving. This is natural as
you're going to write about things from your perspective.

But VC and founders interests are not always aligned. In fact, in my
experience, the number one cause of startup failure is that the VC isn't
giving "advice" but orders. EG: not "you should do less email marketing" but
"you will pivot away from this business into another one", and things of that
nature. The number two cause of startup failures in my experience (over a
couple decades) is fights between the founders, and a large portion of those
are caused because one founder wants to do what the VC says and the other
thinks its the wrong thing for the business. The number three cause of failure
is being too early/not addressing the right part of the market/lack of
customer development.

Things are a bit better these days with angels who seem to want to exert less
control, and more participants in rounds.

But we really need a good blog that is critical of VC perspective, and arms
founders so that they don't get screwed every time.

There's a book by Remus Sutten about buying a car called "don't get taken ever
time". Yet IMNSHO Founders are still getting taken every time.

------
pcmaffey
Fred is right, it's the entrepreneurs who are mythologized as heroes... and by
consequence, the VC's are idolized as hero-makers.

This industry / culture feeds off everyone's desire to be the hero. Why do so
many startups flag after raising money? Because the founders set themselves up
to believe that raising money means they've succeeded, because VC's have
opened the gates to them...

It's a perverse value-system similar to 20th century Hollywood and the music
industry. Of course VC's are looking for real value, and want to support that
with, as Fred describes, intelligent decision making, etc. But they are highly
incentivized to maintain their position as gate-keepers. They certainly won't
endorse the idolization, but they're not going to change the way the game
works either.

------
chejazi
> _If you are at a board meeting and a VC says “you should do less email
> marketing and more content marketing”, would you go see your VP Marketing
> after the meeting and tell them to cut email and double down on content? I
> sure hope not. I hope you would treat that VC comment as a single data
> point, to be heard, but most likely not acted on unless you get a lot of
> similar feedback._

This is good general advice. The credibility of a person, VC or otherwise,
does not suffice as proper consideration, let alone multiple data points.

~~~
rlucas
It's also very good _specific_ advice.

Investor opinions are signals created by an active market.

Think of them as guesses about the number of jellybeans in the jar (by people
trying to win a prize). The guesses in aggregate will be right, generally
speaking.

Having professional jelly-bean-guessers doing it all day long makes their
individual guesses a little bit more accurate but makes the aggregate guesses
work pretty well.

(Source: raising angel and VC rounds, getting feedback some of which I didn't
want to hear, and then watching it come true as I slogged through the issues
that were not only foreseen but described to me ... albeit in aggregate from
the investor market.)

------
danblick
I'm starting to think of what VCs do as providing a "product" to
entrepreneurs.

Is it really qualitatively so different from getting a car loan (with banks
competing to offer you the best terms?).

Shouldn't we all be asking, "do I really need a car loan (or an expensive new
car)" rather than regarding financing as a goal in itself?

(Granted: it's nice that founders are able to support themselves and their
companies by convincing others that what they're doing is valuable.)

~~~
rlucas
The VC market overall is about 1% the size of the consumer credit market.

In consumer credit, those banks who compete to offer you car loan terms are
relying on a big ecosystem.

There are credit bureaus to give you a FICO score. There are state laws about
roads and traffic and licensure and insurance and repossession and collections
to protect their downside. There is a governmental infrastructure of auto
titles to prove your ownership claims. There is Kelly Blue Book or other
sources to value your collateral, the nature of which changes slowly over the
years. There is a dealer network (and e.g. Bankrate) to distribute your
"product." There are millions of precedent transactions for use in modeling
default rates, marking the collateral value over time, etc. And as a bank you
are entirely passive, merely smoothing consumption of a depreciating asset
over time.

In VC-land, the terms are almost the least of the problems. The ecosystem is
absent (or radically less developed).

There is no "FICO score" or other agreed way to evaluate the entrepreneur.

There is no "Kelly Blue Book" to evaluate the collateral (underlying).

The collateral changes year by year, and (to stretch the car comparison) is
often engineered to try and annihilate all of the prior collateral to which it
was compared.

Nobody has a driver license. The roads aren't yet paved.

There are tens of thousands of precedent transactions, but the power-law
distribution of outcomes means that they are basically incommensurable, since
one out of 10,000 might end up being bigger returns than all the rest put
together.

And most crucially, the VC cannot take a passive role: the default state of
venture funded businesses is rapid change and need for continuous new and
risky decisions about team, market, new financing, etc.

So. Maybe it would be better compared to lending money to demolition derby
drivers who are expected to pay you back out of the prize money, which all
goes to the winner of the derby.

(Source: 10 years in tech finance/investment roles. Self-serving biases
acknowledged.)

------
inputcoffee
It would be interesting to an analysis of the composition of the VC fanbase.

I suspect a lot of people -- not experienced people, but lay persons -- think
that if they get an idea, convince a VC to fund it, they will magically become
rich.

So a VC seems magical to them. Like a film producer or an editor at a big
house that can make their dreams come true. Of course they want to be around
them, talk to them, come in contact with them and so forth.

~~~
w1ntermute
A great example of this from the music business is Macklemore's _Jimmy Iovine_
[0].

0: [http://genius.com/Macklemore-and-ryan-lewis-jimmy-iovine-
lyr...](http://genius.com/Macklemore-and-ryan-lewis-jimmy-iovine-lyrics)

------
DelaneyM
I mourn the days when it was nearly impossible to succeed in VC before first
excelling as an operator.

~~~
20yrs_no_equity
I'm not sure when those days were. Maybe the 1980s? In the 1990s VC firms I
interacted with were made up of partners whose background was non-tech and
associates who were freshly minted MBAs. (Who had lots of opinions about what
we should be doing which seemed to be totally buzzword driven.)

~~~
CurtMonash
Certainly not the 1980s. John Doerr was rising then, and his operational
background isn't much. Art Patterson at Accel was a big early hitter in
software, and he'd never operated much. Hummer Winblad was one of the more
successful startup VC in the 1980s, because of their software focus; Ann
Winblad had started a company (and sold it pretty quickly), but John Hummer
went straight from his sports career into the finance sector.

Even before the ones I named, Don Lucas was first guy in at Oracle; I don't
think he operated much. Ditto Jacqui Morby and Henry McCance in Boston.

And Ben Rosen was a stock analyst, who trained the guy who trained me. He was
one of the best VC of all, although he didn't bother doing it for long.

------
mudil
I agree with the post as I believe that VCs play tremendously important role
in moving the tech forward. They have business knowhow to grow the companies.
For that reason I am always looking for business ideas and thoughts in blog
posts and books by VCs.

That said, I think that VC business is stacked up to optimize their returns
and to sieve many entrepreneurs away. The whole business of "apply here" and
"present to us" is somewhat demeaning to entrepreneurs, in my opinion.

Consider my recent experience with a "gold-tier ranked accelerator" with
"concierge approach". They sent me an email and told me that they are very
interested in my website, the website I've been running since 2004. (The
website been profitable pretty much since day one.) So, what's the next step?
Turns out I have to apply to them. Now, they came to me, not the other way
around. I have not had any outside investors, and even though their expertise
can propel my company, I existed without VCs, and technically I don't need
them. I think they need to apply to me! So, I said no thank you, and that was
the end of it.

Again, in my opinion, the system is somewhat upside down for smaller startups.
Sure Google and Uber had enough of courtiers, but smaller startups are forced
to beg, present and to apply.

------
hkmurakami
>What I recommend to entrepreneurs is to listen carefully but not act too
quickly. Get multiple points of view on important issues and decisions. And
then carefully consider what to do with all of that information, filter it
with your values, your vision, and your gut instinct. That’s what we do in our
business and that is what entrepreneurs should do in their businesses.

This is why the best advice isn't really even advice. It's anecdotes from
someone who was in the trenches in an analogous or related situation, and what
worked or didn't work and what happened for them. We can then take what we can
from that data point, and apply it to our own situation, which will have both
similarities and differences from the anecdote that this person graciously
shared with us.

------
GCA10
A little humility goes a long way.

The most controversial area -- which Fred Wilson doesn't touch -- involves
VCs' "contributions" when startups are trying to sort out interpersonal
issues. (Co-founders don't get along; top producers in sales or engineering
are becoming hard to work with, etc.)

From what I've seen, about 10% of VCs are genuinely good at guiding everyone
to a better outcome. About 40% are well-intentioned and intermittently
effective. And the bottom half of VCs have a boardroom style that just makes
things worse.

In any company, big or small, people issues usually involve some delicate
stuff that isn't easily blogged about. So VCs either don't talk publicly about
this part of their jobs, or else they present a very sanitized (and sometime
misleading) version of what they do. There may also be a fundamental
misalignment of priorities here. For founders, getting the people issues right
is crucial. For VCs, it's a time sink that's best dealt with rapidly on any
basis, so that more time can be created to go chase hot new deals.

------
firasd
Good thoughts. That's exactly what I thought when I saw the tweet as well. VCs
are pontificating on SnapChat about what kind of team you should build at the
seed stage because they are doing content marketing. Like all content
marketing it is a mix of useful insight and a strategy to get you to pay
attention based on interest/entertainment/etc. Don't take it too rigidly.

------
tedmiston
It's surprising how much of being a good entrepreneur boils down to just
applying solid critical thinking skills.

------
vonnik
VCs' content marketing posts are the bleating edge of technology.

That said, there are some good ones. They are usually written by long-time
operators who flipped to investing. Or from VCs with a real sense for data
analysis, combined with real-world experience.

One problem VC posts have, for a founder audience, is their level of
abstraction. Because VCs are exposed to so many startups, they do see patterns
within and across sectors, but that point of view and level of generality
aren't usually shared by people in the industry. Also, while the operators may
not be exposed the same breadth of businesses, their understanding is much
more granular and the VCs' broad theses can ring false, given their very
specific conditions.

------
neom
Can't wait till we've proliferated wealth back in far enough that we don't
need VCs, maybe then the high st bank will become relevant again. Oh wait,
pipe dream. Guess I'll go back to enjoying Fred Wilson then. :)

------
tormeh
A question for HN: Is investing in public VCs a good idea? From casual
observation it seems the good ones are usually private.

(Yes, I know an ACWI index fund is better, but I'm not investing big money and
I'm willing to lose out a bit monetarily in exchange for fun and supporting
companies I like)

------
jomamaxx
"VCs are not heroes. We are just one part of the startup ecosystem."

Funny, 'hero' never crossed my mind!

When you start with a statement like that, you're saying a lot about 'self
awareness' within this group. Maybe saying more than the rest of the article.

Jesus H.

------
cloudjacker
"If you are at a board meeting and a VC says “you should do less email
marketing and more content marketing”, would you go see your VP Marketing
after the meeting and tell them to cut email and double down on content? I
sure hope not."

HAHAHAHAHAHAHA _wheeeze_

I've seen so many founders come back from board meetings pale faced and
interpreting the gospel of VC as this exact next step

~~~
firasd
Yeah. It's odd how often otherwise-serious businesspeople have this weird
"recency bias" for feedback, even from non-board members.

~~~
neom
Have lived this first hand in a large startup and thought... wait, we know our
business and customer better than the folks you chat with once a quarter over
fizzy water, why are we moving market position exactly?? (I was livid)

~~~
gmarx
If you ignore advice and fail (always the more likely outcome no matter what
you do) then you failed because you refused to take advice. If you take the
advice and fail, you can't be blamed. This is oddly powerful pyschology

~~~
jpna66dd
If you're the boss, you'll be blamed either way. This should not be part of
the decision process. The loneliness of being the boss...

------
jgeada
All you need to know about most VCs: they have money, end of story. Doesn't
automatically mean that they have any particularly insight into business,
competition, technology, etc. They may have some insider information and
connections, primarily because of the money; but it doesn't mean that those
will be played to your advantage.

Anybody can win a lottery and have money, but you don't immediately assume a
lottery winner has any particular insight about money making or business. Just
because the lottery is different doesn't change that property.

~~~
dang
> _All you need to know about most VCs: they have money, end of story._

This is the sort of reductionist dismissal that we need less of on Hacker
News, regardless of how one feels about VCs. That applies even if you're 100%
correct that none of them know what they're doing.

Reflexive denunciations devoid of substance are incompatible with (indeed
destructive of) the things we do want in HN threads—thoughtful critique and
concrete experience—so it's important to inhibit the impulse to post like
this.

