
An Engineer's View of Venture Capitalists (2001) - dandrewsen
http://ycombinator.com/tredennick.html
======
ChuckMcM
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."

~~~
simonebrunozzi
"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?

~~~
ChuckMcM
It is an interesting debate, mostly centered around the chicken and the egg,
which is do evil people become rich? or do rich people become evil? And its an
area I've wondered about as well as I've personally known lots of people who
have gone from 'not rich' to 'rich' and was able to observe some before and
after studies.

This was a recent PBS NewsHour report on the Psychology of Wealth
([http://www.pbs.org/newshour/bb/business/jan-
june13/makingsen...](http://www.pbs.org/newshour/bb/business/jan-
june13/makingsense_06-21.html)) which included this comment:

 _" One of the things that wealth and money does is it comes with a set of
values, and if you want a deeper ideology, and one of them is, generosity is
for suckers and greed is good. But it turns out, there are a lot of new data
that show, if you're generous, and charitable, and altruistic, you will live
longer, you will feel more fulfilled, you will feel more expressive of who you
are as a person. You probably will feel more control and freedom in your
life."_

My observation over the years watching people become millionares and
billionares is that there is a switch that people do when they go from 'not
rich' to 'rich' where they have to somehow rationalize their wealth relative
to their friends who are still not wealthy. My first exposure was at Sun (I
joined on the Monday after they had gone public) and a number of people were
thinking they were better off than before, but by the time I left nearly 10
years later many knew they were _much_ better off.

One of the more common rationalizations was they 'deserved' it, there was
something special about what they had done, or what they brought to the
company that made the company (and them) successful. Lots of things to point
too and remember to give some meat to that belief. I met people who were fired
at Sun for being incompetent, got jobs in start ups that went public during
the dot-com boom, became multi-millionares and got fired _again_ and _still_
believed it was their "specialness" that made them rich, not random chance.

My best guess is that when you are rich you become a target for people who
want to be rich but aren't. This is a common fate of lottery winners who often
lose all their winnings in a relatively short time for reasons that are not
altruistic or fulfilling. Makes me wonder what divorce rates are for lottery
winners compared to the general population. Being so targeted can make you
cynical, and perhaps push you toward being evil.

There is lots of research into the topic, lately its been a bit trendy because
the disparity between wealth and non-wealth in the Bay Area and elsewhere
makes for good page views (and discussion).

From the perspective of VC's, which are a self selected group of people with
money, they are often people who are rich and trying to get richer still, and
it perhaps that trait which selects for soullessness. People who get rich,
stop work, and spend the rest of their days doing things that make them happy
are not in that group so the results skew.

~~~
lmartel
To be fair, there are lots of poor and middle-class people who get constantly
fired yet think they're special, too.

(But the point you're making is interesting and makes a lot of sense)

------
applecore
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
> 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! ;)

------
ganeumann
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
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.htm...](https://al3x.net/2013/05/23/letter-to-a-young-
programmer.html)

" ... 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]

~~~
ganeumann
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.

~~~
rfrey
The underlying cause isn't attention deficit or information asymmetry. It's
opportunity asymmetry.

That could be disproved if it turned out serial entrepreneurs have bad
experiences at similar rates to rookies.

~~~
ganeumann
I buy that. How do you fix it?

~~~
simplekoala
I think the situation has started to get better with software start-up
infrastructure costs going significantly down, angels and incubators eating
traditional VC's lunches (to a point where firms like Sequoia had to initiate
stealth scouts program so they could get in early into potential killer
startups), founders getting better terms, a healthy founder friendly eco-
system nurtured (carefully?) by newly minted successful entrepreneur turned
angles. I am optimistically hoping that "Shark VCs" are a dying breed. Not
sure how long have you been a VC; You probably have a better handle on this,
and privy to a lot more than what keeps getting written. Not to put too much
pressure on you but frankly I was hoping you would have a thesis on how to
make it even better for engineers/budding-entrepreneurs.

~~~
ganeumann
My thesis is to try not to be an asshole and to hope that somehow not being an
asshole leads to returns good enough that I can keep investing.

I don't think that's enough of a manifesto to inspire systemic change, though.

~~~
simplekoala
Thank you for making the valley a better place (and hope you make a good
return on your investment in the process)

~~~
ganeumann
I'm in NYC (which also means that my definition of not being an asshole might
be a bit more lenient.)

I've worked with plenty of seed and A-stage investors in SV, though, and found
most of them to be focused on being helpful to founders--you have to be, and
have more opportunity to be, when you're working with people starting their
first company. In my experience it's the later stage firms that are harder on
founders. Their attitude--not to be an apologist--is that everyone at the
table is an adult and can look out for themselves. The best thing you can do
as a founder or startup exec when you start talking to Series B and later
firms is

(a) Have a seed or angel investor who can give you good advice (and who, since
they were early investors, has an economic situation closer to the Common than
to the Series B Preferred) and ask them for advice; and

(b) Have options, including: other Series B firms, the potential to get a
bridge or extension round from your seed and A folk, possibly being acquired,
and extending your runway by cutting burn.

------
simplekoala
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"

------
rthomas6
So what happened with the idea to use programmable logic for firewalls? That
idea still seems really doable. Has anything happened with that?

~~~
vinceguidry
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.

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

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

------
auctiontheory
_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?)

------
yesimahuman
> 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
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
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 :)

------
not_that_noob
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
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.

------
diziet
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.

------
spullara
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.

------
unono
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.

~~~
asenna
A _good_ VC brings a lot more to the table than just money. Crowdfunding
cannot replace that.

~~~
dragonwriter
> 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.)

------
asenna
> You can self-fund by consulting and by setting aside money for your venture.
> That doesn't work.

Why does this not work?

~~~
vickiku88
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
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.

------
thebokehwokeh2
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
Everyone wanting to start a company should read this book. Then proceed.
[http://www.slicingpie.com/](http://www.slicingpie.com/)

------
paul_f
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
What on earth makes you think prospective starlets have stopped getting
literally screwed?

------
beachstartup
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?

------
GalacticDomin8r
I've viewed the Angel/VC infrastructure as the modern form of slavery once I
understood the details.

------
michaelochurch
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
I hope you also have read
[https://news.ycombinator.com/item?id=6369626](https://news.ycombinator.com/item?id=6369626)

