
Jason Fried: “Venture capital money kills more businesses than it helps” - yarapavan
https://www.recode.net/2019/1/23/18193685/venture-capital-money-kills-more-businesses-than-it-helps-says-basecamp-ceo-jason-fried
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zby
VCs want binary outcomes - either something grows 100 times or it dies. This
is not because they are evil, or crazy (and don't want money from a slow
growth but still money earning business) - but because this is a way to avoid
principal agent problem ([https://medium.com/@zby/the-problem-with-
crowdfunding-81b53f...](https://medium.com/@zby/the-problem-with-
crowdfunding-81b53f963387)). If you don't want that - then don't take VC
money. Fried is right with that, but the VC model works well in fields where
there is a strong first comer advantage (like everything with network
effects). Because there if you don't outgrow your competition - then you are
dead.

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timavr
I don’t get it. How does it help to avoid principal agent problem. The link
also states it as a fact with no explanation.

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theamk
The link says:

> This relies on the theory that startups goal is to grow a 100 times or die —
> so small continuous extractions by the executives are ruled out.

I interpret it as following: if the regular company earns $1 million/year,
then an executive stealing $500k/year by making deals with friends will make
investor's return much smaller. But in a startup, it does not matter -- if the
it fails, it would simply fail slightly earlier. And if it succeeds, then it
would earn $100 million/year, and $500k/year that executive steals will be a
small, insignificant change.

(I am not personally convinced this is true, but this is how I interpreted
that article)

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jgalt212
I guess, but why steal $500K a year, when you can steal millions? Certain
insider deals from a certain very large unicorn are what I'm thinking about.

~~~
zby
VC investing is on a spectrum - at companies already at the unicorn stage it
is more private equity than what happens at earlier stages. Also now partial
liquidity events for the founders are a standard. They improve the incentives
alignment at these later stages.

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mrnobody_67
70% of VC backed founders end up with zero in capital gains, after toiling for
5-10 years... primary reason is they are "forced" to grow at unnatural high
rates, to attempt to deliver exponential 50x returns to their (diversified)
VCs, which usually doesn't work out.

I wonder how that number would be different, for those very same companies,
had they not taken investors?

~~~
ymolodtsov
70% of tech startups (or even more) fail on themselves and not just because
they took VC money. It's just a risky asset class and people should understand
that. And the most of them would be impossible to properly launch without
significant initial investments as most of the time the idea is to reach near
zero marginal costs and scale by investing a lot in your tech/community.

~~~
mrnobody_67
Main point is the startup risk is unnaturally amplified by capital, which
increases monthly costs, with the hope of generating unnatural growth rates
that never arrive...

It'd be really interesting to see the failure rate of bootstrapped tech
startups vs. those that took VC money, I'm betting it'd be a lot lower.

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yingw787
I think there's a happy path between bootstrapping your own company and taking
millions in VC funding, where you can place your customers ahead of delivering
investor returns but not have to design your products and roadmaps due to
financial limitations. On that note, TinySeed is open for applications until
2/15 :) [https://tinyseed.com/](https://tinyseed.com/)

(I'm not affiliated with them, but I read Rob Walling's "Start Small, Stay
Small" and it was the best book out of 70ish books I've read in two years)

~~~
bsbechtel
There is....there are investors who don't require 100x returns. It's just
harder to find them, they're usually more risk averse, and you'll need a way
to return their money that doesn't necessarily include an IPO.

~~~
d0m
Not clear to me why someone would want to invest in high risk startups for a
low-mid return.. there are much safer options that would give similar returns.

~~~
qqqwerty
From my understanding, VC funds as an asset class don't perform that well. A
few of them hit the jackpot, but if someone spreads their bets across a number
of funds, I would be surprised if they beat the market. So keep that in mind
when comparing returns.

Another thing to consider, is that focusing on the 'middle road' does not
necessarily preclude a company from swinging for the fences, it merely sets
the incentives such that getting to profitability sooner is advantageous. They
do this by encouraging dividends as a form of compensation, but the company
still has the option of going the VC route.

So if anything, I think this structure is the best of both worlds. If a
company can take ~$100k in seed for ~10% in equity and turn that into a small
business worth $10M, that is a 10x return. But if it looks like they are on to
something bigger, they can raise another round and keep grinding.

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pnw_hazor
Some Angels too. I have ran into small startups that are forced to make
poor/crippling choices because their angel(s) would rather not spend anymore
money before flipping the company.

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benj111
Why are these articles always aimed at the 'victim' companies, rather than the
actual venture capitalists?

If the thesis is correct, they are the main losers, with incentives to find
the 'right' size for companies.

Edit: I am aware of the current business model of venture capitalists.

It just seems to me that the value maximising outcome would be to enlarge
every company to the largest it could be but no bigger.

Why isn't this happening?

Is it that venture capitalists are psychopaths and bad investors to boot? Is
it that identifying the 'right' size of company is hard? The question that
then arises is why are founders so good at identifying the right size, when
investors find it so hard? Is there survival bias here? Sour grapes? If
founders are genuinely better, why hasn't that been picked up on and
harnessed?

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DennisP
They're not losers if the profits from a few big winners outweigh the losses
from the losers.

That works out for VCs because they're diversified. A founder lacks the
diversification, so while their average expected return is the same, their
specific outcome is likely to be poor. They'd be much better off with a
strategy that has lower expectation but also less variance.

~~~
crazypyro
VCs also have a resource that is much more scale-able, especially in a
horizontal direction, money.

Most founders don't have the ability to diversify anywhere near the same
degree because the resources they have personal control over (time, energy)
are generally much more limited.

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nikanj
Venture capitalists see a whisp of smoke and dump a truckload of firewood on
the first embers.

They want a big bonfire asap, and don’t really care if they end up
extinguishing the flames instead.

