

VCs Are Not Your Friends - terrisv
http://steveblank.com/2011/02/03/vc%E2%80%99s-are-not-your-friends/

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jdp23
It's not as catchy a headline, but I'd phrase it differently: whether or not
VCs are your friends, their relationship with you is a business one.

Imagine Steve had been in a somewhat different situation: a friend of his was
running a company that was a potential strategic partner, and after an initial
investigation decided that it didn't make sense. Would that mean they weren't
friends? Of course not: it just means that the business relationship didn't
work out in this case. Real friendships survive that.

~~~
random42
He meant to convey, that person X, _when acting as your VC_ , is not your
friend.

More clearly noted here, when he writes about not confusing a VC's good
behavior, as their personal trait.

 _... they add tremendous value to your startup (recruiting, strategy,
coaching, connections, etc.) they are not doing it out of the goodness of
their hearts._

 _... At the end of the day VC’s have to provide their limited partners with
great returns or they aren’t going to be able to raise another fund. If you
succeed so do they. Great VC’s do everything they can to make you successful.
But just like your bank, credit card company, mortgage holder, etc. they are
not confused where their long term loyalty lies._

~~~
mey
From my personal previous experiences with VC's, my general issue with them is
how they wish to make you successful. They are concerned with the short term
success, pump and dump to a certain extent. If that is your concern as well,
then excellent. If not, beware that your definition of success, and theirs are
going to conflict at some point, and could end up hurting both of you.

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gyardley
You could write a similar article called 'The CEO Is Not Your Friend' or 'Your
Boss Is Not Your Friend' -- whatever your relationship with someone, when
they've got a job to do they're going to have to do it.

A couple of my angels are invite-to-the-wedding friends, but I still expect
them to make rational decisions when it comes to their pro rata in later
rounds, and I don't automatically expect them to invest in whatever I decide
to do in the future.

~~~
gordonbowman
True. You could easily say this about all professional relationships:

"Don’t confuse being friendly with your ___’s with ___’s as your friend"

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damoncali
The interesting part of the story is not that they refused to fund the
company. It's that they refused, and expected the CEO to continue to work at
it.

If that signal truly meant there would be no follow on round, why would you
expect the CEO to not throw in the towel as well? I've neve been in that
situation - anyone out there who's been there care to comment on what it's
like to face the world after your lead investors bail?

~~~
jonpaul
I can't comment on the situation, but I think throwing the towel as a CEO is
the wrong decision. Just because you don't have an upcoming round, your duty
as a CEO is to the company in any condition that it's in, come hell or or high
water. I would even argue that a CEO is almost married to the company.

Throwing in the towel when the going gets tough seems like a spineless move.

~~~
damoncali
Clearly there has to be _some_ point at which the CEO calls it quits. Having a
death-warrant placed on your funding seems like it might be one of those times
- again, I'd love to hear from someone who has been there.

~~~
redthrowaway
As founder and CEO, the point at which you call it quits should be the point
at which the company officially declares bankruptcy. That's your duty as CEO.

~~~
damoncali
Is it? I thought it was to maximize the value to your shareholders.

~~~
redthrowaway
And when it becomes clear that that's no longer a viable option, your job is
to take care of bankruptcy, etc. You don't just jump ship.

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j2d2j2d2
I don't understand why financial relationship has to be perceived as a
negative thing. A business relationship can be excellent, just like a typical
friendship.

Expectations are different, sure. There are a lot of good things that can come
from it in spite of that.

It's the people involved that make it crap or awesome.

~~~
dy
I think John Rockefeller said it best: "I'd rather turn my business associates
my friends than my friends into business associates."

~~~
gruseom
Not to be glib, but did Rockefeller have many friends? I'd bet he didn't say
this.

~~~
dy
Real quote: "A friendship founded on business is a good deal better than a
business founded on friendship."

src: [http://www.woopidoo.com/business_quotes/authors/john-
rockefe...](http://www.woopidoo.com/business_quotes/authors/john-rockefeller-
quotes.htm)

~~~
gruseom
Doubtful. The internet is chock full of these cuckoo quote sites. If Google
doesn't yield a primary source, it's almost certainly fake. This is one area
where absence of evidence really is evidence of absence.

Edit: not a criticism of the quote itself. These things wouldn't get
misattributed if they weren't worth repeating. But they wouldn't get repeated
if they weren't misattributed, either; it's a kind of cultural appeal to
authority.

~~~
kens
The quote is from Rockefeller quoting his business partner Flagler. For a
primary source, see "Random reminiscences of men and events" by JD
Rockefeller, 1913.

Google Books is great for verifying this sort of quote:
[http://books.google.com/books?id=IHnZAAAAMAAJ&dq=A%20fri...](http://books.google.com/books?id=IHnZAAAAMAAJ&dq=A%20friendship%20founded%20on%20business%20is%20a%20good%20deal%20better%20than%20a%20business%20founded%20on%20friendship&pg=PA12#v=onepage&q=A%20friendship%20founded%20on%20business%20is%20a%20good%20deal%20better%20than%20a%20business%20founded%20on%20friendship&f=false)

~~~
gruseom
Good catch!

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carsongross
Given how inexpensive it is now to start a software company, and how costs can
scale linearly with capacity as managed cloud-based capacity comes online and
goes down in price, I'm not sure we (that is us software guys) need VC in a
significant number of cases.

The recent blanket offer by Yuri, I think, adds credence to this line of
thinking: money is getting cheaper for software startups as demand for it
falls. (An alternative theory, which I am also sympathetic to, is that we are
at the tail end of a reflationary credit bubble, set to burst Real Soon Now.)

But, regardless, why sleep with the enemy if you don't have to? You can build
a POC on heroku or EC2 for peanuts...

~~~
lsc
"the cloud" has massively changed the cost model for hosting on the low end;
which is a great thing, the low end of hosting has always been ridiculously
inefficient.

However, "the cloud" passes on very little of the economies of scale involved
on to the consumer, so while it's great to start in "the cloud" you want to be
careful not to lock yourself in. It's a great place to start, but once it
makes sense to start buying your own hardware, you want to be in a position
where you can do so.

~~~
gfodor
Citation needed

~~~
lsc
1\. amazon wants north of 0.08 per gigabyte transfer. he.net wants $1 per
Mbps. This is something like 1/3rd of a penny per gigabyte. _I_ get that deal
from he.net, this isn't something only available to the huge.

2\. a 32GiB ram 8 core, 4 disk server is around $2000 worth of parts. renting
something like that is going to cost you around 1/3rd to 1/4th that /every
month/

3\. power costs need to be factored in. you can get a full rack with 15a power
(remember, only use 3/4 of that) which can handle maybe 8 or 9 of the
aforementioned servers for around $400/month

Of course, there are a bunch of other costs that come with owning your own
hardware, and certainly, on the small end of things, the cloud saves you a lot
of money if you don't have a hardware guy on staff.

My point is just that you have to be careful, because as you scale up, the
"cloud" prices don't scale down very much at all. We can argue all day about
when reach the point where owning hardware starts to make sense for the stuff
you leave on all the time, but it's pretty clear that at some point you do
reach that point.

Moving off ec2 on to your own hardware, usually, isn't that difficult. Linux
is Linux. But moving off something like appengine on to my own hardware? that
starts to get... difficult.

~~~
gfodor
How do you explain Netflix's move whole hog to AWS?

The equation of cloud vs not cloud is much more complicated than pricing. In
fact, I'd argue price is the least impactful component, especially since it's
getting cheaper and cheaper.

The most important questions are around personnel, risk, time, and so on. The
cloud dramatically changes these and my view each day that goes by it makes
more sense to run your business on AWS than it does to rack your own servers.

~~~
lsc
>The equation of cloud vs not cloud is much more complicated than pricing. In
fact, I'd argue price is the least impactful component, especially since it's
getting cheaper and cheaper.

for some parts of some businesses, you are right. if compute time is a very
small portion of your budget, who cares if you pay a little more? I mean,
tools are a vanishingly small portion of my budget, but they are really
important to the continued functioning of my company, so I'm willing to pay a
very hefty (percentage wise) premium for nice tools. It's only a few bucks
extra, even if it is a 50%-80% premium over the cheap stuff, so who cares?

My understanding was that netlfix moved it's cpu to the cloud, for the reasons
you stated. If processing is a small portion of your budget, paying more for
hosting of your CPU, and having the excellent flexibility of the cloud might
make a lot of sense.

My further understanding was that netflix used something else for actual
streaming distribution of the movies; amazon wanted too much money for that,
and unlike CPU time, bandwidth /is/ a significant cost for Netflix.

The parallel in my business is that probably the largest monthly cost of mine
is new hardware (followed by power for my existing hardware) Unlike netflix,
my margins on each bit of hardware I get are pretty thin. An 80% increase in
the cost of my hardware would kill me outright. I put a lot of effort into
keeping my hardware (and my power) costs down.

(to be clear, moving to amazon ec2 would increase my costs by quite a bit more
than 50%-80% - in most cases, ec2 would charge me more wholesale than my
customers pay me, retail, for guests.)

and I don't know. Maybe if I started actually selling hardware (which I've
considered... I'm pretty good at choosing/assembling, and can do it quite a
bit cheaper than Dell's retail prices; the big hangup would be sales.) and I
started spending thousands of dollars a month on tools, I might want to spend
more effort getting the cost of tools down.

That's the idea behind using standard parts. A screwdriver is a screwdriver; I
can easily switch brands. The same, really, could be said for "unix box on
demand" services like ec2. It's not that difficult to move from one provider
to another, or on to your own hardware, if that makes sense down the road.

On the other hand, with the "proprietary programming environment" systems like
appengine, it may be somewhat more difficult to move off of the system. (the
open-source runtimes may have progressed further since last I looked, but last
I looked it was pretty much run it on google, or re-write your code.)

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jgervin
I might be wrong, but VC's are only friends to those contribute to the fund.
So say the VC gets a $1 billion dollar fund, they take there 20% commission to
run the fund (fly around, acquire space, etc...) then they go out looking for
the biggest risk with the biggest return. They are making a killer salary with
the 20% commission to run the fund. They don't have any friends at that
point.... at least that is what I have come to learn.

~~~
sokoloff
As I understand it, their "commission" is closer to 2%, not 20%. The 20%
figure you're thinking of is the carry (think a VC-imposed capital gains tax
on profits). So, a dollar invested gets the VC 2 cents. A dollar of net profit
gets the VC 20 cents.

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lylanm
I like the end of the posting, as well as most of the comments in this thread.

VCs have a job to do, just like everyone else. Sometimes they need to make
hard decisions.

It's important for every business professional (entrepreneur or anybody else)
to understand the basics of other people's goals and incentives.

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joshu
one issue to be noted here is that he was funded in the first place because
they were his friends and not because they looked at the business
critically...

