Remember: if VCs believed in what they were doing they would not take a 2% annual management fee and 20% of the upside.
They’d take 40% of the upside and live on ramen noodles.
VCs make money by raising money from LPs.
They spend this money on investments which don’t look too bad if they fail, because nearly all of them fail. Looking good while losing all of your investors money on companies which go broke is the key VC skill.
Once in a while you get a huge hit. That’s a lottery win, there is no formula for finding that hit. Broad bets helps but that’s about it. The “VC thesis” is a fundraising tool, a pitch instrument, it makes no measurable difference to success. It’s a shtick.
Sympathy, however, for the VC: car dealership sized transactions paired with the diligence burdens of real finance. It’s a terrible job.
Once you understand that VC is one of the worst jobs in finance and they don’t believe most of their own story — it’s fundraising flimflam for their LPs - it’s a lot easier to negotiate.
1) we are a sound bet not to get you in trouble if we fail (good schools and track records)
2) we will work hard on things which your LPs and their lawyers understand, leaving evidence of a good effort on failure
3) we know how the game works and will play by the unwritten rules: keep up appearances
The kind of lunatics who actually stand to make money with a higher probability than average - the “Think Different” category - usually violate all of these rules.
1) they have no track record
2) they work on esoteric nonsense
3) they look weird in public
And they’re structurally uninvestable.
Once you get this it’s all a lot easier: the job of a VC is not to invest in winners, that’s a bonus.
The job of a VC is to look respectable while losing other people’s money at the roulette wheel, and taking a margin for doing so.
They’d take 40% of the upside and live on ramen noodles.
VCs make money by raising money from LPs.
They spend this money on investments which don’t look too bad if they fail, because nearly all of them fail. Looking good while losing all of your investors money on companies which go broke is the key VC skill.
Once in a while you get a huge hit. That’s a lottery win, there is no formula for finding that hit. Broad bets helps but that’s about it. The “VC thesis” is a fundraising tool, a pitch instrument, it makes no measurable difference to success. It’s a shtick.
Sympathy, however, for the VC: car dealership sized transactions paired with the diligence burdens of real finance. It’s a terrible job.
Once you understand that VC is one of the worst jobs in finance and they don’t believe most of their own story — it’s fundraising flimflam for their LPs - it’s a lot easier to negotiate.
1) we are a sound bet not to get you in trouble if we fail (good schools and track records)
2) we will work hard on things which your LPs and their lawyers understand, leaving evidence of a good effort on failure
3) we know how the game works and will play by the unwritten rules: keep up appearances
The kind of lunatics who actually stand to make money with a higher probability than average - the “Think Different” category - usually violate all of these rules.
1) they have no track record
2) they work on esoteric nonsense
3) they look weird in public
And they’re structurally uninvestable.
Once you get this it’s all a lot easier: the job of a VC is not to invest in winners, that’s a bonus.
The job of a VC is to look respectable while losing other people’s money at the roulette wheel, and taking a margin for doing so.
I hope that helps.