Been thinking a lot about this statement, but still not sure exactly what he means by it. I could interpret it a few different ways, and I'm probably over-thinking it. How do you interpret this?
You may think you're shaking hands with someone but he's actually picking your pocket. "Count your fingers after shaking hands with that guy" is an idiom suggesting that the guy will steal one.
It struck me more as simple than gold. If a VC that invested in a company gives them advice then obviously his goal is to make more money... but that goal will, in turn make you more money too.
If you don't like the fact that a VC has the potential to make more money than you, the solution is to not take investment from one, not to ignore them after they take investment.
Also remember that yes, they're not putting in a lot of work to make the money - but you aren't putting in a lot of money that you might lose, which they did.
I'm not arguing for or against working crazy hours, just against the idea that you should be scared of any suggestion from a VC.
VCs invest money from so-called limited partners: universities, pension funds, wealthy families, etc. They're partners in the VC firm by dint of providing money, but they don't get operational control of deals.
The fee structure of a VC firm is similar to that of a hedge fund: they take a management fee (based on the committed fund size) and a performance fee (based on the profits, if any, from investing). Typical numbers are 2% annually and 20%, respectively.
If a VC fund invests $100 million in a company and, after four years, the company goes kablooey, that actually cost the LPs about $110 million or so. The VCs made $10 million.
Of course, and I did know that had I been thinking straight, but I don't think it detracts from the point I was trying (badly) to make.
Obviously advice from a VC is given selfishly, as you doing well means he does well, but for them to do well (i.e. get the performance fee), that will mean that you have done well too.
A VCs risk profile does not look like yours, due to the fact that they're diversified and you're not. Imagine your company is doing well and there are two ways to proceed:
option 1: your company can be sold today for $75m.
option 2: you can try for $1,000m or zero, with an 85% chance that you'll fail.
The VC is likely to prefer option 2, whereas if you aren't already rich, you'd likely prefer option 1.
Many a VC funded company has died because the VCs needed you to make a ton of money very quickly, or die trying, in order for their model to work. When considering VC investment, one really needs to be certain that their business needs align closely with your own (and are likely to continue in alignment) if you want to avoid heartbreak.
True but maybe not so significant. Without hits the VC can't raise the next fund. Fees are real but I'm not sure they drive model or the viewpoint.
IMO the larger divergence of interest is investment of time. Financial risks can be diversified or hedged, but there is no protection against lost time.
Don't be so sure. In a down economy, with a large fund, the fees can be so large as to be demotivating. What's 2% of a billion dollars? A fuckton by my standards.
VCs are (primarily) investing other people's money. The basic overview is this:
VC raises a $100m fund that is expected to last for 10 years. They charge a 2%/yr management fee, for their work as investors. Then, they also keep 20% of the gains from their investments.
So if the fund operates for 10 years and exits for $400m, my understanding is that they'd take $20m for managing the fund, plus $60m "carried interest", and return the rest to the limited parters (the investors whose money was actually at risk).
If the fund operates for 10 years and the companies sell for a combined total of $50m, they still charge the $20m management fee, and the investors have $30m returned to them.
That seems insane. Why would a wealthy (and presumably intelligent) investor hand over 20% of gains to someone with no skin in the game?
I guess if the VC had a track record from which to estimate expected returns, it could be a big deal, but no one has a track record, because these business cycles are so short.
If were a multi-millionaire, why wouldn't I say "Hey Mr. VC, if you think you can turn $100M into $400M, why don't you borrow it from me and pay 10% interest?"
You can usually get a 10% annual return by investing in regular stocks. The kind of investors who put their money in VC firms are looking for higher returns.
Let’s say I invest a million bucks in my local VC fund, and its investments earn back an annualized 15%/year over ten years. My million bucks has turned in to a little over four million. After paying the fees, I would still be about a million dollars ahead of someone who got a 10% return from a regular mutual fund.
It's not really 20%. It's 20% of whatever is left after the limited partner clears their hurdle rate. And to a degree, it is a bit insane, especially when you look at the historical returns of venture capital. But you'll find similar structures throughout the finance world - hedge funds, real estate, leveraged buyouts, etc.
They make money on 1 out of 10 companies they invest in. If a company they invested in goes bust they make the money somewhere else.
EDIT: Sorry for this lame answer, I wasn't reading the question right. The real answer is that the people working with VC are managing someone else's money (the limited partners' money). They themselves get a salary which is a percentage of the amount of money the manage, only sometimes with a bonus correlating to how well they are doing their job.
But what is not obvious is that the VC might not care if _your_ company is the one that makes him money. Remember that VCs are managing a portfolio of companies, in order to spread their risk. The VC might decide that your company is in the part of their portfolio that won't go big, and so they won't give it any more but the bare minimum of attention.
First, the goal of entrepreneurs is not just to make money. Unlike most VCs and all of their LPs.
Interests of VCs and entrepreneurs differ in a number of other ways. A key one being that VCs have a whole portfolio and are hits-driven, while entrepreneurs have exactly one company. That means VCs have an incentive to push for giant hits, even at with an increased risk of failure. That makes VCs more money, but means you're much more likely to be, e.g., that guy who had to shut down everything because you expanded too fast.
"It struck me more as simple than gold. If a VC that invested in a company gives them advice then obviously his goal is to make more money... but that goal will, in turn make you more money too."
Not necessarily. Especially when talking about funding, the VCs are NOT out to help you or your business. They are out to make money. Sometimes those goals can coincide, but not often.
And seriously, the rest of that post is just an excuse for their bullshit. They have money. So fucking what? Why should that enable them to take most of the company, when it was your hard work that actually made it successful? I understand they need a return, but there is no reason why they should get the lion's share of the reward.
"""It struck me more as simple than gold. If a VC that invested in a company gives them advice then obviously his goal is to make more money... but that goal will, in turn make you more money too."""
This is just gold.