over the past 10 years, early stage US venture
capital on average has had return on investment
(ROI) less than the S&P 500.
(2) As in remarks on venture capital at the Web site
of Peter Theil's The Founders Fund, at
where click on "Read More" in a tiny image near the
bottom of the page, with
'What Happened to the Future?'
By Bruce Gibney
in section "VC's Long Nightmare", see:
"Along the way, VC has ceased to be the funder of
the future, and instead has become a funder of
features, widgets, irrelevances. In large part, it
also ceased making money, as the bottom half of
venture produced flat to negative return for the
And the herd mentality is not new, in the '80s there was overinvestment in PCs and disk drives. If my memory is not failing me, at one point there were around 40 (sic) mostly? entirely? VC funded disk drive companies (not that most actually got a product to market). It was a really crazy time, some/many of them shipped a lot of drives that they knew didn't work, and MiniScribe, a fairly well established one that had been cooking the books for a few years after losing an IBM contract, ended by "shipping bricks" (!!!; http://en.wikipedia.org/wiki/MiniScribe):
"The primary scandal erupted in the final weeks of 1989, when after failing to procure short-term financing, the company executives decided to embark upon a fraudulent course of action to bring in the financing unwittingly from their customers. As each unit sold was tracked via serial numbers and also sat uninspected for some weeks inside warehouses in Singapore awaiting use in production, the decision was made to ship pieces of masonry inside the boxes that would normally contain hard drives. After receiving payment, MiniScribe then planned to issue a recall of all the affected serial numbers and then ship actual hard drive units as replacements, using the money received to meet financial obligations in the short term.
However, MiniScribe embarked upon a round of layoffs just before their Christmas shutdown, including several of the employees that were involved in the packaging and shipping of the masonry. These people immediately called the Denver area newspapers...."
(1) Money invested provides returns because it's invested in some profit-generating process. Large corporations generate predictable but low returns. Small companies, if the right ones are picked, should be able to do better.
(2) Putting money in the smartest people (technologists) should be a no-brainer winning proposition.
(3) Venture capitalists don't just want to give people money. They want to manage, and they want to take what they see as "the fun work".
This leads to adverse selection. The best entrepreneurs limit VC involvement (they'll raise money, but on their terms) so VC gets stuck with the middle.
The golden rule is, he who has the gold makes
the rules. Well, the people with the gold
are the limited partners, heavily pension funds
and university endowments. At these limited
partner organizations, the people making the
decisions are in the tradition of banking and
finance MBAs. They are not particularly technical
So, they like to look at usual accounting
data and otherwise think much like bankers.
For them, venture capital is a small 'asset class'
for which the limited partners do not want
to make exceptions. So, the limited partners
have the venture partners on short leashes,
that is, constrained. For the
information technology venture partners
(biotech may be quite different), apparently
the main constraints
are, the venture partners will invest only
in the 'themes' they presented to the limited
partners and then only based on near surrogates
for accounting measures. The main surrogates
are the parts of 'traction' -- for a Series A,
usage, 'monetizable' in a large 'space',
significant and growing rapidly.
With this guessing about rules,
one issue is 'bubbles': Without some
constraints, the venture partners may be
able to blow bubbles. Then we could hear
again "Never be between a VC and the door
when the lockup period is over.". Likely
then the limited partners could be losers
when a bubble bursts. So the limited
partners want to hold down on bubbles.
(2) The limited partners like to see
venture partners of a certain kind.
So, if look at the Web sites of the
venture firms, apparently someone
up there doesn't like venture partners
to hold Ph.D. degrees, not even in
STEM fields. Instead, the 'vanilla'
background of a venture partner is
an Ivy League non-technical Bachelor's,
a Harvard or Stanford MBA, a few years
in management consulting, and some time
in a successful start up in a non-technical
slot, say, sales, marketing, or business
development. There is an assumption:
The 'technology' is just routine
My view is, with this setup, no wonder
on average venture capital is doing
poorly on return on investment. I
wouldn't know what the heck to do to
make money in that situation. It appears
that the smarter venture partners want
(A) to get a lot of publicity so that they
can see the best deals early on, (B) do
a lot of pressing of the flesh, especially
in Silicon Valley, Boston, and maybe NYC,
to hear about the best deals early on,
and then (C) get in the best deals. So, e.g., they
want to recognize and get in on the next
Facebook when it has 1 million users
and is growing at 10% a week or some such.
To me this approach throws out the baby
and drinks the bathwater. Uh, the big
advantage is the technology! We should
push the technology forward and exploit
the technology for more powerful, valuable
solutions. But the venture partners do not
want to have to try to evaluate technology
and, really, want to assume that all the
technology is just routine software. Or,
usage significant and growing rapidly in
a big space is terrific; if there is also
some really advanced technology, then
maybe that is not too bad!
I don't see it; I don't see any hope.
To me the key is to concentrate on
more and more powerful technology,
in a military aviation analogy, to
"push the envelope" on altitude,
speed, rate of climb, turning rate,
etc. So, in that famous one word
answer, what we want is "more".
My guess is that what we need to do
for a 'project'
is to pick a 'big' problem, that is,
one where the first good or a much
better solution will seen as a
'must have' by, say, 1+ billion people
(or a few people each willing to spend
a lot of money). Then use the most
powerful technology we can to get the
most valuable solution we can for this
big problem. But that's not what
venture partners want to do if only
because they want nothing to do
with trying to evaluate advanced
Yes, projects of the kind I believe
are needed arrive in the e-mail
in boxes of the venture partners
far too rarely. But, when they do
arrive, the venture partners do
not see another Facebook and ignore
the contact. The solution is (A)
more projects of the kind that are
needed and (B) venture partners
paying careful attention to such
To get more projects of the kind I
believe are needed will require
work all the way back in the
'high technology supply chain'.
How to do that? The US did that
in a big hurry once Sputnik went
up, on TV, in middle schools,
in high schools, in summer programs,
in colleges, in the best research
universities, with lots of grant money
in STEM fields, and, during the Cold
War and the Space Race, a product of
that supply chain in two weeks going
on seven interviews and getting five
offers, each for an annual salary
six times what a new, high end Camaro
cost. It can be done. At the very
least, venture capital will have to
reach out and encourage much more in
advanced technology. Then venture
capital will have to learn to
evaluate such projects.
In the meanwhile, venture capital
will look for new ways for teenage
girls to gossip and look for boys!
Your mention of technology and pushing the envelope makes me think of one of my current laments, "Who's going to finance the development of the next FPGA?", where FPGAs are an example of a neat and important general purpose technology.
How much of that is "New and Improved!" with the emphasis on improved, as in, better/cheaper ways to do the same thing, vs. just plain new? I cite the FPGA because while it was the end of a long line of innovation like PALs, it was qualitatively different. E.g. allowing telecom vendors to support new or improved ^_^ protocols with new firmware (vs. an inflexible ASIC or the like or very very fast general purpose CPUs).
The cloud, yes (and a classic disruptive innovation). SDN and virtualization, I'm not so sure. Or at least the latter was just applying old concepts (it's been a long time since IBM's main OS could boot on raw hardware) to a different platform. Radio I don't follow at that level. Low power/high performance eventually equals a qualitative difference which I gather we've reached, so yes, but I quibble that was semi-inevitable, driven by demand and specifically enabled by Moore's Law and the savvy of ARM Holdings et. al. Camera sensors even more of that, plus also enabled by low power infrastructure.
ADDED: no breakthroughs in batteries, but some incremental improvement?
I'll grant you that that's qualitatively different, although what it means we'll just have to wait and find out (aside from those involved in inventing that future---I'm very much not a part of that, owning a feature phone that's turned off almost all the time, in part because my lifestyle is not very mobile).
SSDs are in part a classic disruptive technology, a repackaging of something new and at least originally not quite ready for prime time that's eating away at various disk drive niches, some lower end.
On the other hand they're at least a bit of a sustaining technology, just another mass storage technology (well, at least until people start using them as other than drop in replacements for disk drives and use them with their advantages and limitations). Funding them as a class of technology is not a hard decision for VCs, they're not as much a new thing as FPGAs, and there's e.g. Intel validating the concept.
The VC was seventy-five minutes late to the meeting. She refused to see him even though he was in the office and her calendar was clear. Later that week she raised money from someone else. He kept emailing her saying his partners were going to kill him, please take the meeting with me.She never took the meeting, and she never called him back.
Good for her. If he's 75 minutes late the very first meeting, that signals you're not a priority and could suffer in the future when you most need it.
I don't care how "big" you are....if you want people to respect you, respect their time.
We know from the article the VC had flown into town to see her and had the rest of the day clear as well, which suggests seeing her was a priority. Not calling to say he'd be late certainly suggests a lack of judgement (although we don't know the reasons/excuses behind that) but refusing to see him to prove a point smacks of arrogance, even if she didn't need the investment by them. I bet she'll miss a few scheduled appointments "on her way to building a billion dollar company" too.
The whole article reeks of sense of entitlement: I guess it's easier for the article author to feel a lot smarter than an industry when he's already persuaded it to part with >$70million to try to get his company to profitability, but he'd be in a stronger position to lecture the dumb VCs if and when he actually produces the return that proves his superb judgement negated the need for their suggestions and everybody that hesitated to offer terms should have called him earlier.
I thought this too, but the article makes no indication that he ever attempted to explain. He could have called/emailed and explained in advance, and asked to reschedule—even for the same day—, or he could have explained in one of the emails he sent afterwards.
Of course, this information could just be omitted from the article.
Good points, but what a sad level of discourse. "Dumb VC"? If you don't like the VC, or find them unprofessional, there's no reason to lose your own professionalism, certainly not to write "dear dumb VC" articles on Medium.
I explicitly said I wasn't disagreeing with his point, just pointing out the lack of courtesy that I find endemic in rantings that are posted here. Your posting of the "hierarchy of disagreement", on the other hand, looks like classic middlebrow dismissal.
On yet another hand, courtesy and manners are social inventions of aristocracy that constitute a tone argument, which is pretty low on the PG hierarchy and at any rate is an argument that benefits only the (in this case) VCs.
While I appreciate where you are coming from, I actually prefer the blog post's vernacular when operating in the startup world. Where language is deliberately used as a mask, it's refreshing to hear things presented in the straightforward manner - it does away with the complexity for which there is little time on either side, the entrepreneur's & vc's.
Yeah, I wouldn't want to be one of the VCs that's named in the article.
Maybe the 'dumb vc' thinks you have what it takes to be successful as a person with the right product and that's why he/she wants to talk to you without knowing the product. If he/she reads this article you probably lost a fan.
Maybe he/she honestly just wanted to give good advice, if you think the advice sucks then you are the stupid one to meet 6 times with the VC..
I hate this one-sided professionalism that we're expected to hold where we never tell the truth about ex-employers or scummy ex-business partners. If someone screws people, the world should know.
If I say, "<Venture Capitalist X> had sex with a woman not his wife", then I'm being unprofessional because I'm taking someone's private matter and exposing it to the public, quite possibly maliciously. On the other hand, that's not what we're talking about. If I say, "<Venture Capitalist X> screwed me and damaged my career", I'm helping everyone else out there make better decisions. How is that a bad thing? How is that "unprofessional"? Relevant information should be shared. (It's the embarrassing but less relevant "dirty laundry" that shouldn't be exposed.)
If companies can damage our reputations by, for example, firing us after 3 months because we refused to commit perjury to save an imperiled executive's ass, then I think we should be allowed to fight back. They don't act like they're entitled to protect our reputations, so why do we have to protect theirs?
In OP's case, he's not even naming anyone; just pointing out sub-optimal behaviors.
The author makes the mistake of taking a single data point (a throwaway comment at that) and generalising from it.
If you've got a board member or advisor (be it from a VC or elsewhere) with strong experience, then it's crazy not to talk to them about the problems you're having.
It's not just about product strategy, it's about building a company. If you've never had to scale a sales organization, if you've never had to open offices in foreign countries, etc. then it makes a huge amount of sense to speak to someone who's not only done it but has sat on half a dozen boards of companies who've had to go through the same set of problems you'll face.
What you should however take away from the article that it's important to do due diligence on your investors. You want an investor whose advice you'd want even if they weren't invested in you (this applies both to the VC firm and to the VC partner you'll be dealing with).
Why would anyone chose a top-tier VC over another VC - it's not because they offer the best terms of investments. It's because their value-add in terms of expertise, etc. is higher than everyone-else.
There's no point in going after a top-tier VC if all you want is money.
After working as an analyst for one of these Dumb VCs, this is the first piece I have written that summarizes everything I feel about them adequately. Especially the last snarky remark about the 94% of VCs that read the article.
I genuinely feel like there is an incredible market out there that is waiting to be tapped: No Bullshit VC's. Give entrepreneurs a commitment: Once you get to the stage where they want to meet with you, they meet with you once, have an agreed upon time period for research, and at the end of the time period, they give you a term sheet or a refusal. Extra points if they give straight-forward valuations without the salesmanship bullshit of trying to quantify intangibles like the value of their advice or connections. And extra extra points if they avoid meddling.
One thing I noticed about some of the major successes in the good old days (the '80s for me) is that they had a "No Bullshit" early investment, one where a VC took a good look at the company and without wasting time signed a check. Sun I think enjoyed one of these....
More medium.com linkbait. You can't generalize like this. I've seen VC's rescue companies that were on the skids and I've seen VC's invest in companies being more than happy to be hands off. I've also seen them contribute to new management after the original CEO met with some really bad luck right after the investment.
All VC's (unlike whiny articles on medium.com) are not created equal. If you're going to go out and write a piece like this anyway you might as well go all the way and name the party, as it is it's an unverifiable one-sided ploy for attention.
We were the first company to transmit cable television signals over fiber optic cable, but during a board meeting, our VC's representative heard we were using lasers, and wondered if we could expand the business by selling tattoo removal equipment. There are instances where a VC should give you money (assuming you're a good bet), and yet NOT get a board seat (or as the article says ... a returned telephone call).
I don't understand. They want a VC who is "hands off," yet at the same time they want a VC who "cares about the product," citing the example of a VC showing up wearing their company's pants. Why does a VC need to care about your product if you want them to just fork over cash and remain hands-off?
Works when I do it, in Chrome. If it's failing in Firefox, my guess is it's an issue related to the JS history API, which differs slightly between the two (and is generally a giant pain in the ass to use correctly.)
very well put together - great piece. As op expects, there will be flack as 'dear dump startup' etc but we all know that as its the norm and VC's have an aura as if being on the other side of the fence they are playing a different ball game. Nope !