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The current venture capital model is all about social dynamics. Almost everything that VCs do is intended to remind founders that they are the supplicants asking for money, and the VCs are the wealthy financial professionals who are the gatekeepers of their social class.

If you've ever been to a major VCs office you'll know exactly what I mean. The decor is all marble and old money. It's designed to let visitors know that the VCs are rich, powerful and important, more so than the founder who is coming to seek capital. It's not that the VCs are bad people, trying to manipulate founders with psychological mind games. It's that this is the way things were done for most of the 20th century and most VC firms are still playing by the old rules.

Most of the things that pg complained about specifically fall into this category of social dynamic reinforcement. Why do VCs make raising money into a ridiculously drawn out process of months of email after email? Because only the powerful side of the negotiation can do that. Those who are serious about getting a deal done answer the phone when it rings. The boss can afford to wait until they have time on their schedule.

Why do VCs compel founders to accept more investment money than they might need? Again, it's a power thing. When you go to the bank and ask for a loan they don't convince you to take $5MM more than you asked for. This is because bank loans have become a commodity and they need your business as much as you need their money. VCs are fighting commoditization with everything they have. They like a system that makes them much more important than the other side.

The kind of VC that pg said would get "all the best deals" is one that valued founder's time as much as their time. That placed the founders financial needs on the same level of their financial needs. Well, what VC wants to play that game? It's smarter to preserve a system that you are firmly at the top of than it is to lower standards to get more deal flow. Right now the Sequoia brand is worth it's weight in platinum, which means that they get to dictate terms entirely. It will be a long time before they change the way that they do business in order to cater to the needs of any given founder.

I'm not saying that VCs are malicious or evil. They are generally very intelligent, capable and good people. It's just that they are they are caught up in an antiquated system that places too much value on social status and position. Most VCs worked their lives to get there, they aren't going to give it up even if it's the right thing to do.

I think the real question is: Why doesn't Paul Graham start this mythical founders first VC firm? People trust him with money and he's proven that he can put common sense over his ego. He has the respect of the community and as he said himself, if he followed his own advice he could get all the best deals.




"Why doesn't Paul Graham start this mythical founders first VC firm?"

Partly because it would conflict with YC, partly because I wouldn't be good at it, but most of all because I don't want to. I like dealing with early stage startups, because at that stage the big problem is what to build. I wouldn't be any good at advising founders how to organize an executive team, or how to prepare the company's finances for an IPO.

Incidentally, VCs are not nearly as bad as this comment suggests. The best ones are nice people and genuinely helpful. When they take a long time to make up their minds, it's because they're afraid—not just of the risk of investing in a particular startup, but because that startup has to be the only one of its type they invest in.


"but most of all because I don't want to."

Like a boss.

pg - I know you mentioned increading idea conflicts in the essay, but in your comment you touched on it again in a slightly different way. VCs can only invest in one of a given type of company. The increasing ease of starting a company should result in more startups in more obscure markets where previously would-be founders only saw employment and academia as their two paths. These new investable markets should present VCs with new and less saturated opportunities.

Are VCs and other investors going to be ready to jump into previously uninvestable markets? Feels like they weren't with hardware. Do you expect it to be different this time?


New markets shouldn't be a problem for VCs. They're used to the idea of startups moving into markets that didn't have startups before. They have a bit of inertia, like anyone does, but on the whole they're probably more open to having their minds changed than most people, if only because any experienced VC has seen a bunch of apparently crazy ideas turn out to be good.


Unfortunately, someone being a "nice person" doesn't mean they're immune to being corrupted by power. If I had known Obama before he was elected, I'm sure I'd have thought of him as a nice guy. As this last month shows, that's no protection against abuses.

Given that the corruption is minor - petty abuses like not returning emails or stealing a few percent equity or inserting terms at the last minute - and the amount of power so large (giving tens of millions to people who are often broke, with zero appeal or oversight), I'd be surprised if it didn't happen.


The best ones are actually very careful not to do anything fishy. They don't need to, and in any case it would not be worth the risk to their brand.


(A side note irrelevant to this comment thread. One has to applaud this essay for one of the most strategic uses of "Hell if I know".

I learned a lot about writing by reading what you write. Thank you.)


because that startup has to be the only one of its type they invest in.

That's surprising. Would anyone mind explaining why that's the case? YC has no such restriction, and it seems to work out ok. Why wouldn't later stage investors do deals with multiple startups in the same space?


VC's won't invest in competitors - how would you give advice/counsel? It would cause all sorts of weird dynamics in the firm (e.g. partners competing) that are likely to be pretty detrimental.

In terms of why YC can get away with this, companies are so early that it's not clear what they will ultimately be doing in the end. Many of the internal competitors ended up that way by accident. Moreover, YC doesn't make singular large bets, while later stage investors do. As a result, they aren't nearly as diversified as YC is and so a duplicate represents a much greater overall risk (essentially guaranteeing a loss before you even start).


VC's won't invest in competitors - how would you give advice/counsel?

Hmm. YC does, and it seems to work ok. Why wouldn't it work for later stage VCs? Or rather, why does it work for YC?


YC deals with people at such an earlier stage that a lot of their advice and hand-holding is more generic - how to get a product out the door, how to improve user conversions, how to attract quality talent - these are examples of isuses that are universal, so having (some) competitors isn't too much of a conflict.

A later-stage VC, though, you might be having conversations with portfolio company A about how to entice sales people from portfolio company B, or portfolio company B might be getting ready to expand internationally and you're advising them on the best way to capture market share in Asia, where company A is stronger.

It's much more specific, targeted advice and consultation vs. "here's how we're going to help you get off the ground"


I'm going to take a guess here.

YC doesn't have to give up the best of its limited resources to competing startups. They just help get you to a Series A round. They can do this for competing companies without any issues.

VC's help assemble an executive team, provide critical business relationships, etc., and it's not in anyone's interests if they have to divide their best contacts and resources between two competing companies. They should want to go all-out in providing one company all their best resources.


I think there might be a disclosure requirement or perhaps it only matters if they take board seats or what kind of access they have to internal matters.

At latter stages it might arise if a company pivots into another space. See this on how Andreessen-Horowitz dealt with a conflict (Instagram v. PicPlz):

http://bhorowitz.com/2012/04/22/instagram/


Conflict of interest. If you're advising startup X in the "deliver food to people at lunchtime" space, it could very well be a conflict to do the same to startup Y in the same space, as they'd be competitors.


Thanks PG for this essay. Some of the issue with the various mythologies (and more often than not, bromides) around seed/angel/VC is that they're based on historical conclusions (that seem to have been arrived at in the late 90s early 00s), rather than a more forward-looking approach to what's changing (infrastructure costs, tech eating the world, etc.). As an angel, it seems pretty obvious to me the shape of the investing world is shifting, so it's nice to see it put so well.


"When you go to the bank and ask for a loan they don't convince you to take $5MM more than you asked for. This is because bank loans have become a commodity and they need your business as much as you need their money."

This is mostly wrong. Banks have all the power in the vast majority of business lending situations. The reason they don't throw extra money at you, is not due to the borrower having the power (not even remotely close).

A typical bank only wants your business if it's good business. Their returns are modest on a standard business loan, and they don't like to have even one bad loan if they can help it. They never get a surprise windfall (think: Instagram); the return is well set ahead of time. Their business model is so radically different that it's not very useful to compare to the VC business and its money or style.

A bank doesn't normally convince you to take more money, because they fund very strictly for sound operating practices ideally, because their returns are thin. Their ideal loan is the exact amount a business needs, because that business has to pay on that loan monthly or similar (whereas with most VC that is not the case). The bank loan adds to the operating cost, and has to then be factored into the business equation. They can't afford to lose 90% of their portfolio because one grandslam will make up for it.

Where a bank gets the money it's going to lend out is also radically different from VC, and the conservative nature of that money properly requires conservative lending practices.

And it's not true that banks won't try to throw extra money at you. They do, and I've seen it. But they only do it for 'perfect' customers that present nearly zero chance of default or failure (which describes very few business borrowers).


> and they don't like to have even one bad loan if they can help it

I'm sorry, which banks are we talking about here?


PG did start a founders first vc firm. It's called yc, and they have a nondescript office in mountain view and tell you yes or no after a 10 minute interview.


I wouldn't say that it's nondescript.


The building is pretty plain in an off-the-beaten-path location that you could easily miss. I think "nondescript" is a pretty good adjective for it.


I was thinking of the interior. I guess you're right considering the outside of the building. However, that's like almost every building in the valley. Sand Hill Road isn't exactly an architectural tourist destination, either.


The interior too. It's pretty non-descriptive (and orange) compared to most company / vc offices.


> Why doesn't Paul Graham start this mythical founders first VC firm?

My question is why would he? I can only come up with two reasons: 1) more money 2) a sense of altruism (we have to help startups succeed even more!)

In terms of the first, YC seems to be doing pretty darn well by the numbers, how much more money do you need? The second is nice in theory, but I wonder if it would actually have a negative effect.

The value provided by an early investor and a later stage investor is different in the same way that young companies need very different things than they do later in life. In the beginning what companies need is largely the same, and so advice and such can scale relatively cleanly (as YC has shown). As you grow, though, what is needed more and more is specific, individual advice - the answer won't always be the simple "don't die".

There's no question that YC (and PG himself) represents one of the most authoritative sources of information on early stage investments, but it's not clear if that will directly translate as companies progress. If not, he'd essentially have to start over, refiguring out what it means to succeed and who knows, maybe he wouldn't be any good at it. Either way, if you tried to master both, I think one of two things would happen: you'd either lose your grip and be good at neither, or you'll "succeed" with the end result being homogeny. You'll seed companies and direct them into being what you want them to be for the next fund. That kind of "vertical integration" easily leads to a rules oriented echo chamber - the exact kind of stagnation that lets some scrappy "startup" come in and eat your lunch.

Could he do it and make it work? If anyone could, I'd bet on him, but I actually think there's value in having YC stay at the stage they are. It's better to have multiple forces at work, pushing and pulling against each other.


You made me realise that what Graham wants is an institution that has the risk appetite of a VC and the operational behaviour of retail banking.


I see it more as a case of PG observing that gravity will pull the industry in that general direction and that smart money will move downhill along with it.


He's describing classic cartel-breaking behaviour, a variant of the prisoner's dilemma. When an individual agent can profit more by cheating on a cartel, then such cartels are going to find it difficult to remain stable.

But the question is whether the VCs see it that way. By which I mean: cartels disintegrate when there is a clear profit to cheating. But the VCs might not see the "cheating" as very profitable.

What seems more likely is that this role would be fulfilled by an outsider; once the new model is proved, then the decision to cheat on the cartel is more obvious. aka "Disruption".


I would say the same:

Paul isn't going to be doing this idea. But he does sound pretty positive about it.

Maybe there aren't that many VC-class high net worth individuals reading here, but it only takes one.

Who's going to be the first? (Apologies for the obvious slant...)


With the obvious caveat that nobody can speak for PG except him, I'll take a shot:

I don't think he wants to. Even though I think he'd argue otherwise, he's a genuinely good guy. Not in the way that you think of when you think of the class clown / extroverted nice guy, but more like the kind of good that he sees the potential in people sometimes before they see it. In his current situation, he provides help really broadly for a lot of founders, thereby helping the entire ecosystem. If he ran a traditional-ish VC fund, he'd probably have to be on boards, learn what it's like to run a huge company, etc. It just doesn't seem like it's as perfect of a fit.

I think PG has found his way to influence the startup world for the better, and it's through essays and through YC. He gets to spend a few months at a time working really hard to help startups succeed, and then he takes some time for his family.

I think a lot of people forget how much work it is to try something new and different. Given the numbers he references, YC is, at this point, basically a proven startup. If he were to try to switch his model, he'd have to essentially start over, which means lots of guessing, hits and misses, etc. I know I wouldn't want to try to start over from scratch when the thing I'm working on now has so much potential.

That is, unless, raising a fund / swinging for the fences would be a way to broadly change the startup ecosystem. (jury is out on whether that'd be the case, imo)




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