Tired of Self-Hating VCs

Matt Harris —  February 22, 2011 — 15 Comments

This post was stimulated by a tweet i read over the weekend, by a VC I won’t name because I don’t know him, and he has a very good reputation for being a nice guy. His tweet read: “I’m really not sure I like VC’s”. My reaction to this missive went from, at first, a knowing smile, then to mild irritation and finally to downright anger. Anger, not at him, but at myself. Anger at the fact that this kind of radical and broad based self-deprecation (and by “self” I mean all of us) was amusing, old hat and totally unexceptional to me, and to all the rest of us who practice venture capital.

I have a clear sense of why this is. The origin story of the VC as black hat is based around the archetype of the entrepreneur as philosopher king, and the VC as necessary evil. It is a story that is perpetuated by every entrepreneur who was told “no” by a blue-shirt-and-khakis-wearing weenie like me, and by every angel investor looking to build a brand. It is a story that is fueled every time a VC checks his/her blackberry in a meeting, or says something inane or just fails to return an email. I get it, and I’m sure I share in the blame for the lasting power of this narrative by my lack of social skills or by the response time implications of my clogged inbox.

But the biggest way in which I contribute to the persistence of the “VC as evil” meme is by nodding knowingly when it is mentioned in my presence. There is a way in which, by agreeing that the phenomenon is real, I implicitly place myself outside of it … “yeah, VCs are jerks, but I’m obviously one of the good guys.” Just the other day, I was speaking with a successful angel who is considering raising a fund (I know, you’re *shocked* to hear that), who characterized that decision as “going over to the dark side”. I laughed. Here’s what I should have said: “Screw that.”

And that’s my take on this notion from here on out: Screw that. The worst VC in the world spends his or her entire working life providing jet fuel to the entrepreneurial economy. That’s what we do, even in our darkest hour … that is literally the only tool in our tool chest. Remind me what’s so bad about that? Of all the professions in the economy, what is so “dark” or “evil” about injecting cash into high growth companies? I’m clearly missing something. Every venture capitalists I know does three things all day long: figure out which entrepreneurs to back and wire money to those entrepreneurs; work like hell to help those companies; and pitch limited partners that they should give him/her more money to rinse and repeat that process. Again, personal foibles and the occasional jackass aside, I think we can agree that these are activities that are massively net positive to the world.

Now, like any insider in any field, I could talk at length about how far short of the ideal I and my compatriots fall. But how unusual is that? If you want to hear something chilling, you should go out for drinks with some medical residents, and hear them talk about the foibles and failings of overworked young doctors. Or discuss food hygiene with a chef in an honest mood. Or watch “Waiting For Superman” to learn about the delta between the perfect and the real in the teaching profession. Here’s a quick newsflash: human beings are deeply flawed. The bottom 20% of any field is depressingly pathetic. That fact does not make medicine, cuisine or teaching worthy of wholesale mudslinging, and the same should be true of venture capital.

The other day, my 2.5 year old daughter asked me what I did for work. I said that Daddy helps people start companies. I’m pretty sure she didn’t understand what I meant, but it felt good to say it. I’m proud of what I do, and I think she’ll be proud of me, too, someday (though I’m pretty sure she’ll always be willing to swap me for Dr Seuss.)

15 responses to Tired of Self-Hating VCs

  1. Nice Matt. Very thoughtful, well articulated commentary.

    I think your last point is what really matters and as a father I can relate. Our children are a valuable moral compass. If you can share, honestly, what you do for work with them and feel good about it, you’re probably doing alright.

    • I really appreciate you saying that … having kids has changed my whole lens on these matters.

      • I hope you’re surprised regarding your daughter. It depends on how quick she hears the word company on television or wherever. From that, she will formulate her own ‘jpg’ in her mind regarding what is a company.

        That ‘jpg’ will evolve over time.

        • Totally surprised. Even more surprising, she actually knows the word entrepreneur, in that her mom has a radio show on NPR about entrepreneurship (www.fromscratchradio.org). I’m glad to hear that these “jpgs” can evolve!

  2. terrific threnodial Yawp…. heard its resonance all the way up the west side….
    dave

  3. Let’s be real Matt. You don’t help start companies. You find people who probably have a company started and several risk milestones already completed. You jump on an already moving train and add momentum to that train.
    And in so doing, you provide terms which are wildly nasty to the entrepreneur, but given the paucity of people handing out millions of dollars of other people’s money, they’re usually the only terms available (liquidity prefs, participating preferreds, warrants, etc…). You tell the entrepreneur that you’re in their corner until they stumble on an inevitable growing pain by which time you and the rest of the VC cabal conspire to bring in someone with good hair and teeth and resume who will then go through the motions of being ‘adult supervision’ all while running the business into the ground.
    I’m not asking you to hate yourself, but don’t bullshit those of us in the Valley who know how things work for you. You get to enjoy a very nice salary while waiting for a few of your portfolio companies to come in with the tide while asking entrepreneurs to live ramen lifestyles and hope their one chance at glory doesn’t blow apart their family.
    Excuse me if I don’t bask in the glory that is VC.

    • Thomas, to be honest, I hear you. You say a few things that I think add to the conversation, if I can paraphrase:
      >Most VCs don’t come in at the raw start-up phase. Empirically that’s true … most don’t, and most of the capital comes in later. My own firm has started out with about 50% of our companies at the seed stage, ie, based on a powerpoint. I will admit I am most proud of those deals.
      >VC terms are prejudiced in favor of the VCs. Agreed. That is in fact the intent. The principle that is embodied in these terms is that if I buy 1% of the company for $100,000, and the founder gets 1% for starting the company, I should get my $100,000 back before he/she gets anything, regardless of the equivalence of those ownership stakes. This explicitly privileges cash money over sweat equity. Personally, I think that is fair, but I am open to the counter-argument.
      >VCs replace founders. This happens. In our portfolio, it has happened in fewer than 25% of the cases, and in the vast majority of those, the founders were in agreement with the change, but there have been instances where that wasn’t the case. Our explicit philosophy is never to back a company where we don’t think the founder can make it all the way. Replacing founders is amazingly unpleasant, and as you point out, often fails. Having said that, I think most reasonable people would agree that there are instances where founders aren’t equipped to grow from a 1 person company to a 500 person company, and as a result transitions are necessary in some cases. But which cases? Reasonable people can disagree (and I assure you, the founders in question will indeed disagree, regardless of the merits of their argument). As we all know, entrepreneurs are persistent and stubborn, to their credit. So this is a sticky issue, acknowledged.
      >The economics are unfairly weighted towards the VC. Here’s my view of the math there. Let’s say the average VC firm owes 10% of a portfolio company. Let’s assume that the average VC firm doubles their capital under management, so that 50% of the proceeds from any exit represent profit, for the purposes of calculating carried interest (admittedly a simplifying assumption). Let’s assume that an average VC partner shares in 25% of the carried interest pool, granting them a 5% share of profits. Ok, now let’s assume a $150MM exit. The VC fund pockets $15MM. $7.5MM of that represents profit. 5% of that $7.5MM goes to the VC partner, or $375K. That is 25 bps, or one quarter of a percent, of the exit proceeds … roughly the option grant that a VP, Finance would get in a venture backed company. I’m not saying that’s unfair, or that a VC brings more to the table than a VP, Finance, but we should keep this question of VC compensation in perspective.

  4. “>VC terms are prejudiced in favor of the VCs. Agreed. That is in fact the intent. The principle that is embodied in these terms is that if I buy 1% of the company for $100,000, and the founder gets 1% for starting the company, I should get my $100,000 back before he/she gets anything, regardless of the equivalence of those ownership stakes. This explicitly privileges cash money over sweat equity. Personally, I think that is fair, but I am open to the counter-argument.”

    More money can be acquired, more *time* cannot. When you’re dead, you’re dead. Therefore, time is more valuable than money. Therefore you should definitely not get your $100K back before the founder.

    This valuing money more than life energy is the “evil” that most people see in VCs. The phrase “sucking the life out” comes to mind (vampires). To be fair, this is more an aspect of the “money as the only measure of value” flaw in capitalism, but it’s still the part of VC activity that feels evil to many people I think.

    The minimum “fair” balance of this is that both are valued equally. Here’s how I would do this if I had a VC fund: I would say that the hours the founder puts into the venture are valued at the rate that such work would be paid if they were a contractor doing such work (say, $100/hr) and they build ownership at that rate. VCs are buying their ownership with the money they invest (and perhaps their hours should also be valued at some $/hr rate as well). Profit/Income get paid out at the ratio of relative values based on accumulated hours (converted to dollars at the rate) and invested dollars.

    The founder doesn’t get X% just for the idea because, as we know, it’s about execution. Additionally, the investor doesn’t get X% for an X$ investment because the percentage of their ownership fluctuates as the founders put in more time (assuming they aren’t paying themselves, or are paying themselves at a reduced rate).

    Just my 20 cents (inflation :-)).

  5. This is the first blog post of your’s that I have read. Will certainly be checking out the rest. Didn’t realize there was such a thing as a Self-Hating VC. Seems to be the charmed life for those of us on the other side of the table. Closing with the Dr. Seuss line really got me. No matter what I do all day, how my kids see me in the evening is the most important thing. Good to see that’s true even on the dark side (j/k!)

    Cheers,
    Hong

  6. What is wrong with your assessment of value creation is that in the marriage between the asset from an LP (money) and the assets from an entrepreneur (ideas), VC as the arbitrage has failed, producing on average -4.6% 10-year returns. And that means investing in the wrong companies has created many false positives and false negatives and has turned Venture subprime.

    There is no good reason to hate VCs but there is a good reason to hate the institution they have created, awash with subprime collusion.

  7. The fallacy in your argument is that you assume that only the bottom 20% of the VC industry is depressingly pathetic.

  8. This is an excellent post, Matt. I agree whole heartedly. The VCs as ‘evil’ moniker is old and arbitrarily applied.

    As a side point – deal terms are almost always market driven and impacted by supply and demand of capital as well as a natural pricing of risk. In *general*, describing deal terms using normative language makes little sense.

  9. What would annoy me most about the tweet that triggered your post is its grammar. It should say “VCs” instead of “VC’s”.

Trackbacks and Pingbacks:

  1. Tweets that mention Tired of Self-Hating VCs | For The Win -- Topsy.com - February 22, 2011

    […] This post was mentioned on Twitter by Deb Berman, Matt Harris and Alex Taussig, Bilal Zuberi. Bilal Zuberi said: VCs suck. at PR. RT @mattcharris: [NEW POST] Tired of Self-Hating VCs http://bit.ly/fFZalF […]

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