Strong Opinions @marksbirch

brycedotvc:

JWZ had some choice words for VCs the other day:

When a VC tells you what’s good for you, check your wallet, then count your fingers.

I did make a bunch of money by winning the Netscape Startup Lottery, it’s true. So did most of the early engineers. But the people who made 100x as much as the engineers did? I can tell you for a fact that none of them slept under their desk.

So if your goal is to enrich the (VCs) of the world while maybe, if you win the lottery, scooping some of the groundscore that they overlooked, then by all means, bust your ass while the bankers and speculators cheer you on.

I don’t know Jamie’s history with VCs, so I won’t speculate. But his post got me thinking about the contrast in perception vs. the reality of VC economics…not exactly the windfall Jamie berates in his rant against those greedy, good fer nothin’ freeloading VCs who are only passing along table scraps to the founders and employees of the companies they back…

This is a good inside perspective on the economics of the VC industry.  The example that Bryce provides is instructive and drives home the point that things are not so cut and dry and profitable, even on what on the surface looks like a windfall.  However, this really does not change the perception, nor does it address the core grievance which is the gap in the wealth/work ration between the VC’s and entrepreneurs.

Entrepreneurs are putting in a significantly greater level of risk when building a startup, particularly first time founders.  They are on the death march to succeed.  They are beholden to investors to make something of their investments, they are beholden to employees to make sure they get a paycheck, and they are beholden to customer and partners to deliver on the promised goods and services.  They are doing this all with little, if any, personal wealth.  Thus they burned the bridges and it is do or die time.

VC’s are simply coming from a very different life situation and have a very different level of personal risk than entrepreneurs.  VC’s by and large come from careers whether finance, tech or otherwise, where they have generated a decent level of personal wealth and provides for a comfortable living.  While they do risk part of their own wealth when forming a fund (common misconception is that they do not), it is a small part of a much bigger fund, which gives them a greater ability to take and manage risks.  This capital is deployed towards high risk investments, it is across a broad portfolio of investments and in the math of VC’s, it only takes a few homeruns to make up for all the strikeouts.  So when Bryce goes through his example, while the VC firm may come up on par with the early employee in terms of pay out, the employee only has one transaction, the VC has many times the opportunity for large payouts.  The example informative but it is not really an apples to apples comparison.

But back to the crux of this argument.  VC’s and founders both work hard.  People in high risk ventures generally do and the riches go to those that put in the hours.  On the startup side, there are intense coding sessions, all-out sales blitzes, and strategy shifts and pivots.  But VC’s are also working hard raising funds and dealing with their own investors, researching and meeting with 1000’s of startups, and ensuring the success of their portfolio companies.  It is easy to look across the table and think the VC life is good, but it is only the result of hard work and many hours put in.  On top of that, most funds really have not performed well, greatly limiting the potential windfall.  While the carrying fees can help limit the blow for the partners of a fund’s poor performance, it is not much solace nor much of a financial consolation prize.

Rather than spend energy complaining or comparing or insinuating however, maybe we can simply be at peace realizing that it is a partnership of design.  Without VC’s, most high risk technology ventures would founder*. Without entrepreneurs, there would be little innovation and business creation.  There are bad actors on both sides and there are certainly plenty of scumbag investors, but on the whole, the partnership has worked over the past 50 years since the first venture deal.  But the partnership works because everyone has different roles and everyone has to work hard to make it successful.

* WORD NERD ALERT: I was going to use ‘flounder’ here, but I realized that the meaning was not accurate.  Here is a good explanation of the difference between flounder and founder.