Last week, a bit of a controversial, but thought-provoking, perspective about Venture Capital caught the attention of a lot of my readers and followers.
There has been a horrific rash of *VC Bad* propaganda and misinformation lately, sparking my thought that people are being misled about the what Venture Capital is and does. That, entrepreneurs are frustrated because VC isn’t meeting *their* expectations, when what’s actually happening is that people have expectations of VC that are misplaced.
True or not, is the role of venture capital clear? Does a lack of clarity fuel frustration and misalignment of advice and expectations? Are people in disagreement about all this??
A comment on the article somewhat affirmed my hypothesis:
“My own feeling is that VC is too much like flipping houses. In many, if not most cases the entrepreneur and the angels are not interested in building anything, they are just interested in flipping and leaving the final investor with a flawed, leaderless business.”
As I spent the weekend sleeping over this idea, some notable VCs joined me in a discussion asking this question, affirming that indeed, people misunderstand the role of Venture Capital…
Is funding startups kind of like betting on horses? In the sense you bet on a lot of losers, for that one big win?
Is funding startups kind of like betting on horses?? This isn’t well known?? People are hoping to invest in startups as though there is a winner of a race?! Venture Capital is NOT like betting on horses; in horses, there is always a winner.
Venture Capital investing is not even like gambling in a casino, at least the odds there are better than 10%.
People have this exuberance for being a startup investor biased by headlines of wealth and the public perception of being an “Angel” or “VC.”
Here’s the dirty reality…
Startups are for the high risk takers. Startups are for people willing and able to try ONLY because they want to make a difference. There is no higher financial risk endeavor than startups. You could literally do anything else and be better off.
Startups are NOT new businesses. There’s that saying, something along the lines of “business owners work their butt off today so they can take it easier in the future.” (Something like that). That applies to new businesses – not startups!
When a business model is known, you should absolutely consider starting or investing in said “business.” A known model means you should be able to make money and succeed.
That’s not what “startups” are.
Startups do NOT know the model. They’re the R&D of the economy. They try and try and try to do completely new things, and overwhelmingly mostly fail.
That’s normal. That can’t change and isn’t wrong. That’s what startups are: try the stuff that won’t likely work so as to uncover the new stuff that might.
MAYBE think of startups more like medical research in new drugs. It will cost a lot. Some things will harm people along the way. With enough attempts, time, and effort, we might find a cure for cancer.
Is that worth it? Absolutely YES. To some. Most shouldn’t even consider taking the risk because it’s not about financial gain, it’s about the achievement. And on the path to that achievement is difficulty that most can’t manage or afford.
How is funding startups like betting on horses? Imagine running every kind of horse, donkey, and giraffe you can find, not though Churchill Downs but a dirt bike track, betting on all of them, and hoping one crosses the finish line.
Good analogy. Does that make incubators breeders or trainers?
You have me intrigued. Or veterinarians?
Breeders seems to make the most sense, with accelerators being more the trainer. But then that neglects that incubators tend to teach (train) while accelerators push them to be more (breeding the next generation?)
Hence the vet. What incubators mostly do, in my experience, is drastically reduce the rate of failure; they keep the injuries at bay. When 1 might finish and a few plod along, most get injured along the way and drop from the race; incubators change those odds and get more to the finish line.
Thus an interesting and valid point about investors – in what will someone who owns and breeds horses always invest well? A good vet. I’ve long held the view that VCs should be supporting incubators, because they increase the pool of founders who persevere; that rather than seeking the Unicorn, wise VCs would be supporting the work that results in more thoroughbreds.
I like the introduction of the vet option; on reflection it I think we need part vet, part horse whisperer, part trainer. Not too much of an ask?!
Paul, to be honest I’ve been underwhelmed by the VCs I’ve interacted with the last two years. Many seem to lack organizational leadership experience and assume that because of their current role that they can use one set of slides and a 60 minute zoom to evaluate a team that often has decades of experience mastering their tech/craft. Thankfully our Angel has actually built multiple companies and is willing to spend the time coaching and mentoring our team. And for that we now have a budget surplus and are on our way. Had that one Austin VC firm given us a chance two years ago we’d be leaps and bounds ahead of where we are today. Yet, as we become more successful we actually become less likely to work with a VC.
Now I’m curious though, VCs where in the world? What kinds of funds?
Your experience isn’t uncommon Scott Mac Leod, begging the more nuanced consideration: which VCs? Did their objectives truly align with yours? Were they really VCs or did they just call themselves so?
Particularly, I’ve found that “VC” sets different expectations depending on where they are in the world, because their experience, and the expectations of *their* investors, vary depending on those local norms.
I don’t Think the analogy is right Paul O’Brien. Would you like to be a horse or worse a donkey? I also believe that it depends on the stage of the startup. I‘m more in the creation space when it’s about 0 to 1.
What’s wrong with horses and donkeys?
Paul O’Brien or rhinos or zebras ? what a zoo out there…
Maybe what is missing is alignment of interests? If someone thinks investing in a VC is like investing in a hedge fund (or a private equity fund) the VC almost has an obligation to not take their money. There is a lot of information out there about alignment of interest between GPs and LPs, but maybe there needs to be more of a focus on that in the VC space?
Is there a racetrack program for startups?) Favorite horses win more then 30 percent of the time, although at lower payout.
“We have a proprietary algorithm that enables us to identify the donkeys and giraffes that have the highest likelihood of finishing in the top quintile.”
Great article Paul O’Brien! Always appreciate startup insights!
Cheers Javy D Martinez, there’s a whole series wrapped up in some of these notions. As the world struggles with and rethinks Venture Capital, we have a lot of work to do to teach how and why things work the way they do – it’s easier to rethink and envision a new model for funding startups, when our baseline of understanding is closer to being on the same page.
VC is gambling. period. I will keep saying this.
Insightful read, Paul. Many thanks for sharing this.