As Populist as it May Feel, 98% of VCs Aren’t Dumb

Posted on May 25, 2013 | 93 comments


By now you will likely have read Andy Dunn’s scathing post about Venture Capitalists in which he decries the industry’s masses.

Screen Shot 2013-05-25 at 1.38.06 PM

I read Andy’s post with a knowing smile on my face. After all, I am no stranger to publicly expressing the frustrations of dealing with the downside of this industry as I wrote about in 2006 when I was an entrepreneur.

But VC is like congress. It’s easy to hate it en masse yet many people love their local congressman.

Why?

Because they know him or her. They see how hard she does her job. They know her personally and know she cares about her constituencies even if she has to make tough trade-offs from time-to-time.

In the original version of his post, Andy writes

“This essay is dedicated to the great VC’s on my board who I am lucky to work with: Sameer Gandhi from Accel, Jeremy Liew from Lightspeed, and Kirsten Green from Forerunner.

I rest my case. “Hate the industry, Love my local guy.”

But many of the assertions in his post – while populist – aren’t exactly how things are in reality. So I thought I’d have my hand at a friendly counter point.

After all, I understand’s Andy’s frustrations with the industry.

And yours as well. I have felt them myself.

I wrote Andy first to be sure he wouldn’t be offended if I did. Luckily Andy is good natured

andy dunn tweet

So let’s look at the main assertions

1. The industry is dying, except for the top 2%

“I don’t know the exact math, but I hear it again and again: the top 2% of firms generate 98% of the returns in venture capital.”

Unfortunately the first part of that statement is true. The second is not.

The top 2% do not drive 98% of the returns.

LP distributions

I have seen many slices of the data. The quickest I could find was from PitchBook. As you can see from the chart their data suggests there are about $25 billion of VC distributions per year in the US.

According to FLAG Capital there are 100 active VCs (as defined by making at least $1 million in VC per quarter for 4 consecutive quarters).

Their data looks at tech VCs. So for argument’s sake let’s triple the number of active VCs and call it 300.

flag data on vc firms

 That would mean 6 firms drive $24.5 billion in returns.

Not even close to the case.

Most top tier VCs return about 3x invested capital and outlier funds (the best of a vintage) might return 6-8x. It’s true this was much bigger in the dot com era but I’ve studied the data and know that over the past decade these numbers are right.

So if you take 6 very strong performing firms of $250 million and assume they do 5x each that is $1.25 billion each, $7.5 billion in total or 30% of the industry returns.

But Mark, many of the great firms are $500 million and up! If you double your number that would mean 60% of industry returns. Not too shabby!

Yeah, true. But the larger funds usually have lower returns because they are often investing bigger dollars at later stages with less risk and therefore lower returns.

As you can see in this Cambridge Associates data, early-stage investing beat later stage investing in returns in 70% of the past 30 years.

ca data

It is true that every few years a fund exits that delivers smashing results because it has Facebook, Google or Twitter in it. But as an LP you can’t count on that any more than VCs can. You invest across many funds just as VCs invest across many companies.

The better way to think about VC returns is, do the firms consistently beat alternative asset clases on an IRR basis to adjust for the increased risk and lack of liquidity?

Here the data is not always kind to VCs.

But the top 25% do consistently beat the alternatives. The problem is the illiquidity because investors are often locked in for 7-10 years. The goal of an LP is to get into the top decile. But picking today’s top 10 does not pick the next year’s 10.

Take for example Accel. When it went to raise its fund 10 years ago the rumor was that many LPs were disappointed with recent returns and did not re-up. Yet their next fund had Facebook in it. Doh.

And I believe that Accel has consistently shown its ability to be in the top decile in the last decade.

But the funds that every LP wishes they were in – USV & First Round Capital – not to mention Foundry Group, Spark Capital, Floodgate, IA Ventures, Founder Collective, K9, Felicis Ventures, True Ventures, PivotNorth, SoftTech and many others either that didn’t exist 10 years ago or were just sprouting. Neither did Andreessen Horowitz.

So the reality is that yesterday’s winners are no guarantee of tomorrow’s success and today’s emerging managers might just be tomorrow’s best investors.

The industry isn’t dying. It is changing. And reinventing itself. And some firms will go under. And others will emerge. That’s normal. It’s  a market, after all.

In 2000 our industry had more than $100 billion in LP money. By 2009 had reduced to around $15 billion in capital from LPs. In 2013 it is expected to be around $35 billion.

Not. Dying.

Why?

Compare the state of play in 2013 versus 15 years ago. 33% of the world is on the Internet on average of 3.1 hours / day. There are 138 million smart phones in the US alone and … wait … 99 million tablets. Insane.

2008 App ecosystem on iOS = $0. 2013 = $25 billion of which Apples share is more than $8 billion at > 90% gross margin. Credit cards = less friction = more purchases = cha ching.

VC opportunities ahead

2. The best VCs don’t try to help entrepreneurs

I’ll admit that I do know one VC firm who’s strategy is not to call their entrepreneurs and not to be involved in operations. But I seriously only know one. They believe that stock picking is the most important function they can play. They are also less than 10 years old.

But the people whom I consider best in this industry are quite helpful indeed.

Let’s look at some great companies.

Facebook. Is it right that VCs had no involvement in persuading Sheryl Sandberg to join the fledgling company? Not according to my sources.

Google. If you read Ken Auletta’s piece it makes it clear there was active VCs involvement in the early days. It led to hiring Eric Schmidt. And Coach Campbell. And to finally admitting that ads weren’t evil so that Google could copy the model of the fast growing Overture.

Twitter. There have been a lot of management shuffles at Twitter. But in my mind there is no doubt that placing Dick Costolo at Twitter was the most positive thing Twitter has done to become a long-term success. Hard to imagine that Dick joined “organically” or that his becoming CEO also was organic. My guess is both had heavy VC involvement.

Amazon. I’ve heard directly from top executives that Jeff Bezos (in my opinion the most talented person in the tech industry) has received his fair share of VC coaching in the early years

Tumblr. Nothing was more heart warming than the photo of David Karp hugging Bijan Sabet after the sale to Yahoo! And hard for me to imagine that Bijan and Fred Wilson and Albert Wenger weren’t instrumental mentors to David.

bijan david

After all, many people love their VCs but hate the industry.

According to Andy

Dear Dumb VC, it’s so painful to sit in meetings with you and hear your vision for what the company should do and what’s going to happen in the industry.

Just so you know, Dumb VC, the top 2% never do this.

They’re too busy using their superb judgment getting into great deals and bowing out graciously from the ones they don’t want to back.

Not in my experience, Andy.

The best VCs I know take 11pm conference calls. Meet with their teams on weekends. Broker critical introductions since entrepreneurs are often younger & newer to industry whereas the best VCs often have great contacts across decades and many deals.

In my mind, the best VCs actually deliver outsized returns by “leaning on the scale” not by “deal sourcing.”

I had dinner last week with somebody you would consider one of the best known names in our industry. I asked him what he’s learned as a VC. He said,

“I prefer to do Enterprise A rounds and Consumer B rounds.

On the enterprise side, I know every buyer of technology in this industry. So I can make a huge difference in the company’s trajectory. And I’ll know in 18 months whether we have product / market fit. But we can have a huge impact on that.

With consumer deals you can’t manufacture consumption. So I prefer to watch what works first and pay a higher price to get in when it’s proven.”

This rang true with me. Great VCs create the fabric of their success by backing the best entrepreneurs they have access to and then helping them to lean on the scales.

This happens at acquisition time, too. The best VCs know the buyers and can help guide and manage the process.

3. VCs Spend Too Much Time Deciding

Yes. This one is probably true. And for a good reason. Even though I know this sucks when you’re an entrepreneur and just want the money deposited tomorrow so you can get back to running your businesses.

Many entrepreneurs come by with great pitches and say, “I’m hoping to have term sheets in the next 30 days.”

If this happens to you as a VC – you’re too late to the deal. Shame on you. Get to the entrepreneurs earlier next time.

If you don’t really know the entrepreneur through many meetings, debates and encounters – it’s really a crap shoot the fund them.

That’s why I wrote this.

Per Andy,

“I should be building the company, you should be deciding quickly whether to invest or not.”

If anything a “Dumb VC” would decide quickly without knowing the entrepreneur. In my opinion Dumb VCs are too worried about being in “hot” deals so they chase the hottest new trend, the fanciest, best known entrepreneur or the party round that has so many other great names attached to it that they feel they can’t miss this one.

The unfortunate reality is the most partners at VCs firms see hundres of deals every year and invest in 1-2 of them. After 6-7 years they therefore have 7-10 board seats, which is about all most VCs can effectively manage.

A priori many deals look attractive.

Post hoc it’s obvious who the winners were.

Ask any VC who’s been in the industry 10-20 years and they’ll tell you that often those that looked the best when they wrote the check didn’t turn out to be the best. And vice versa.

So caveat emptor to those that feel rushed into deals.

Some of the most bizarre sounding deals end up being huge winners. Some of the most obvious companies and talented entrepreneurs end up not working or burning through too much capital.

VCs are wise to go slowly.

Even though that may not be what entrepreneurs want.

4. VCs shouldn’t call their entrepreneurs once they invest

“Dear Dumb VC, now that you’ve invested, leave me alone! Did you know that the 2% never call their entrepreneurs?”

I’ll just leave it to entrepreneurs to decide on their own on this one.

I call often. So I must be dumb, I guess.

My view … it is my job to be a sparring partner. I want to challenge the founders view.

Why?

Because being an entrepreneur is a lonely job. You have to make tough decisions with few inputs and little history from which to base your decisions. CEOs can rarely express their uncertainty and doubt to others.

So the VC’s job is to challenge. Cajole. Debate. Offer contrasting views. Play Devil’s Advocate.

And then step back.

And let the entrepreneur decide the course of action. Even if it is different than what you would have decided.

Fred Wilson talks about this in his post about Tumblr.

I seriously know exactly one VC whose policy is not to call their entrepreneurs. One.

5. VCs often don’t use the products of the companies in which they invest

Agree whole heartedly. I never understood investing in companies in which you didn’t really understand their products.

I blog. I create videos. I use analytics. I use social media. I IM and DM and SMS. I Instagram, Cinemagram and Path. I Quora. I Trello and Salesforce and DropBox and 500px.

I try to live a “day in the life of” the users.

It’s hard for me to imagine investing in companies in which you don’t use and understand the products and markets.

6. VCs should never be late

Hard to argue with this. Nobody should really ever be late to meetings because it’s disrespectful of other people’s times.

But I’d be lying if I didn’t say I wasn’t habitually late. But I have been since I was a kid. No excuse, but it turns out to be one of the most common traits of people with ADD as I found out when I read Delivered from Distraction.

I wish I were better. I struggle. I try to make it up with humor, kindness, apologies and by giving more time at the end of the meeting.

Many VCs are in fact late. Many entrepreneurs are, too. So are corporate executives.

I have found that being on time versus being late is a personality trait more than a power play.

What I hate more than anything is when people are late and then cut meetings off early. If an entrepreneur was told they have 45 minutes they should get 45 minutes.

In a perfect world everybody would be on time. In reality, that is seldom the case.

The best entrepreneurs don’t get too worked up about this. They understand that it just is. It’s hard for me to imagine that an entrepreneur who was waiting to see the CEO of their largest potential customer would leave if that customer were 20 minutes late. You might be bummed, but you’d bite your lip.

So what I’m really hearing is, “VCs piss me off. So when they’re late the piss me off even more.”

Fair enough.

I pitch a lot of LPs. I have to raise money, too. Many are late. Many don’t return my emails on time. Many don’t commit when I want them to.

I have walked a mile in their shoes so I’m a lot more tolerant about it these days than I used to be.

7. You suck if you don’t have 2+ $1 billion exits.

Ergo I suck.

I work with partners who have seen 15 such exits. My partner Yves will have 3 in our last fund alone and possibly 4.

Me?

Zero.

But I became a VC in 2007 and wrote my first check in 2009 – 4.5 years ago.

So $1 billion exit is unrealistic for me.

And as John Doerr has noted, “your lemons ripen early” so I like to say that if I had a ton of exits it would be because I haven’t done my job as well as I would have liked.

Most great companies start to really shine in years 7-10.

I believe I have some great investments. And some that are proving more challenging. And if you call any founder I’ve backed – good and bad – they’ll tell you I don’t quit easily. I’m on their side good times and bad.

I am seeing some companies like Maker Studios and DataSift where the growth has been faster and more impressive than any companies I ran. And while all companies have challenges – I am inspired by their progress to date.

In Summary

I was an entrepreneur previously. I know the frustrations.

I am now a VC. Not yet for as long as I was an entrepreneur.

I spend significant amounts of time with VCs now that I have gone to the Dark Side. I have more empathy than I once did.

I see the hours and hard work put in by my peers. I see how much time they spend on the road away from their families. I see them on conf calls at any hour – even from vacation.

It’s hard being an entrepreneur and making money.

It’s hard being a VC and making money.

In reality neither side is evil.

It always reminds me of my time as a CEO. Everybody always thinks they can do your job because they’re doing the hard work while you get to fly off to conference, speak with the press, go to fancy board meetings & dinners. They think it’s easy – until they have to do it.

VC is a bit like that, too.

From one of you. Now on the other side of the table.

BTW,

I think a more humorous attack our industry’s behavior was done by this hilarious video done by my friend Dorrian on YouTube recently

Screen Shot 2013-05-25 at 1.47.57 PM

 

Dunce photo by PaperDoll Dreams on DeviantArt

  • http://www.justanentrepreneur.com Philip Sugar

    I don’t know where that one came from either. Its so important to have an outside non operational perspective. When you’ve got your head down implementing that perspective is invaluable.

    Now it has to come from a well informed thought out perspective. If it is a did you see this in TechCrunch? interruption from somebody that showed up 30 minutes late to a board meeting, cracked open the packet for the first time its different :-)

  • bernardlunn

    Good post. For a balanced an in depth view read http://www.iveybusinessjournal.com/topics/the-organization/venture-capital-firms-in-america-their-caste-system-and-other-secrets#.UaINLs1fqds

    The big takeaway: only 10% of VC firms raise more than 4 funds. That is the genuine top decile ie about 10 funds. Look at it from the LP POV and that is what you see.

  • http://www.justanentrepreneur.com Philip Sugar

    Just an entrepreneur perspective: I’ve never really met a dumb VC. I’ve met arrogant, self-centered, late, unprepared, conceited, short-sighted, and immoral VC’s. But never a dumb one.

    It is a tough job.

  • Neoganda

    Mark maybe you have some advice for me.

    As I read Dunn’s article, his frustrations resonated with me. While I’ve never had too much interaction with the VC world I did bring on a high-profile advisor in exchange for equity in my company. Initially I was so excited about the big value-ad of an experienced veteran. Mentoring and help with funding, plus a lot of the now very cliché things that VC say were all discussed. I was already post-product with revenue at this point so I felt adding a super-connected person like this would be that little push I needed.

    However, after the paperwork was signed things changed. I could’t seem to get a meeting. I emailed my deck to this person and was told, “100% (not even 99.5%) sure your deck will be a turn off to professional investors.” I was pretty bummed to hear that because that’s what I specifically brought this person in to fix. After waiting 7 more weeks for an face-to-face meeting I was told that I had a chip on my shoulder and that was actually the real reason I wasn’t connecting with investors. That was a somewhat indefensible thing to respond to but I took my lumps. I asked if I could still get help with the technical details but the recommendation was that I find someone who worked at Bain and give that guy money AND equity to help write that deck. Again, _this_ is the person I gave equity to help me with all this in the first place. End of story, while he still has points in my company I haven’t heard from him in over a year.

    This isn’t really a VC issue as this was an interaction with an advisor in my vertical but I’ll be dammed if the experience wasn’t parallel to all the gripes I’ve heard from my side of the table.

    If you or anyone else on this thread has thoughts I’d be happy to hear them.

  • http://bothsidesofthetable.com msuster

    You’re right. Group think is a real problem in the industry

  • http://bothsidesofthetable.com msuster

    thank you. fixed.

  • http://bothsidesofthetable.com msuster

    I agree with your sentiment. It can be a problem. And especially in accelerators where young companies get “advice whiplash”

  • http://bothsidesofthetable.com msuster

    Of course you’re right. I know many entrepreneurs who don’t like the VC who invested in them. There are many who love their VC. It’s a big industry with lots of players. When you try to throw 98% of any industry under the bus (except your own beloved team) people are bound to call bullshit.

  • http://bothsidesofthetable.com msuster

    LOL. That is a pretty good description.

  • http://bothsidesofthetable.com msuster

    that is precisely why most advisor stock has 2-year vesting. I guess you didn’t have vesting in your agreement? Did you give stock or warrants? I would talk with a lawyer. It seems this “advisor” isn’t that.

  • Carrie Mantha

    More on who won that battle here: http://youtu.be/gJ1Mz7kGVf0 :)

  • Dmitry Shapiro

  • brentgrinna

    Nice post and dialogue. Andy is one of our investors. I appreciate your involvement in TechStars (we’re Boston ’11). I like that most of your counterpoints were grounded in data or relevant anecdotes.

    But I don’t get this passage:

    “It’s hard being an entrepreneur and making money.

    It’s hard being a VC and making money.”

    This seems to imply that it’s equally hard to make
    money for entrepreneurs and VCs. Or at least that’s how it reads to
    me.

    Chris Dixon (pre move to A16Z) lamented that “most VCs get rich via management fees”. Few founders get rich from salaries. Which are kind of like our management fees.

    My friends who’ve taken gigs as VC associates have earned strong, predictable comp with little downside. And while their GPs take more financial risk, base salaries increase commensurate with that risk.

    Meanwhile, my peers who’ve founded companies at TechStars and elsewhere have been all over the map on compensation with equally high beta “carry” outcomes ranging from a lot to zero.

    My point isn’t that the above is unfair. We know what we’re getting into. But rather that it seems incorrect to say that it’s “hard being a VC and making money”, at least relative to entrepreneurs.

    I do accept that it’s hard being a VC and making money relative to other VCs.

    But that’s kind of like being shorter than the other centers in the NBA. Or slower than the other wide receivers in the NFL. You’re still a lot taller or faster and better paid than everyone else, even if it doesn’t always feel that way when you’re at work.

  • P.K. Fields

    How true! I actually had a women VC in Palo Alto tell me to add some “scrappy” under 25’s to my team! Unfortunately, senior housing providers -don’t really relate to “scrappy” anything, and most under 25’s aren’t focused on their grandparents care.

  • David Stark

    I believe it does change the math. Say you invest $20m each in Startup A and Startup B. Startup A simply returns your capital, giving a gross return of $20m and net return of $0. Startup B yields $40m, for a gross of $40m and net of $20m.

    Based on gross returns, Startup B accounted for 2/3 of your returns. Looking at net returns, Startup B accounted for 100% of your returns.

    There’s a similar math involved when evaluating the share of returns that funds generated in the industry. Looking at net returns — which is what really matters — changes the denominator, giving dramatically more weight to the winners. In your example above, the 6 firms of $250m size that returned 5x gross would have returned $7.5 billion gross and $6 billion net. That $6 billion net could easily represent substantially all returns offered by the industry.

  • Carrie Mantha

    Interesting post – great to hear both sides of this argument. With all due respect, though, I think we may be looking at the wrong data. Andy wrote about returns, not distributions. That’s reflected in the net cash flow. Eyeballing the chart, I don’t even think that number is positive, so it wouldn’t be at all unfeasible for 2% of the funds to drive the 98% of the returns. Digging into the argument a bit… if you assume those theoretical top 6 funds were 10x performers, that would mean 408m in annual contributions- simply not possible for 250m funds (even at 20x they’d have to contribute over 200m per year). Something is amiss. I think the answer lies in looking at be pitchbook data further (or at least that which can be found by googling and not being a subscriber!)- they report that 2/3 of the dollars invested in recent years are in late stage deals and nearly 3/4 of recent LP investments are into funds over 500m is size. With that in mind, you can imagine how large contributions come from large funds and large distributions go to large funds, with none of these flows actually creating positive returns. Buried in there, though, could be 2 or 6 or 200 smaller funds who have smaller contributions but outsized returns. The lack of a real net positive return though, suggests that either all off the large have awful negative returns or a very small number of funds are at that 3x or 5x or 6-8x level. (I’m certain there is much more data out the on the actual returns, so I would love to know if I’m totally off for some reason!).

    At the end of the day, I don’t think Andy was arguing that the VC industry was dying (excitement bias will probably always drive funds there) but rather that in any given conversation with a VC, the numbers suggest you’re taking to someone who’s business is in the process of failing (or at least not creating positive returns for their investors). That makes it a little hard to swallow the arrogance and dismissiveness (is that word?) with which some of them treat founders. Just as a small percent (whether thats 2% or 25%) of funds with outsized returns make the industry great, another small percent with outsized egos can make the industry intolerable.

  • Scott Kriz

    Great response Watts! :)

  • http://www.kylemurphy.com/ Kyle Murphy

    Check out the VC report from Kauffman Foundation from last year. The report is more more damning about the VC industry than Andy Dunn’s comments and it is based on real empirical data.

    http://www.kauffman.org/uploadedFiles/vc-enemy-is-us-report.pdf‎

  • https://www.reesio.com/ entrepreneurSF

    I agree with Mark’s rebuttal. However, I would have been much more inclined to
    agree with Andy if he was talking about ANGEL investors at the earliest stage
    — i.e. those writing checks of less than $100K. There are a multitude of
    different standards that VC’s should be adhering to versus angel investors,
    such as needing more time to think about deals, more involvement before and
    after the deals have commenced, etc BECAUSE THEIR CHECK SIZES ARE SIGNIFICANTLY LARGER.

    In my opinion, angel investors that are writing $25K-$50K checks should be able to make quick decisions without screwing around and asking a billion questions, and then stay out of the entrepreneur’s hair (for the most part, unless they’re rock star angels). Deals move much faster at the seed stage, and angels that “don’t get it” or “haven’t used the product” are dispensable.

    I would also throw another in another guideline for what to look for in angel investors, which is “Angel investors should be investing primarily in the TEAM, and everything else second, because the right team will figure it out.” Not that the team isn’t important at the VC stage, because it most certainly is, but there are fewer answers at the angel investing stage, and the ability to scale is mostly dependent on the team versus some random metric that will probably change anyways in 6 weeks.

  • http://www.3pmobile.com/ Peter Cranstone

    IRR’s are the only thing that count. If you have positive IRR’s then you’re not dumb. If not, you’re learning.

  • bernardlunn

    This is a great post that really got me thinking about getting advice from investors or giving advice to entrepreneurs as I have also sat on both sides of that table.

    Getting good advice is critical, but entrepreneurs can get that advice from many sources – friends, family, angels, advisers, VCs, blog posts, chance conversations in a coffee shop. The problem with advice from VCs and angels is that it becomes loaded with the issue of money.

    98% of worthwhile advice is solicited. OK, I chose that 98% just to have fun with the thread, no data points! When I seek advice I really want it, I am a receptive vehicle, I am open to learning. The great advisers just answer that question and the response is not loaded in any way. I could ask “I totally screwed up, what should I do?” and get a useful response. Now try doing that with somebody who just wrote a big check. A few great entrepreneurs can do that and a few great investors can do that, but usually the relationship is too loaded and guarded.

    Occasionally an investor may want to be proactive, to offer unsoliceted advice. The best understand that there are a very few teaching moments and you need to invest in the time to be there when those teaching moments arrive. You also need to have an honest relationship so that the recipient is receptive. Asking good questions that guide the advisee to make their own decision is ideal. This takes time and patience of course.

    Occasionally as an investor you may decide that a CEO needs to be replaced. The Ivey research I linked to in an earlier comment shows that the willingness to do that early is key. It is tough and unpleasant but as entrepreneurs we all know that our biggest error is usually waiting too long to fire a non performer. But I think it has to be binary. A manager either has my 100% confidence or I have taken a decision to fire. A muddled decision, losing confidence so being constantly “all over them like a cheap suit” does nobody any good. I recall one entrepreneur being totally frustrated with a VC offering continous unsolicited advice. I advised the entrepreneur to throw his car keys onto the boardroom table and say “OK, if you don’t like how I am driving, you drive”. Apparently it worked. On the other side of the table I offered that same entrepreneur some advice. History did prove me right, there was a big shift happening that required a strategic change, the entrepreneur ignored me, went through some tough time…and went on to great success with his chosen strategy with only a minor pivot.

  • C_LaFontaine

    I guess past experiences can shape outlook. Mine are different from yours.

    My investors tend to fall into two categories: Those that are hands off and those whose input I find has been very helpful.

    The challenge of being a startup CEO is the daunting amount of challenge on your time, even if you work 90-100 hour weeks like I regularly do. Sometimes, outside input can help you to sort through certain issues or views which naturally form as a result of the workload.

    So, from my experiences, investors have been helpful, both angels and VCs. Part of this is for another reason: we don’t just chase after any money we can get, we strategically pick our investors to pitch based on the synergies we believe will be good for the company AND the investor. Otherwise you will always be at odds because the footing wasn’t sound to begin with.

  • C_LaFontaine

    Mark: While this isn’t a “dumb VC vs. smart VC” thing, I believe it fits with the context of this post and would love to hear your thoughts.

    One of the biggest challenges I have run into is what I call the “stage disparity”.

    I find that what are expected accomplishments for raising funding around certain rounds vary in definition, particularly “Early Stage” investment rounds. Frequently I have met with those who say they are early stage investors yet expect Series A traction. Nothing has been more frustrating to me personally than this disparity as I meet with those who expect early stage returns with Series A (or later stage) risk mitigation.

    Perhaps the best I have seen defined as the standard stages of accomplishments for business phases has either been in presentations by Dave McClure or from Dermot Berkery in his excellent book “Raising Venture Capital for Serious Entrepreneurs”.

    I am curious as to what your thoughts are regarding this.

  • Anan

    On the contrary, i have evidence suggesting 102% of them are dumb

  • http://www.startupmanagement.org/ William Mougayar

    The VC industry is a very misunderstood one, especially looking from the outside. I have come to appreciate further the more I dealt with it.

  • StartupBook

    Really great you brought in data to back up your points…Andy’s post was very intriguing from the perspective of a frustrated entrepreneur, although you’d think since he just raised $30 million there wouldn’t be so much bitterness

    http://startupbook.co/2013/05/28/mark-suster-calls-out-bonobos-ceo-who-says-98-of-vcs-are-dumb/

  • http://hirethoughts.blogspot.com/ Donna Brewington White

    As soon as you make a blanket statement about 100% of a particular group you become a bigot. And that’s unfortunate because some of what you say makes sense. But who is going to listen when it’s so easy to write you off as being bitter and irrational? And I don’t just mean listen and sympathise — you will find someone to do that — but listen and actually feel motivated to do something about it?

    And what solution do you propose?

  • http://hirethoughts.blogspot.com/ Donna Brewington White

    Part of why I initially became a fan of the VC industry is because of the potential I see in this industry to empower startups and help promote an entrepreneurial culture, not just with money but many people won’t provide the other types of support needed without the vested interest or incentive that a capital investment induces. I guess what I was hoping was that VCs would inherently be venture catalysts. I learned early on that many VCs don’t and can’t provide that support and I have tended to fan those like you and Fred who do — and then along comes A16Z taking this support to another level — although I know at least one top VC who has a problem with A16Z’s comprehensive support model. The proof will be in the pudding and they just don’t have a lot of “pudding” (i.e., exits that represent self-sustaining companies whose founding CEOs were able to go the distance) to prove whether their model truly works in the long run.

    Also with the more prevalent emergence of incubators, accelerators and involved angels, there is increasingly a larger group in that catalyst role, at least at the earliest stages.

    All that to ask, if VC is being disrupted, what does this look like? What will VC look like in 10 years? Even five?

  • makles

    “Because being an entrepreneur is a lonely job. You have to make tough decisions with few inputs and little history from which to base your decisions. CEOs can rarely express their uncertainty and doubt to others.”

    That’s a good point. After all a VC has to be an ally, not an enemy.

  • http://www.iheavy.com/blog/ Sean Hull

    Andy’s title is brilliant and his copy sure does foment. Gosh darnit, the internet today… facts be damned! Bring on the trash journalism…

  • Heather Parker

    I think you are missing the point that it is a CHOICE of an entrepreneur to take VC money. If you choose not to, bootstrap. Your comments make it seem that the VC forced themselves into the entrepreneur’s life, when it’s actually vice versa.

  • Fabrice Gould

    Been following you online for a couple years and just saw you speak at the OCTANe event. Hoping to introduce myself, but it was certainly busy. As a founder of Diggen seeking a seed round, your grounded explanation and advice about investors was insightful. It always seems so distant and foreign a conversation, but yet they are humans too! My way of saying I don’t subscribe to the populist assumption.

    I appreciate your thoughts in the posts and even more important is the dialogue it creates afterward. I enjoy networking in general, but my challenge has been the laughs when I talk to a VC considering I am in too early a stage. Yet it is recommended to start those conversations early.

    I am experienced enough to value the relationship over the capital, since the entire team is crucial to me. However, it has been a good litmus test to see investors reactions at this early stage and know they wouldn’t be a good fit.

    Anytime you are in San Diego and have time to meet a local founder I am available!

  • Pradeep Javangula

    Brilliant post, Mark. Great to read the clarity and candor. Appreciate your site very much. Cheers.

  • http://hirethoughts.blogspot.com/ Donna Brewington White

    From recruiting a lot of “moms and kids” marketers I recall that there is an age (maybe around 7?) where the transition occurs and the child/tween becomes the consumer. Of course it depends too on the sophistication of the product as well as the purpose and price point.

  • http://hirethoughts.blogspot.com/ Donna Brewington White

    Well said.

  • fl1nty
  • http://mrjamie.cc/ Jamie Lin

    Great post, Mark. You’ve been on a row lately.

    Kauffman Foundation published some data on skewed VC returns last year by the way ( http://www.kauffman.org/uploadedFiles/vc-enemy-is-us-report.pdf ). According to their report: “…One study conducted by a fund-of-funds investment manager revealed that, from 1986–1999, a mere twenty-nine funds raised 14 percent of the capital in the industry, but generated an astonishing 51 percent of total distributions—about a 3.6x multiple. The remaining 500+ funds in the industry generated a 0.4-0.6x multiple. Put another way, the study concludes that the twenty-nine top funds invested $21 billion and returned $85 billion, while the rest of the VC fund universe invested $160 billion and returned a scant $85 billion.”, which means top 5% VCs generate 50% of total returns.

  • Devin Elliot

    If the VC industry dies, just how exactly do you expect to fund an early stage company? We want the VC’s to take multiples and allow them to shoot for the moon as many times as they can comfortably manage. Its not a sign of incompetence to take a swing at the unknown, you are confusing skill with risk.

  • Devin Elliot

    I have no idea what the deal is but no matter how hard I try and literally cannot consistently be on time somewhere. Its beyond a choice. Everyone who knows me does not understand it, I don’t understand it. I wish it didn’t happen. It’s one of the few things I have been unable to conquer in my life. In return for my tardiness, I am attentive and productive, and offer to make up any inconvenience I may have caused. From what I can tell it has nothing to do with disrespect, there is just a loose wire running to my internal clock.

  • Dmitrij Harder

    Great insight! So much useful information here! Thanks! And be sure to check me out, an international finance expert at facebook.com/dmitrij.harder

  • Devin Elliot

    What makes you so certain than an outside opinion from someone who sees more of the industry than you do isn’t a value add? As Mark points out you aren’t required to act on the opinion, but considering postions outside of your own is just good business sense. Its up to you to do the DD on your investors not just them doing DD on your business. Know who you are working with. If you want an investor who is going to throw money at you without thinking and then never follow up. Go find that investor, they’re out there, I’ve taken money from them. But I can tell you, when things get tough in a startup, and they do, I would much rather have someone there who returns a call and lets you bounce concepts off of them.

  • Jonathan

    As for returns, I suggest folks read the following Kaufman Foundation report: http://www.kauffman.org/research-and-policy/we-have-met-the-enemy-and-he-is-us.aspx

  • http://cafepeople.com/ Pete Meehan

    Sorry, this is a late and lonely comment because this article is about a week old, Yep, like most of you, I have a stack of things to get through one-by-one. Time poor.

    Anyway, I just felt like paying Mark the homage that he deserves. He is providing tremendous value to our industry, and having a ball to boot.

    Kudos to you sir. Enjoy some great moments!