By one of those flukes-of-webbrowsing, I just stumbled upon Paul Graham’s “Unified Theory of VC Suckage.”
Paul’s theory could be summarized as: greed for big management fees => big funds => big investments => over-spending, over-control, and panic.
There’s something in this, though perhaps it is just a touch self-serving, given Paul’s YC makes small early-stage investments.
There is another difficulty, though. It’s that the skills to succeed in the VC business are too distant from the skills needed to run a company.
Here are things that make a difference to success or failure for a venture investor:
- “Deal flow” and reputation for “quality”. If you see the best startups (“deal flow”), you’ll be successful, even if everything else you do is random. If your VC brand is seen as a badge of quality, the best deals may come to you, too.
- Deal selection. Do you invest in the best deals when you see them? It’s a distant second because selection is so hard that it’s close to rolling dice. Everyone simply tries to find a good team in interesting areas. And since everyone does it, the chances of one venture fund being dramatically better than another at it is remote.
- Distant third. “Guiding” the company. Mostly a negative ability, the opportunity to ramp spending prematurely, force the wrong management changes, and so on. Rare indeed that venture investors’ guidance makes a big positive change in a company.
Neither #1 nor #2, which largely determine success or failure in venture investing, have anything to do with improving your startup.
That can have a corrosive effect on the personalities and behavior of those investors. Nothing like knowing, deep down, that your work with someone is irrelevant to your own success or failure -and yet having that person feel dependent on you – to induce lots of random and/or obnoxious behavior.
Some startups need the money, nonetheless. And unless you have it to burn, using other people’s money (OPM) has a lot to recommend it when pursuing something as uncertain as a startup.
What to do?
Take the money, if you need it. Keep as much legal control as you can (easier to do at present, given the positive market for software startups). Alongside the de jure control, keep de facto control – define explicitly how you will work with your venture firms. Don’t let the relationship drift, make sure you spend time on it – but on your terms. Consider yourself the VC firm’s customer, not the other way around. And don’t listen too much to all the value that they’ll tell you they add to “their” portfolio companies.
[Related on myperfectstartup: Founder CEOs]