I assume I’m not the only one who is bombarded with the mix of Hustle Porn and Funding Announcement Inundation I see coming from the VC community.
If you aren’t bragging about some huge round your portfolio company raised then you’re telling me about some award they got. Or how proud you are of their accomplishments and how honored you are to be a part of their journey in changing the world one API at a time!
I know. I know. It’s mostly marketing and PR. And a good Venture Capitalist should certainly promote her portfolio companies and their accomplishments. It’s table stakes for top-tier VCs that have a thoughtful answer to their value after they invest.
Still, it bugs me a little because it skews perception.
I should clarify that the concept of promoting hustle and accomplishment doesn’t bother me. The degree to which it is deified and promoted is what bothers me.
I know shows like Silicon Valley have done an admirable job of lampooning the VC industry and its quirks. But I assert that most outsiders still view VC as a glorified gambling game where you throw money at hyper growth companies and then hype their progress until they fold or get sold.
It sure seems glamorous from the outside and it’s no coincidence that I don’t hear nearly as many top-tier grads moving toward I-Banking, Consulting, or PE. They want to be VCs now. After all, who wouldn’t want to be a “kingmaker” working with some of the most impressive people in the world (without having to do the tiresome company-building heavy lifting)? What a gig!
So I thought it would be helpful to offer some words of caution. A pinch of salt to go with all that tasty sugar.
Having been outside of VC looking in for nearly a decade (looked at jobs in the industry straight out of undergrad) and now being inside the VC world for more than half a decade, I can tell you from personal experience that there are real costs to becoming a VC. If you read history (or generally pay attention to life) everything has a price.
These are a few thoughts on some negatives (costs) I have seen in myself and my colleagues and competitors as we try to fund the next multi-billion dollar startup . . .
- Comparison Snobbery
I noticed this one recently as I was trying to get some work done at my house. All I needed was some basic landscaping and handyman work. I went about researching and getting some bids. After speaking to a few vendors, I started getting frustrated. They made me set aside time out of my day to talk to them. Then I had to meet them. Then they had to quote. Then they did the work. Then they needed a PHYSICAL payment (you don’t accept Paypal!?!?!). What kind of backwater, antiquated (mumbles incoherently) . . .
And this is when I realized that I have come to expect an extraordinary level of customer service.
That’s not fair or reasonable.
Not every retailer can be Nordstrom. Not every hotel can be the Four Seasons. They are exceptional for a reason.
Still, it’s what we expect of our startups — extraordinary customer service.
Even worse, and I blame Steve Jobs for this, we expect intuitive experiences. If I need a User Manual to figure out how to work your tech product, then it isn’t user-friendly enough.
And that’s what I mean by comparison snobbery. I compare all of my consumer experiences to what I see my startups trying to do in the wake of the iPhone, Google, AirBnB, etc. If it isn’t exceptional and intuitive, I get impatient as a consumer.
Being a VC has made me less patient with the majority of companies that are trying to win my business because I (consciously or subconsciously) compare them to companies that are MANIACALLY focused on making it easy for me to give them money.
2. Echo Chamber
This one was fascinating after the election in 2016. I’m not political at all and know very little about anything in politics. Still, I found Silicon Valley’s infatuation with and unwavering support of Hillary Clinton super interesting.
Not because I was strongly supporting or opposing Hillary or that I was surprised hyper-left NorCal would, but because it was unfathomable to that crew that anyone would ever vote for Trump. It seemed like in the minds of the talking heads in VC there was a toothless hillbilly in rural America who would vote for Trump but all of us thoughtful, progressive thinkers could only make one responsible choice.
When Trump got elected, everyone in SV was floored. He got votes in urban areas! He got votes in purple states? What in the world happened?
Again, I’m not condoning or decrying political leanings and I fully acknowledge that California and Northern California in particular are staunchly liberal and will probably vote overwhelmingly Democrat for the next hundred years. Duh.
What is interesting is how out-of-touch they were with the rest of the country! They thought they represented the majority of the country and they were shown otherwise.
The same thing happens on the tech side.
Everyone wants Uber in their city, right? Travis should grow the company as quickly as possible to make that a reality for this transportation-starved planet. Turns out, people care about the type of company picking them up and driving them to the airport.
Everyone wants flexible office leases, right? Turns out, most public market investors want to see that a company is even in the same galaxy as profitability. Oops.
I’m not trying to pile on the anti-Uber or anti-WeWork band wagons (I use and like both). What I’m saying is that you tell yourself you know what consumers and investors want and sometimes you’re right, sometimes you aren’t.
Guess which of the two gets undervalued by VCs? We think we completely understand and represent the US and global consumer and, more often that we admit or realize, we do not.
That’s an echo chamber and it is absolutely real in venture.
Similarly, once you make a few investments in companies that take off, you think you have the Midas touch and declare yourself a kingmaker (at least in your head). It’s a derivative of survivor bias, but the more success you have in this space, the more prone you are to “reading your press clippings” or “drinking your own kool-aid” so to speak.
Ego is ABSOLUTELY NOT unique to VC, but it is pronounced because of the time frames. Companies regularly go from $0 in enterprise value to $1B within 5 to 7 years and that’s an extremely quick feedback loop telling you that you have the hot hand in picking winners.
The truth of it is — all of us are interdependent.
What % of companies that have big exits only had a single round of fundraising or a single investor? It’s not 0% but it probably rounds to 0%.
Angels need healthy Seed investors to invest.
Seed investors need the A investors to be active.
A investors need to B and C guys to be active.
And so on . . .
In the upstream/downstream analogy, we all need a healthy amount of thoughtful capital in BOTH directions (earlier than me = upstream, later = downstream) or our portfolio companies are going to struggle and possibly fail.
We all need each other. Early successes tends to obscure that and young VCs start becoming overly confident.
4. Comparison Snobbery (Part 2)
Try this —
Spend a few years with entrepreneurs using drones to clean buildings, using robots to hang drywall, using water to propel low-orbit satellites to provide affordable WiFi to all of Africa.
Then go talk to your college buddy about the accounting firm she is starting.
See how excited you feel about young accounting firms.
See how much you care about an unanchored strip center that just sold for a sub-6 cap in rural Arkansas. (Sub-6?!)
It’s a problem. Tech startups are still a tiny part of the US GDP. The majority of the economy is more traditional companies. They don’t get the sexy headlines and valuations but they are still the backbone of our economy.
Starting a company, any company, is grueling and not for the timid. Those of us who spend most of our time around ambitious world-changers tend to lose sight of the fact that starting a law firm, or accounting firm, or brokerage shop, or whatever is still an impressive feat of entrepreneurship and I think we are worse for it.
One thing I want to be clear about:
VCs are some of the most impressive and conscientious people on the planet. As a group, we have helped support some of the greatest transformations in human history.
Still, as with any worthy cause or challenging career, VC has its costs and it’s not all beautiful Sand Hill Rd offices, whiz-bang pitches, making kings, and then ringing bells on Wall Street.
There are costs and biases that come with the job.
The first step to mitigating them and managing them is recognizing them. That’s all I am pointing out here.
I’m not pointing fingers at anyone any more than myself. I’ve seen these things bubble up in me and I want to prevent them from becoming a part of my personality.
So, if you are a young investor looking at a carer in VC or a young startup looking to partner with a new VC, keep some of these in mind. Understanding your partner’s filters and biases is always wise .
Am I the only one who struggles with these? Shoot me a note and let me know (Mknight@blkhwk.com)