VCs want founders who are willing to play the game and can do it well: lying to (potential) customers, making insane promises, presenting fake demos as if they were real products and using fancy accounting tricks to make the business look profitable, when in fact it is bleeding their money, all so that they can easily find _other_ investors to bail them out. VCs have perfected legal Ponzi schemes.
Back when Andreessen Horowitz was investing heavily in ICOs I realized that their business was essentially offering their LPs legal access to the ground floor of scams. Every time one of the ICOs turned out to be a fraud they could say "We had no idea, we're one of the victims!"
This, in turn, probably led directly to FTX. They did laughably bad diligence on FTX because they needed to do bad diligence in order to retain plausible deniability.
Interesting take. Surely, VC's have created some very large, profitable, innovative entities.
But I wonder if the nature of the industry is such that it attracts some moneyed folks who lack ethics and talent for business. To make up for that lack, they effectively "scam" investors.
Surely, there are some great VC partners who can identify unique talent and business opportunities. But there are probably more individuals who happened into the position from wealth (e.g. Ivy education, wealthy families) who lack both sufficient real world experience and business context.
To be precise, they don't scam their LP investors, in fact they did generate nice returns to them with those ICO scams. The retail investors who bought the garbage at high valuations were the end target for the scam.
Meanwhile for example AH has made investments also to legit startups.
Were any of the “retail investors” who lost money investing in a product approved by the SEC? If not, how is it any different from investing with a random person who approaches you on the street with “a great opportunity to make money”? Why would your expectation of being cheated be any different?
Right. VCs are involved in one stage of the formation of companies, with repeat games. This creates certain incentives and biases. One such incentive is to drive hype for other investors. And one bias is that they tend to see startups and founders as a homogeneous cohort. This is normal, but should not be touted as gospel any more than other players.
The weird undertone that permeates the debate around VCs is that they are somehow the embodiment of some deeper wisdom – that others should pay attention for some universal reason – that they sit on the key to success. It’s just a particular type of player in a market economy. There’s absolutely nothing special about them. Of course they have something to say, like any other profession. But when the thought leading leather jacket comes on, and hot takes start to replace actual semantic sentences, it’s time to tune out.
VCs can act as gurus for a certain sort of idealistic founder types who also have a need for validation. VC funding resembles the traditional form of validation that we are raised with, namely an authority figure conferring acceptance. I can see this as a hedge against the extreme uncertainty of starting a new venture. However, IMO, this need for approval from authority as an adult is ultimately psychological vulnerability and it is exploited.
Obviously, not every funding case is like this. But when young founders lead more with who has funded them than what they’re building or done, I have to wonder.
Feels weird defending VC's but here we go: I'm not sure what your experience is dealing with actual VC's? Are you a founder?
In my experience with some top tier VC's none of the above is true. At least none of the VC partners I work with has ever even suggested "lying to customers", "making up numbers" or anything like that.
Sure, looking bigger than you are is useful. Not airing dirty laundry. Also aggressively going after customers is normal. But this is normal for any business.
If you're looking at a basket of investments from the pension fund level, 90% of that basket is going to be highly predictable risk, derisked in a highly predicable manner. Those same people try to exert that down into VC a little bit by way of LP agreements, typically by way of restrictions. For example for some funds I'm an LP in, they can only target 10% ownership, not more, not less, so by virtue of that, it is an "OPM game" (other peoples money) as one GP at a sandhill road firm once described it as. And it's true, VC is just that: an individual firms standard divination risk environment, derisked by (often only), distributing the risk using an OPM strategy.
This system isn't really great, so your snark is justified, and the reason I know that is true is: pension funds are starting to experiment with cutting out the VC funnel and spinning up venture studios instead (Koru).
VCs want carbon copies of themselves, socioeconomically and politically, taking the the risks they would if they had the situations of their founders. If you're not them, slightly sifted in circumstance, basically them, they see you as prey.
Exactly. They know it is a giant ponzi scheme as we have seen with SVB collapsing right in front of their faces, throwing millions on unprofitable startups which 90% of them will never make it to the finish line and it was never sustainable and they knew it. A perfect example of a ZIRP (zero interest rate phenomenon) with decades long cheap money fuelling it.
To them, they see your startup as a vehicle for an IPO to dump all over retail investors at an inflated price, which is why they need to keep raising money every month.
If it works out, on to the next one. If it doesn't then either they force you out of your own company an drive an acquisition to prevent the loss of their own money or accept the loss and never to meet the founders again.
Do you have any data to support that claim? What proportion of a VC firm’s returns come from a later round’s investors if a firm never has a liquidity event? (IPO or acquisition) And if the firm fails before then, how does the vc firm get paid?
A ponzi scheme is a way of stealing from investors, but it only works if the perpetrator can actually take cash out - in vc, I’ve never heard of a vc firm being able to take cash “off the table” in a later financing round, other than what is meant to be the terminal event for a vc investment, IPO / acquisition.
It's called a "secondary"[1] and it's extremely common. It's how both investors and founders make millions on startups long before an acquisition or IPO, often before the startups are profitable.
As for my take on VCs in general, of course I don't have any actual data to support my rant, it's purely anecdotal based of my personal experiences and should be treated as such.
> In August 2022, Andreessen Horowitz (A16z) announced its newest investment: It would put $350 million into a company called Flow, which "aims to create a superior living environment that enhances the lives of our residents and communities" — in other words, rental real estate. The company was founded by a charismatic Israeli-American named Adam Neumann. If the name sounds familiar, it's because Neumann was also the founder of WeWork — a company that was once worth an estimated $47 billion before imploding spectacularly amid accusations that Neumann had, among other things, taken a "sizable chunk" of weed across international borders on a private jet, fired a pregnant employee, and — most importantly — expanded far too quickly, leading to enormous annual losses.
Was this ever addressed by anyone at YC directly? I've heard Andreeson talk about it but never answer the simple question: this guy was extremely irresponsible and unethical, why would you trust him again?
I can't help but feel it worsened their reputation, at least to the normie. Just makes it look like VC is just a big game where if you're in, it doesn't matter much what you do.
As long as you can consistently get enough bag holders through the door for your buddies to cash out with a tidy profit before everything peters out, they won't care that you're a serial flim-flam man. An uncomfortably large amount of alleged VC business acumen in tech is just being a gifted corporate hypeman without that many scrouples.
Anyway, I don't blame you for being skeptical, the Flow Monorail is really more of a Shelbyville idea...
> It can also help to have something else: a chip on your shoulder. Josh Wolfe, of Lux Capital, is fond of the phrase "chips on shoulders put chips in pockets." Feeling left out, excluded, or estranged can make you extremely competitive. VCs want founders who are willing to commit to low-probability ideas — ideas they think the rest of the world is wrong about — for a decade or more. What motivates a person to do something like that? Wolfe, who grew up in a single-parent home in New York's gritty Coney Island neighborhood, told me he thinks there's a common answer: revenge.
At this time, I'd like to ask all the VCs to form an orderly line in front of my desk, and to have their checkbooks ready.
They would if you had a really good low risk deal for them to invest in, like if you had a history of great successes, or if your product is already famous and you just need money to ramp up.
Because other investors wont line up and lick your boots? Not sure why that would matter, but it wasn't my idea, I guess some just like attention and seeing people grovel before you makes them happy and take VC funding when they probably could have gotten a regular loan instead.
VCs are often connected to other founders, or have a greater network of contacts, which they can tap into to promote your product. They can give you money AND exposure.
It's interesting, I'm building a startup accelerator type thinger in Canada, very specifically for Canada (long story) - after about 6 months I noticed a really interesting early stage phenomena where: Canadians are primarily being funded by Americans and Canadian Funds are primarily backing Americans. In closed doors, over lunches and dinners, over time, it finally came out, Canadian vc's don't believe Canadians are ambitious enough, they "don't even imagine moonshots".
I wondered originally if it was a small thing, but as I've dug in over month and months, I've noticed it's both a very real thing and a very wide spread thing.
>I've noticed it's both a very real thing and a very wide spread thing.
Sorry, just to be clear -- is the very real thing the fact that Canadian Funds believe Canadians aren't ambitious enough or is the real thing (in your opinion) that Canadians aren't ambitious enough.
Funny, when I was trying to formulate a theory in my mind I was thinking of the phrase "vicious cycle". I was close enough, I think:)
I'm wondering if it's because Canadians and other countries with similar environments have been conditioned to exercise a different muscle: getting and retaining public funding. The incentive there is to under-promise and deliver/over-deliver, or at least appear to be delivering or over-delivering on paper. It's like that because the public judges are often much less knowledgeable and are forced to judge you on what you said you were going to do on your initial proposal and you're often times forced to start working before any money is deposited in your bank account.
In Roberts reply to my comment above, he mentioned I factor I thought was a 40-60% contributor, I'd say your observed factor is a contributor, and if I was asked to assign a value I'd say between 10-30%. I should probably write a blog post/phd on this.
In Canada I don't think it's the same reasoning. We don't shame ambition, but we also prefer to be a "big fish in a little pond."
It's the inferiority complex that comes from living so close to America. Companies and individuals that stay here are mostly focused on becoming the best Canadian version of the thing.
This is a well-known thing in Scandinavia (or at least I think it's well-known - I'm not Scandinavian.) They call it the "Law of Jante". (https://en.wikipedia.org/wiki/Law_of_Jante) I didn't know it was a thing in Irish culture too.
We don't have a word for it that I'm aware of, but I would say that is at least 40-60% of the undertone I notice. Even when I myself was getting into startup stuff 20+ years ago, I very very very vividly recall my father looking at me and saying with real distain "why do you think you have to be better than everyone else?".
As a Canadian founder who's been through YC, Series A, to a solid exit -- and who knows lots of other Canadian founders who both went through YC and didn't -- my view on this is that you're just seeing a kind of 'capital ghetto'.
The best Canadian companies and founders typical raise from US VCs, full stop. They "escape the ghetto". The US VCs give them better terms, more aggressive, more knowledgable, just overall a higher class of investors. Plus far more choice. At each round I've fundraised, the Canadian VCs were at least 20% lower on important terms like valuation and generally much harder to work with. Yes, there are great Canadian VCs too. But the speed, optimism and 'knowledge of the game' that good US VCs typically bring is much higher.
So what happens? If the best Canadian startups fundraise primarily from US investors, what are Canadian VCs left with? The more conservative, slower growing, less ambitious ones. So the VCs approach that with caution. Which furthers the cycle.
Canadians are more conservative in general, and that conservatism bleeds over into startups and VCs too (not to mention B2B / B2G markets). However, the real issue is that when a company appears to break that stereotype, they just raise from US VCs.
At least this is how it's been for the last 10+ years. Now in the 'new normal' after the frothy period, it's anyone's guess how things will play out. Perhaps the conservatism of Canadian VCs and startups will help them produce more viable long-term businesses in this environment vs. what worked best in the cheap-capital era.
Adding another interesting layer - my analysis doesn't hold true for angel investors, though. Maybe I was just really fortunate (or, 'of course I was!' in hindsight) but the Waterloo region angels who invested in us were so similar to YC themselves and angel investors from the valley. Founder-friendly, people who'd done it before, adventurous, etc. Almost the anti-pattern to Canadian VC.
So there's an interesting dynamic change between pre-seed and early seed angel climate and proper serious institutional VCs in Canada.
Do you mean that Canadians are fiscally / financially more conservative? I would probably agree with that (using risk tolerance as a proxy metric), but I thoroughly disagree if we're talking "conservative" in terms of politics / social beliefs.
Canadian VC are way too cautious and they want outsized equity when in early stage. In general they are not reliable partners and will try to bail the moment the startup has a rough time. At best they are OK investors when you are already making money and you need some cash influx to continue growing. That is why we go for American VC, they understand the risk better, they have more money and (good ones) play the long game.
Maybe you can help me a bit. In what is almost a year of this research and building now, I've really only found Staircase Ventures and Inovia to be "American Style" in a genuine way (everyone talks, talk is cheap) - do you have anyone else you would add to this list? (Happy to take offline too, email is in bio) - Thank you! :)
Could the answer be that on average Canadian VCs are simply not rich enough compared to their American counterparts and the few that are succumb to the peer pressure of trying not to be the one schmuck who lost a lot of money?
I've seen the same behavior from freshly minted American millionaires who want to take a swing at this "angel investor" thing due to FOMO.
You only need a few VCs (and there are always outliers) and so many founders and their employees (by definition it's hard to have a crowd of outliers).
The article is phrased as VCs wanting founders who take risks, but actually it's just another framing of the fact that VCs are looking to reduce their risks as much as possible.
No matter which new market the founders are working on proving, if and once the founders find PMF, first mover advantage provides a very narrow window of opportunity before second-mover advantage competitors enter the market, many of them either incumbent players with large GTM operations or simply foreigners (e.g. Chinese) willing to steal IP and undercut on cost. Exploiting the new market sufficiently quickly to develop into a major player that is capable of providing VC-acceptable returns requires the founders to have, shall we say, a certain kind of cut-throat character.
It has never been more feasible to avoid VC funding. Initial server costs are cheap. Social media makes it free (even profitable) to develop a following to sell to. Why waste your time chasing VC funds?
If you don’t take VC funds someone who will is going to copy your business, expand much much faster than you with all their free money, undercut you and any other competitors for years driving you out of business, before ultimately dominating the market and squeezing customers for more money than you while providing a product that is worse in every way and a fraction of what you had envisioned for your own product.
This article is deeper than most of the offhand comments so far are
giving it credit for. It's a fair crack at some psychological folklore
about formative experience and motivation, and how that relates to
risk-taking. Oddly I noticed the words "ethics" and "morals" don't
appear in the text. I think they're important to complete the
discussion around drive and its relation to adversity, opportunity,
sense of being an 'outsider', disagreeableness and all that. I think
there are many more similarities between "founders" and
"revolutionaries" than is comfortable to discuss.
Agreed - the essay is decent and asks an interesting question (how do you find the right tail of venture returns?)
In normal tech hiring (eg Google), they're not necessarily looking for high variance individuals. They're often looking for people who can slot into existing roles. That means the interview process by design should cut off the tails of the distribution.
Venture investing is different because you really want the tail of the distribution (in terms of success). Variance reduction is a bad idea! You want higher variance. In the words of Matt Levine:
> And then [Neumann] met SoftBank Group Corp.’s Masayoshi Son, who “ appreciated how he was crazy—but thought that he needed to be crazier,”
Yes! This exemplifies what an investor might do to increase the variance of the returns of the founder/fund!
As it turns out, Neumann paid himself handsomely and none of this made any money for investors, but the article sort of explains why they would invest in him for WeWork and again for Flow
> Of the billionaires on the 2023 Forbes 400 list — the 400 richest people in the United States — 70% are basically self-made. And 59% came from an upper-middle-class background or below.
I have a very strong feeling the words "basically" and "upper-middle-class" are doing a ton of work in this sentence.
I don’t know if most of the founders listed in the article are abnormally high risk takers in terms of downside risk (other than Adam perhaps). They all seem to have secured a decent backup plan if things started going south.
To see this, just look at what each founder was doing immediately prior to going all-in on their startup. It was typically something that set them up to fail gracefully if necessary. Bezos had plenty of connections at D.E. Shaw by the time he decided to drive to Washington and could have easily returned to the finance industry at any point. If Facebook had failed, Zuckerberg would have at least been able to secure a high-level role at an existing tech company. And it may only be a rumor, but I believe Elon Musk had a certain window of time to resume pursuing his PhD at Stanford if he desired.
This isn’t a criticism of these founders not being “risk takers”, but rather just an observation to serve as a counterpoint to the article. The decisions I have made in my own career so far are based on laying the groundwork for the same strategy—set things up so I can attempt a startup at some point, and if it fails, my previous work history plus a decent amount of savings should minimize downside risk. And the additional experience of leading a failing startup isn’t worthless; I once worked at one where many employees jumped ship to better jobs than the ones they were at prior to joining the startup.
That isn't what they mean with risk taking, they want a person who will bet 1 million to make 10 million, then bet 10 million to make 100 million, then bet 100 million to make 1 billion, then bet 1 billion to make 10 billion, then bet 10 billion to make 100 billion and so on.
That is what those founders did, a person who is happy with 1 million dollars is not the kind of founder these people are looking for. Most people would stop after 1 million dollars, you need to find some very crazy risk takers to continue after that.
I don’t think that contradicts what I’m saying though. The founders set things up so they did not have significant personal downside risk. When that is the case, you have no problem at all gambling $1M or even $1B, because losing that gamble just isn’t that big of a deal if your fallback plan is a job that still pays 5x the median household income.
On the contrary, jumping straight into bootstrapping a startup with a state school background and a small amount of inheritance money would be taking on a huge amount of downside risk. None of these founders did that, which is why they were comfortable with making what looks like an insane gamble to someone who does not have such a safety net in place.
Well certainly, but that’s not an apt comparison. I’m comparing P(willingness to take massive financial gamble | safety net) with P(willingness to take massive financial gamble | no safety net). I think the former is greater, whereas the article seems to imply the latter by stating “people who are born on third base tend to be pretty risk-averse”. Are people born on third base over or underrepresented among tech billionaires?
They want people born on second base, those who didn't inherent millions but got an upper middle class education and a stable family to rely on. I know people who were born with millions, they are very risk averse as they don't feel they could rebuild what they have if they ever lost it.
Note how the successful founders weren't rich, they had educated parents and went to good schools, but they didn't inherent millions so they had to work through life.
I’d bet (and this is entirely anecdote-informed supposition, but I did spend several years as a professional poker player and then went through YC and did that whole world for awhile) that you’d find little to no correlation between someone’s fall back plan and their willingness to swing for the fences.
This is a quite underestimated point. Most people will be extremely destabilized if their monetary situation (either their net-worth or the money they are managing) changes violently in a very short period of time. Startup Founders are people who can cruise through that.
They bet 1 million when they have 1.01 million in the bank, most big founders has almost all their wealth in the company they founded until they step down.
The kind of person who only bets 1 million when they have 15 is exactly the kind of risk averse person they don't want as a founder.
> They bet 1 million when they have 1.01 million in the bank
But that’s still not that big of a loss when it doesn’t entail the loss of personal market value. A VP at Google can quit their job, bet their entire life savings on the roulette wheel, lose it all, and still not worry about starving four months later. For most people with at least $1.01M net worth (roughly 1 in 10 Americans), this is absolutely not the case.
In my experience with many VCs, they are pretty risk averse people (if they were risk taking, they'd be either in hedge funds or starting companies themselves).
So the best way to raise VC funding is to leverage FOMO or sell traction.
It’s much simpler than a lot of people think. Venture capitalists want the largest returns possible, they do not care about anything else, people, environment, social, nothing. They will pretend to in order to get the returns. Just as they expect you to say anything to win they will also say anything to get the best deal.
More risk = more reward
This isn’t just VCs, it’s capitalism. It shouldn’t be a shock
Just so everyone understands how VC works, when a company announces a round of VC funding what they are really saying is they just sold a percentage of their company for the number in the announcement. You know the capital funding number, you don’t always (often?) know the valuation or the percentage.
If you are any sort of entrepreneur, you’ll understand how difficult this is , it can feel like a deal with the devil for a percentage of your soul.
But again, more risk = more reward
Remember , it’s an old game, startups predated modern VCs, tech, Silicon Valley, all of it. Think outside your current bubble, well written business books back to the 1920s exist. Sometimes simpler examples help, never engage with what you don’t understand.
VCs don’t even care about risk. They just want founders to make them a lot of money. It’s just that their portfolio strategy involves trading on tail distributions of risk. :P
