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Broken VCs Aftermath

The vast majority of VCs are either neutral to the value of your business or in fact do actual harm

Venture Capital Blog on Ulitzer

Apparently (apparently!), I have said something that hit a nerve.  When I posted my thoughts on the whole issues as to whether or not the VC model was broken, I had no idea that it would be the most popular post I have ever written (and it’s not even noon on day 2).  Crazy.

Predictably, some of my VC friends showed up to the conversation to point out that 1) am angry, and 2) that the “good” VCs don’t have associates.  First, I am not angry.  It’s easy for the VCs and their ilk to cast those aspersions, but the reality is that they have a fantastic business model, and they are going to fight to the death to protect it.  Second, the venture firm that completely blew me up at my last company has no associates.  One day I will tell that story, but even firms with only partners can behave badly.

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I certainly don’t want to over-generalize an entire industry, but I can say that the vast majority of VCs are either neutral to the value of your business or in fact do actual harm.  I would go so far as to say that 10% of VCs are net positive, 70% are neutral, and 20% actively destroy value in the firms in which the invest.  As I quipped on Hacker News, partners in VC firms tend to practice what I call seagull management: the fly in, make a lot of noise, crap all over everything, and leave.

While the title of my first post included the associates, the bulk of the content was around what was wrong with the incentive structure and funding process.  The information asymmetry which has existed between those seeking capital and those who have it make it so that those seeking it are at an extreme disadvantage.  Further, those people funding the VCs (the pension funds, fund of funds, family offices, etc), have no incentive to hold these guys accountable so long as they continue to produce out-sized returns.  With sites like The Funded and pervasiveness of blogs, it’s now easier than ever for people to share their information about their funding processes.  Interestingly, I am hoping more and more information begins to find its way to the net as to how much money VC firms are actually making, how that persists over time, and the stacking effect which comes from raising multiple funds.  Many, many, many entrepreneurs simply don’t understand this, and if they did, they would have a far different perspective on where the interests of venture firms lay, and the likelihood that their interests and the VC firm’s interests are aligned.  The more time I spend thinking about Paul Graham’s model with Y!Combinator, the more I like it – very entrepreneur friendly.

Someone asked me in a direct message on twitter “how VCs add value?”  I think first and foremost they help you make your job easier.  If that means making connections to potential business partners, or identifying and recruiting talent, or thinking through potential stumbling blocks of your model – those are all good things.  Where the VCs break down is when they start taking their hammer and smacking everything with it.  There are many VCs who are afraid to say “I don’t know.”  They want to prove to you how smart they are or justify their existence.  Worse is when they prevent you from taking an action (I don’t know, say like the sale of your company which would net the founding team lots of cash) because it doesn’t help them hit the returns they need to justify their fees to their investors.  The scale of what “lots of cash” means to a first time entrepreneur and an seasoned VC are orders of magnitude different, and that has a direct impact on what would be meaningful in your life versus what’s meaningful in theirs.

I actually speak on the topic of getting bullied by investors and board members in an interview I did with Andrew at Mixergy.  I spent an hour speaking with him about my experiences at my last funded business, and he should have it up later this week.  There are a lot of lessons in that interview which I hope will be invaluable for entrepreneurs looking to raise money, get started, or even if you have already raised money.  I made a lot of mistakes, and I would love for others to learn from them.

In an effort to share those mistakes, I am going to be launching my community book project.  The working title is “The Failing Point: Hard Earned Lessons About What Not To Do” and I will be posting an essay a week from the book that I am writing.  Each essay will be titled in such way as to finish the sentence “Under no circumstances should you…”  Here’s the first essay from the Getting Started chapter.

The book is meant as the anti - “do this and you will be a millionaire” book.  It’s a set of essays on topics related to getting started, creating a product, building your team, starting the business, raising money, driving revenue and operating the business.  They say you learn the most from your mistakes.  I hope to take the mistakes I have made (a lot of them), and those I have seen made at companies for which I worked, and put them into digestible format for the entrepreneurial community.  I don’t have all the answers or a formula for success, but I hope I can help people looking to succeed with their business.

What I am hoping to get from the community is feedback, and for people to share their own stories in the comments.  If the content resonates with you, fantastic.  If you think I am full of it, tell me.  That’s the only way it will get better.  The content will be online, free of charge, and when the book is done, I will make a hard copy available for sale.  For now, I will have a category link here to “The Failing Point", but very soon I will have a separate site built out for the content.

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More Stories By Brandon Watson

Brandon Watson is Director for Windows Phone 7. He specifically focuses on developers and the developer platform. He rejoined Microsoft in 2008 after nearly a decade on Wall Street and running successful start-ups. He has both an engineering degree and an economics degree from the University of Pennsylvania, as well as an MBA from The Wharton School of Business, and blogs at www.manyniches.com.

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