Wednesday, August 24, 2005

Reflections on "A Unified Theory of VC Suckage"

I just randomly came across Paul Graham's website. He has some great essays that he wrote on his site, so check it out when you can. One of them, "A Unified Theory of VC Suckage," cracked me up:

A couple months ago I got an email from a recruiter asking if I was interested in being a "technologist in residence" at a new venture capital fund. I think the idea was to play Karl Rove to the VCs' George Bush.

I considered it for about four seconds. Work for a VC fund? Ick.

One of my most vivid memories from our startup is going to visit Greylock, the famous Boston VCs. [1] They were the most arrogant people I've met in my life. And I've met a lot of arrogant people.

I'm not alone in feeling this way, of course. Even a VC friend of mine dislikes VCs. "Assholes," he says.

But lately I've been learning more about how the VC world works, and a few days ago it hit me that there's a reason VCs are the way they are. It's not so much that the business attracts jerks, or even that the power they wield corrupts them. The real problem is the way they're paid.

The problem with VC funds is that they're funds. Like the managers of mutual funds or hedge funds, VCs get paid a percentage of the money they manage: about 2% a year in management fees, plus a percentage of the gains. So they want the fund to be huge-- hundreds of millions of dollars, if possible. But that means each partner ends up being responsible for investing a lot of money. And since one person can only manage so many deals, each deal has to be for multiple millions of dollars.

This turns out to explain nearly all the characteristics of VCs that founders hate.

It explains why VCs take so agonizingly long to make up their minds, and why their due diligence feels like a body cavity search. [2] With so much at stake, they have to be paranoid.

It explains why they steal your ideas. Every founder knows that VCs will tell your secrets to your competitors if they end up investing in them. It's not unheard of for VCs to meet you when they have no intention of funding you, just to pick your brain for a competitor. This prospect makes naive founders clumsily secretive. Experienced founders treat it as a cost of doing business. Either way it sucks. But again, the only reason VCs are so sneaky is the giant deals they do. With so much at stake, they have to be devious.

It explains why VCs tend to interfere in the companies they invest in. They want to be on your board not just so that they can advise you, but so that they can watch you. Often they even install a new CEO. Yes, he may have extensive business experience. But he's also their man: these newly installed CEOs always play something of the role of a political commissar in a Red Army unit. With so much at stake, VCs can't resist micromanaging you.
(full post)

This totally reminded me of one of our investors/board members who called my co-founder and friend, Jimmy. On Saturday morning, he was driving by our office and he saw that the front doors were locked, so he calls Jimmy.

"Jimmy! Where are you?!"

A bit puzzled and startled he replied, "Uhh... in the office, Shmoe."

"Well, I see that your front door is locked, so I'm guessin you're not at the office! You should be since you have a long way to make this company a success."

"Well, Shmoe, I assure you that I am in the office working - hard - and there are about 15 engineers with me. We had the front lobby area cleaned today, so we all went through the back of the building."


"Oh. I see. Okay, well work hard."

Shmoe's level of micromanaging was unnecessary and counter-productive. I believed that much of his behavior was due to his lack of ability to provide any real guidance or knowledge.

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