风险投资为什么这么烂：一个统一理论

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. They were the most arrogant people I've met in my life. And I've met a lot of arrogant people. [1]

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.

The huge investments themselves are something founders would dislike, if they realized how damaging they can be. VCs don't invest $x million because that's the amount you need, but because that's the amount the structure of their business requires them to invest. Like steroids, these sudden huge investments can do more harm than good. Google survived enormous VC funding because it could legitimately absorb large amounts of money. They had to buy a lot of servers and a lot of bandwidth to crawl the whole Web. Less fortunate startups just end up hiring armies of people to sit around having meetings.

In principle you could take a huge VC investment, put it in treasury bills, and continue to operate frugally. You just try it.

And of course giant investments mean giant valuations. They have to, or there's not enough stock left to keep the founders interested. You might think a high valuation is a great thing. Many founders do. But you can't eat paper. You can't benefit from a high valuation unless you can somehow achieve what those in the business call a "liquidity event," and the higher your valuation, the narrower your options for doing that. Many a founder would be happy to sell his company for $15 million, but VCs who've just invested at a pre-money valuation of $8 million won't hear of that. You're rolling the dice again, whether you like it or not.

Back in 1997, one of our competitors raised $20 million in a single round of VC funding. This was at the time more than the valuation of our entire company. Was I worried? Not at all: I was delighted. It was like watching a car you're chasing turn down a street that you know has no outlet.

Their smartest move at that point would have been to take every penny of the $20 million and use it to buy us. We would have sold. Their investors would have been furious of course. But I think the main reason they never considered this was that they never imagined we could be had so cheap. They probably assumed we were on the same VC gravy train they were.

In fact we only spent about $2 million in our entire existence. And that gave us flexibility. We could sell ourselves to Yahoo for $50 million, and everyone was delighted. If our competitor had done that, the last round of investors would presumably have lost money. I assume they could have vetoed such a deal. But no one those days was paying a lot more than Yahoo. So unless their founders could pull off an IPO (which would be difficult with Yahoo as a competitor), they had no choice but to ride the thing down.

The puffed-up companies that went public during the Bubble didn't do it just because they were pulled into it by unscrupulous investment bankers. Most were pushed just as hard from the other side by VCs who'd invested at high valuations, leaving an IPO as the only way out. The only people dumber were retail investors. So it was literally IPO or bust. Or rather, IPO then bust, or just bust.

Add up all the evidence of VCs' behavior, and the resulting personality is not attractive. In fact, it's the classic villain: alternately cowardly, greedy, sneaky, and overbearing.

I used to take it for granted that VCs were like this. Complaining that VCs were jerks used to seem as naive to me as complaining that users didn't read the reference manual. Of course VCs were jerks. How could it be otherwise?

But I realize now that they're not intrinsically jerks. VCs are like car salesmen or bureaucrats: the nature of their work turns them into jerks.

I've met a few VCs I like. Mike Moritz seems a good guy. He even has a sense of humor, which is almost unheard of among VCs. From what I've read about John Doerr, he sounds like a good guy too, almost a hacker. But they work for the very best VC funds. And my theory explains why they'd tend to be different: just as the very most popular kids don't have to persecute nerds, the very best VCs don't have to act like VCs. They get the pick of all the best deals. So they don't have to be so paranoid and sneaky, and they can choose those rare companies, like Google, that will actually benefit from the giant sums they're compelled to invest.

VCs often complain that in their business there's too much money chasing too few deals. Few realize that this also describes a flaw in the way funding works at the level of individual firms.

Perhaps this was the sort of strategic insight I was supposed to come up with as a "technologist in residence." If so, the good news is that they're getting it for free. The bad news is it means that if you're not one of the very top funds, you're condemned to be the bad guys.

Notes

[1] After Greylock booted founder Philip Greenspun out of ArsDigita, he wrote a hilarious but also very informative essay about it.

[2] Since most VCs aren't tech guys, the technology side of their due diligence tends to be like a body cavity search by someone with a faulty knowledge of human anatomy. After a while we were quite sore from VCs attempting to probe our nonexistent database orifice.

No, we don't use Oracle. We just store the data in files. Our secret is to use an OS that doesn't lose our data. Which OS? FreeBSD. Why do you use that instead of Windows NT? Because it's better and it doesn't cost anything. What, you're using a freeware OS?

How many times that conversation was repeated. Then when we got to Yahoo, we found they used FreeBSD and stored their data in files too.