If the entrepreneurs, venture partners and investors are fine with it then who are we to argue?
The entrepreneurs who are fine with it are likely, for the most part, the ones who actually get funded.
Venture capital has a self-dealing problem
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Re: Venture capital has a self-dealing problem
#22Venture capital isn't a game you can "win." The goal is to get a return on investment, not to fairly distribute money. Starting a company isn't a contest like american idol.
I think the bigger objections than "fairness" are: 1. These might not be good funding decisions. Maybe investing in Keith Rabois's new startup is a bad decision, but it is only happening because he's a partner at Khosla. If you're an LP in a VC fund, this is something you could reasonably be concerned about. 2. If you're an entrepreneur pitching to a investors, you expect that the pitch is being taken in good faith.…
1) If you're an LP and you think this type of thing is a really big deal, don't put your money in a fund that does it.
2) Even if they didn't invest in themselves, they could just as easily give your idea to a more competent entrepreneur and invest in her instead. If you're really worried about your proprietary idea being stolen, you shouldn't be in these meetings.
Re: Venture capital has a self-dealing problem
#23Two differing thoughts: I'm not sure I would think the LPs would be all that concerned with this. After all, a VC firm is going to live and die by its performance reputation, so if their funds fail to return gains, it will haunt their firm for a long time. What I do buy though is Kevin's other point in the conflict of interest of potential entrepreneurs walking into VC offices and pitching a great product (editing ou…
It shouldn't be frightening. It should tell us all what we already know - ideas are worth exactly nothing and execution is worth everything.
> ideas are worth exactly nothing and execution is worth everything.
there is 3rd component - money. You may have good idea and be executing it well. The VC has money, has your idea and in this situation hey have choice - your execution or to implement their own. Due to money asymmetry, even having somewhat worse execution, they may still do better than you.
Re: Venture capital has a self-dealing problem
#24Venture capital isn't a game you can "win." The goal is to get a return on investment, not to fairly distribute money. Starting a company isn't a contest like american idol.
The "winning" is in creating a successful company, and VC tries to pick those winners. Getting VC funding isn't "winning" at all, and the author seems to conflate those two together.
As a LP, I would actually think that my GPs have a fiduciary duty to fund companies started by their partners if they thought it is a great investment opportunity (and ultimately VC partners are only beholden to their LPs and their own performance. Goodwill and good faith are valuable for achieving that end, not in itself)
Also,
>Now, in the most competitive start-up environment in history, these founders no longer just have to worry about being beaten by other start-ups in their space. They have to worry about potential investors picking off their ideas and using them for personal gain.
You've always had to vet your investors like this. Nothing has really changed.
Re: Venture capital has a self-dealing problem
#25It's not corruption, just 'more of the same' nepotism. If you're shocked by this, you haven't really been paying attention.
Re: Venture capital has a self-dealing problem
#26Earlier quoted context omitted.
VCs with execution capability are rare and word would get around if someone pulled a stunt like this.
I agree, and I choose to believe this fear is irrational, but it's still a thought that might creep around in the back of my mind. I do think the key thing once again touches on my first point, that a VC firm's reputation needs to be positive for both LPs and entrepreneurs to want to do business with them.
Even those in the 'backroom' (like me) are typically under some fairly agressive non-disclosures with the VC themselves to avoid leakage of company info. That won't stop jerks from trying to pump people for information but I have yet to see someone get any mileage out of that. I have seen a reputation or two being destroyed that way (of the person trying to get information in such a back-handed manner).
VCs are very image conscious, if they lost their influx of potentials because their reputation took a hit because of a real or perceived hi-jack of someone else's idea then they would suffer immensely so they are very protective of this channel.
I'm not sure if it would be an existential issue but I'm definitely sure that it would hurt badly to be known as 'the VC that you can't pitch to because they'll rip your idea'.
Re: Venture capital has a self-dealing problem
#27If the entrepreneurs, venture partners and investors are fine with it then who are we to argue?
The entrepreneurs who are fine with it are likely, for the most part, the ones who actually get funded.
Well sure but nobody is owed a chance to get venture funding from a particular fund. We are really stretching to find victims here, no?
Re: Venture capital has a self-dealing problem
#28Imagine if you gave money to Warren Buffett to invest and he turned around and invested it in a company started by one of his own cronies?!
I'd be suspicious, but then again, since his reputation is based on past successes, I'd still be okay with it.
The corollary is that the crony's company did fail, his reputation would suffer, and he'd lose business!
Re: Venture capital has a self-dealing problem
#29By this definition every bootstrapper is 'self dealing'. VCs get to decide how, when and where they allocate their funds, if they decide to bankroll one of their own partners in a new venture then that's totally ok as long as the partners and LPs are in agreement (it's their money after all) and you can bet that they'll have extra outsiders scrutinize the deal to avoid being accused of nepotism in case the company eventually goes south.
VCs with partners capable of executing on their own ideas are pretty rare, but when it does happen it is usually because someone had a side project (possibly even before joining the VC) that got legs (either unexpectedly or belatedly) and this person then uses his excellent VC contacts to secure a deal. And of course he/she does not go to a competing VC, that would be a harder pitch and it would be strange not to offer your partners a shot at the deal first.
All in all I can't see much wrong with this and if you think that it is 'unfair' you have to remember that VCs are not under any obligation to invest in outsiders at all (private funds exist).
Re: Venture capital has a self-dealing problem
#30Venture capital isn't a game you can "win." The goal is to get a return on investment, not to fairly distribute money. Starting a company isn't a contest like american idol.
I think the bigger objections than "fairness" are: 1. These might not be good funding decisions. Maybe investing in Keith Rabois's new startup is a bad decision, but it is only happening because he's a partner at Khosla. If you're an LP in a VC fund, this is something you could reasonably be concerned about. 2. If you're an entrepreneur pitching to a investors, you expect that the pitch is being taken in good faith.…
VCs are under no obligation to invest in outsiders at all.
Yes, it's an old boys network, old boys networks are not illegal nor are they bad. In fact they give the younger boys a fantastic opportunity to side-step the whole thing and start their own network, that's exactly what YC has done.
Whenever you see something like this there is an opportunity.