Venture capital has a self-dealing problem • Hacker News Board

Re: Venture capital has a self-dealing problem

#31

Post by tolmasky » Thu, Mar 12, 2015, 7:53 PM UTC

As long as the money is private, they should be able to do whatever they want. If they're actually bad decisions (a worse startup getting money solely due to being inside), then they'll suffer for it. If the decision however gives a return, then what's the problem?

I don't feel suspicious of family's investing in their kid's venture -- wow how unfair! so biased, they should have given the kid next door a fair listening to as well!

The problem only arrises if bad decisions are then publicly de-risked (as is the case in banks, etc -- don't know specifically if this happens in an indirect way with VC's). But in and of itself -- "people you know" is one of many possibly good or bad metrics you can use to invest your own money (or the money interested to you by funders that know how you operate).

Re: Venture capital has a self-dealing problem

#32

Post by 7Figures2Commas » Thu, Mar 12, 2015, 7:54 PM UTC

coderzach wrote: post #5

Venture 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 goal is to get a return on investment...

This is a simplistic, overly idealistic understanding of venture capital that is unfortunately constantly repeated but rarely rebutted.

The goal in venture capital is to be able to continue to raise funds. On a $500 million fund, a venture firm locks in $100 million in management fees over the life of the fund (assuming the standard 2% annual management fee and 10 year fund life) regardless of performance. Not a bad deal.

But it gets better. Because of the nature of venture investments, it's all but impossible to declare a fund a winner or a loser a few years into a fund. But a firm won't wait 10 years to raise its next fund. It's going to raise its next fund not more than a few years in, and in a hot market like this one, that fund is likely to be bigger, so the firm gets to lock in another 10 years of management fees on an even bigger pile of money.

Carried interest (your "return on investment") is icing on the cake for venture capitalists. Because most LPs are muppets who will continue buying the same inferior product, the real imperative for a venture firm is to make sure its funds are not total dogs. Given historical venture capital returns, that basically equates to not blowing up your fund.

Re: Venture capital has a self-dealing problem

#33

Post by shubb » Thu, Mar 12, 2015, 7:55 PM UTC

tolmasky wrote: post #31

As long as the money is private, they should be able to do whatever they want. If they're actually bad decisions (a worse startup getting money solely due to being inside), then they'll suffer for it. If the decision however gives a return, then what's the problem? I don't feel suspicious of family's investing in their kid's venture -- wow how unfair! so biased, they should have given the kid next door a fair listeni…

Depending on the fund it does. This diagram explains it: http://www.agilevc.com/wp-content/uploads/2014/10/Startup-Ca...

Re: Venture capital has a self-dealing problem

#34

Post by thesteamboat » Thu, Mar 12, 2015, 8:04 PM UTC

jacquesm wrote: post #29

By 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 ev…

Bootstrapping is not a conflict of interest. When people are operating as both VCs and executives there are conflict of interest considerations.

Situations involving conflicts of interests are not inherently unethical, but greater care is needed.

Re: Venture capital has a self-dealing problem

#35

Post by RodericDay » Thu, Mar 12, 2015, 8:12 PM UTC

tolmasky wrote: post #31

As long as the money is private, they should be able to do whatever they want. If they're actually bad decisions (a worse startup getting money solely due to being inside), then they'll suffer for it. If the decision however gives a return, then what's the problem? I don't feel suspicious of family's investing in their kid's venture -- wow how unfair! so biased, they should have given the kid next door a fair listeni…

> I don't feel suspicious of family's investing in their kid's venture -- wow how unfair! so biased, they should have given the kid next door a fair listening to as well!

someone a while back made the case that SV is an offset economy where instead of CEOs you have VCs, and instead of Managers you have Startup CEOs.

Keeping the vague analogy in mind, how is flooding your kids with easy credit not available to other people not a form of nepotism?

Re: Venture capital has a self-dealing problem

#36

Post by jacquesm » Thu, Mar 12, 2015, 8:16 PM UTC

thesteamboat wrote: post #34

jacquesm wrote: post #29

By 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 ev…

Bootstrapping is not a conflict of interest. When people are operating as both VCs and executives there are conflict of interest considerations. Situations involving conflicts of interests are not inherently unethical, but greater care is needed.

How can it be a conflict of interest if it is in the end their own money? They get to spend it any way they want it and of course they will spend it on those that they know better more readily than elsewhere.

It's not as if VCs are distributing public funds and those VCs that have taken public funds (or pension funds) would likely never engage in a deal like this.

If you think you're 'in competition' with the VCs partners for capital you have it backwards, they have the capital and they can dispense it at their discretion, or even not at all.

Re: Venture capital has a self-dealing problem

#37

Post by jcdavis » Thu, Mar 12, 2015, 8:16 PM UTC

7Figures2Commas wrote: post #32

coderzach wrote: post #5

Venture 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 goal is to get a return on investment... This is a simplistic, overly idealistic understanding of venture capital that is unfortunately constantly repeated but rarely rebutted. The goal in venture capital is to be able to continue to raise funds. On a $500 million fund, a venture firm locks in $100 million in management fees over the life of the fund (assuming the standard 2% annual management fee and 10 year f…

Not only that, but fund lives are getting longer. This article says the median time life is now 14 years: http://www.institutionalinvestor.com/Article.aspx?ArticleID=...

Re: Venture capital has a self-dealing problem

#38

Post by jacquesm » Thu, Mar 12, 2015, 8:18 PM UTC

7Figures2Commas wrote: post #32

coderzach wrote: post #5

Venture 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 goal is to get a return on investment... This is a simplistic, overly idealistic understanding of venture capital that is unfortunately constantly repeated but rarely rebutted. The goal in venture capital is to be able to continue to raise funds. On a $500 million fund, a venture firm locks in $100 million in management fees over the life of the fund (assuming the standard 2% annual management fee and 10 year f…

Cynical but spot on.

Re: Venture capital has a self-dealing problem

#39

Post by mc32 » Thu, Mar 12, 2015, 8:24 PM UTC

RodericDay wrote: post #35

tolmasky wrote: post #31

As long as the money is private, they should be able to do whatever they want. If they're actually bad decisions (a worse startup getting money solely due to being inside), then they'll suffer for it. If the decision however gives a return, then what's the problem? I don't feel suspicious of family's investing in their kid's venture -- wow how unfair! so biased, they should have given the kid next door a fair listeni…

> I don't feel suspicious of family's investing in their kid's venture -- wow how unfair! so biased, they should have given the kid next door a fair listening to as well! someone a while back made the case that SV is an offset economy where instead of CEOs you have VCs, and instead of Managers you have Startup CEOs. Keeping the vague analogy in mind, how is flooding your kids with easy credit not available to other p…

It is, but what's the problem? It's like you taking your money, assuming you earned it, and buying things for _your_ friends or _your_ family. So long as your husband/wife/partner is okay, why should that be a problem?

Should I think it's unfair you spend nothing on me?

Re: Venture capital has a self-dealing problem

#40

Post by shawnhermans » Thu, Mar 12, 2015, 8:25 PM UTC

dsjoerg wrote: post #19

Imagine 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?!

Warren Buffett has a solid reputation of making excellent investments. As long as the money returned a good investment, I wouldn't care at all.