I can't believe the folks who disagreed with you are hand-waving away a huge conflict of interest.
They believe that money makes right.
Venture capital has a self-dealing problem
51–60 of 90 posts
Re: Venture capital has a self-dealing problem
#52By 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…
Two issues with that:
i) bootstrapping is different from self-funding. All of them might start with self-funding, but bootstrapping is getting revenue to fund the startup. Not the founder's money to fund it.
ii) VC's money are not their own money in totality. They raise funds with outside investors and they decide where to invest other people's money too.
Re: Venture capital has a self-dealing problem
#53I think the author's Simon Cowell example actually disproves his point. If you wanted someone to win American Idol who would choose to do it? Someone who who you have to train to sing well and coach them on the judges preferences? Or would you choose the person who has worked with the judges for years, knows exactly what makes contestants win or lose, and helps to make the decision themselves. I would choose Simon Co…
The problem is you're feeding the other candidates (and the audience) the illusion that they have a fighting chance against the insider. This deceit won't be taken kindly after they realize how they were beat out.
This is the equivalent of insider trading among government legislators. It's a very real problem, and there is no realistic solution since it is a systemic flaw of the startup/VC model.
It's quite possible startup culture can't continue working forever, and if this is a growing trend, that eventually too much encroachment by VCs will smother and scare away everyone who isn't an insider.
Re: Venture capital has a self-dealing problem
#54Earlier quoted context omitted.
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.
Sure. But I think the author's point was that he does find these concerning, and that other people (LPs and entrepreneurs) might also find them concerning if they were more aware of them, and that he thinks that VC firms should institute rules against them.
So yeah, you can totally have the perspective that those two points don't matter. I'm not saying that you should think that they matter. But some people do think they matter, and I don't think it is wholly unreasonable to feel that way.
My goal with my earlier comment wasn't to make you agree with the author. It was just to point out that the author's points aren't just about "fairness": they're also about whether VC firms are best delivering value to LPs.
On a nitpick point: I never said "idea". The idea that people are worried only about "ideas" is silly. There are other things to worry about: if you're raising a series B and are providing data about your business, that data potentially has concrete value beyond merely an "idea". I don't personally think it's at all unreasonable to be concerned about people misusing that data.
Re: Venture capital has a self-dealing problem
#55By 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…
Two issues with that: i) bootstrapping is different from self-funding. All of them might start with self-funding, but bootstrapping is getting revenue to fund the startup. Not the founder's money to fund it. ii) VC's money are not their own money in totality. They raise funds with outside investors and they decide where to invest other people's money too.
Bootstrapping is usually defined as 'pulling yourself up by your shoelaces' so using the revenues to fund the growth, but the prototype and initial capital is almost always provided from another source (savings, loans).
Not all VCs take outside investors, but plenty do.
Re: Venture capital has a self-dealing problem
#56Earlier quoted context omitted.
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.
Yeah, sure. I don't think that contradicts my post: I'm just saying that people might be concerned about those things, and an LP might question whether a given VC firm is best managing the assets under its control. The author didn't say that VC firms were obliged to invest in outsiders, just that these rules might give LPs more confidence that firms were behaving properly and in their investors best interests.
That's not a wishy-washy "fairness" thing: it's a concern about whether the firm is fulfilling its obligations to its backers. You don't have to agree with the concern... but it isn't an unreasonable thing to be worried about.
Re: Venture capital has a self-dealing problem
#57Earlier quoted context omitted.
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.
Yeah, sure. I don't think that contradicts my post: I'm just saying that people might be concerned about those things, and an LP might question whether a given VC firm is best managing the assets under its control. The author didn't say that VC firms were obliged to invest in outsiders, just that these rules might give LPs more confidence that firms were behaving properly and in their investors best interests. That's…
The author is not an LP with a VC. He feels he's in competition with the VC partners for their money, different situation entirely.
As an LP he might take issue with this, but for that you have to be an LP first and LPs typically do not take issue with this but actually feel that their money is well spent (whether that's correct or not is another matter).
Re: Venture capital has a self-dealing problem
#58I totally agree, poor moral standard is at the root of a lot of shady investors.
I run a VC backed bitcoin startup myself and more then one of the investors we pitched to as early back as two years ago have gone on to create their own bitcoin-related companies in suspiciously similar product verticals to ours.
Re: Venture capital has a self-dealing problem
#59Any investment group, upon hearing a pitch, will do one of three things; a) ignore it, b) figure out how to leverage the new information in existing pitches/plans, c) fund it. To even get a pitch in front of an investment group takes a lot of networking to begin with, so the reality is by the time you pitch, you're probably already an "insider" of sorts.
As an as-yet-successful entrepreneur, you should know that at any time your idea or portions of your idea may be stolen or "adopted" by anyone who hears you talk about it. And forget NDA's. No one signs those anymore...certainly not an investor.
This is why, if you have an idea, you need to bootstrap it, get customers, and generate revenue. Then let the investors come to you.
I think the entire "pitch" process is rigged and pointless. If you're going to build something, be passionate, find great partners and advisers, and bootstrap.
Let the VC's play their game. You weren't invited anyway.
Re: Venture capital has a self-dealing problem
#60This actually happened to someone recently... VC invested millions in itself and created a clone (and not a very good one). Needless to say, that company is self-funding now but got stuck on that for months. (upside: now growing at > 6% per week.)