Venture capital has a self-dealing problem

Oh, maybe the sky is not falling. Maybe it is not true that "We've got trouble, right here in River City. Trouble starts with a T and that rhymes with a V and a C and they stand for venture capital"!

Why? Well in information technology (IT) venture capital, in recent years a strong theme has developed: The VCs want the founders to be technical, e.g., design and write software. As I recall, the firm A16Z is an especially strong supporter of this theme.

Well, then: For my startup, I've read a lot of VC bios: My conclusion is that only a tiny fraction of VCs are in any very significant sense technical in anything in or very close to IT. E.g., when was the last time they designed and wrote 10,000 lines of code? Invented a new algorithm? Did some technical work prior to the software, e.g., the applied math of machine learning or data science, e.g., some applied math for ad targeting? How about some applied math for computer and network security via anomaly detection? How many VCs are qualified to direct a major IT development project with planning, hiring, training, software project management, server farm planning and implementation including performance, reliability, security, growth potential? Gee, let's keep it simple: How many VCs could step into to a slot as database administrator of, say, a major site of SQL Server, Oracle, DB/2?

So, in an IT startup at the seed or Series A level, why would a founder want to hire a VC, and why would a VC want to invest in a VC as a founder or a founder who would hire a VC? How 'bout they wouldn't?

Sure, at the Series B, C, ..., maybe some VCs could do business development, marketing, setting up the sales channels, running the sales organization.

Net, bottom line-wise, the goal of the VCs and their limited partners (LPs) is to make money, and a VC firm that doesn't make money will have a tough time raising more. And, LPs may look with surprise and even concern at losing bets on VCs within the firm. Or, such a VC darned better make money!

Not to contradict your post. But Stanford is equivalent in term of prestige to any Ivy out there, including Harvard. It seems like you agree with GP so that's probably just a wording matter.

Interestingly, venture capital LAW definitely has a self-dealing problem. Many (if not most) major law firms in the valley have both company-side and investor-side clients. And even if they don't, law firms often see a fair amount of company-side clients based on investor referrals. As a result, company-side counsel can often be reluctant to push too hard against investors lest they risk jeopardizing future business.

My first company actually had a situation where the same firm represented both us and the investor during our seed round AT THE SAME TIME. To be fair, this was the investor's idea, not the law firm (and the law firm made sign all sorts of waivers), and we ultimately saved a small amount in transaction fees and I can't say we would've gotten much better terms with independent counsel. But the entire affair makes me cringe a little every time I look back on it.

In case you're wondering, yes, there are rules against all of this. But you can waive a lot of the rules by providing written consent (and many clients don't think twice about this).

Don't you think they consider the people they hire to be "the best"? Do you think being "the best" and being an "insider" are mutually exclusive?

The underlying concern is one that applies to people not represented here in numbers that are significant enough to determine whether or not the problem exists in the first place. If a VC wishes to fund a company by someone they're already associated with that's entirely within their right and their responsibilities are not where the OP wishes them to be. That's why I really don't think this is relevant, regardless of whether or not such conflicts of interest exist. If they exist it is the duty of the providers of capital to insist on proper resolution procedures, for the rest of the world it is much simpler: don't engage in relationships with VCs that you feel are not ethical.

There's this myth that VCs are evil and out to devour young and fragile start-ups. Maybe it's due to the nature of my work (and quite possibly due to who pays me so there's my conflict of interest) but I've seen more start-ups and later stage companies trying to scam VCs than that I've seen VCs trying to scam/rip off (potential) port-folio companies (0).

Maybe this is a local affair and the EU VC scene is different in this respect, there is some confusion in this thread about angel investors being mixed up with VCs but in general VCs tend to be fairly honorable people. To balance that a bit more: there are VCs that have a bad reputation, typically these are smaller funds that are non-transparent wrt the source and destination of their capital, those are probably best avoided but I don't think they're representative of the segment as a whole.

The example given here - as far as I'm concerned - is a fairly typical affair given that capital providers will part with their money more easily when there is a basis of trust between them and the person or entity receiving the capital. Whether that's an optimal allocation strategy or not is debatable but it does not in any way require the measures advocated for in the article.