By almost any measure, business in the world of venture capital is booming and better than ever. According to the research company PitchBook, both early-stage and late-stage valuations of venture capital-backed companies are hitting record highs as investors practically beg founders to take their millions. To help the outside world understand what life is like inside the industry, one venture capitalist spoke with Motherboard on the condition of anonymity, so that they could speak honestly without harming their reputation and business. The venture capitalist unloaded on the lies VCs tell themselves, the industry’s speed-related problems, how the industry is like a game of roulette and why “VCs are so annoying on Twitter.” The comments were lightly edited and re-organized for clarity.
There’s always been an aspect of the job that is like a beauty contest. There’s this old line that being a VC was 99 percent saying “No” and 1 percent begging. And now, it’s more like 10 percent begging. You spend a lot of your time trying to convince some 23-year-old little shit that you are better than some internet celebrity who they think is going to be more effective than you are because they have more Twitter followers.
The early-stage venture industry is a lot like Hollywood in that all of the value accrues to the hit. And it’s worse than Hollywood in that the difference between the biggest movie ever and an average movie is nowhere near as big as the difference between the biggest venture company and an average venture company. As a result, there is this mania to try to identify who is going to be the next [Insert Big Company Here].
Almost without exception, VCs need to invest in companies that become the best companies ever in order for the math of their funds to work. If you’re in something that turns out to be worth $70 billion, instead of $7 billion, that makes a big difference to how your fund performs. There’s probably five or six firms that are able to reliably get at those best companies because of their position in the market. They just compete amongst each other at a certain stage. That’s like Sequoia and Benchmark and Andreessen Horowitz, and they kind of only ever lose to each other.
“There’s this dirty, secret view among many VCs that only rich founders make money.”
If you’re a late-stage investor, and you think you might want to invest in the company, you can actually learn almost everything you need to know without talking to that company now. You can call their customers. You can get a sense of their numbers. You know, that kind of stuff. And so, the market standard now for many of the late-stage firms is that they show up in a founder’s inbox, and they’re like, “Here’s our pitch deck for why we should invest in you. We’ve already done all of the research that we need to do. Do you want to take our money?”
Sometimes it’s maddening. Because you’re like, “Oh, God, like these guys are dopes, but they have a bigger fund.” Like when you’re a better poker player than somebody but they have a bigger chip stack. It’s frustrating to play against them, because they can bully you.
The early-stage people, we’re more like talent agents. We’re not investors, sitting there saying, “Well, what’s the market size and how fast are you growing?” We’re much more like: “I see a lot of actors, and that kid, he’s got something. He’s gonna be a star.” So you end up with a lot of people saying, “Who’s gonna be the next Will Smith?”
You now have this menagerie of different kinds of ultra early-stage investors. Everything from a founder whose late-stage investor gave them $20 million in a personal kitty to an early-stage firm to very big funds that set aside a small piece of their money for exploratory bets. It’s almost like they’re covering every square on the roulette wheel or whatever, just hoping that their number comes up. Some are better at it than others, based on things like: Can they win the deal because they’re famous?
One of the reasons that VCs are so annoying on Twitter is because at the very earliest stages, they win by being known. By just seeing more of the roulette than everybody else. You build a brand. And so VCs are out there trying to build the brand. The implication is: The very best founders get to choose who they want to have invest. And we are all auditioning.
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There’s definitely a fetishization among founders around raising VC money. I’ll meet these 21-year-old kids who sound like they’ve been doing this their whole life. For the founders who feel like they’re not on the frenetic train, the sense of “What’s wrong with me?” and the depression and isolation that can come with that is even more pronounced than before because everywhere they’re reading that money is raining down on everyone, and it’s like, why not me? That disproportionately falls on founders who have underrepresented backgrounds. On people of color. On women. You know, there’s this dirty, secret view among many VCs that only rich founders make money. It’s not even true, but there is a belief that it’s true.
The thing that’s changed dramatically in the last six to 12 months is the speed at which deals go from just talking to getting done. Every week we see new deals getting done the same day the founders started fundraising. And you have all kinds of wacky behavior. All these VCs were competing so feverishly to get into this company Tandem. One even sent them a tandem bike.
Because of not knowing who the next Will Smith is going to be, the mere fact that one firm thinks somebody might be the next Will Smith has been enough to make other firms interested. The traditional solution was “exploding offers”—like, okay, I found you, you’ve got 24 hours, and then the deal goes away. Most classy firms no longer do that. But it has re-emerged at the late stages, because the pricing has just gotten insane. We know about companies that are valued at a quarter billion dollars that have less than $25,000 a month of revenue.
“We know about companies that are valued at a quarter billion dollars that have less than $25,000 a month of revenue.”
It does concern me. But so what? What will happen? Some founders will have their dreams dashed? But to be fair, a smart founder will raise the money right now, and not spend it as if all of those projections are accurate. So to some extent, the founders whose dreams get dashed, it’s on them, not on their investors. Some investors will lose a lot of money, but they’re big boys and girls. These are fucking professionals who are supposed to know what they’re doing. So I don’t really have much sympathy if some investor wants to be a wild gunslinger and ends up losing their money. It’s on them.
The one part of the mania that is harmful for society is when you start pressing companies that are doing something significant to evolve something of social consequence at breakneck speed. A lot of things can go wrong with that. Laws can get broken. People can get hurt. Look at Robinhood, and the horrible death of that person who misread the user interface and thought they owed Robinhood hundreds of thousands of dollars. That is the one concern I have—this kind of late capitalist need for speed. [Editor’s note: The financial services company recently settled a wrongful death lawsuit filed by the deceased trader’s family.]
There’s this sort of implicit permission to ignore things. I’ve had so many founders say to me, “I just need to be a little bit more like Travis Kalanick from Uber. Just go for it and break the rules.” I mean, I had a very smart founder—who’s an elite business school graduate—say to me, “But those are unintended consequences.” We’re not responsible for those. Actually, you are. That’s not how ethics works. This frenetic fetishization of speed can cause a lot of damage. It can build a lot of good in the world too. And I’m not the type who thinks, “Oh, Uber should have followed the law.” I think they were fine to go in and break the law and do things in a regulatory gray area. But I do think that the more we fetishize speed, the more collateral damage there’s going to be. It’s like a speeding car on the highway. We’re going to hit some pedestrians along the way.
I’ve had so many founders say to me, “I just need to be a little bit more like Travis Kalanick from Uber.”
There is a VC mentality that in a fucked-up way goes back to pensions. That is, “I have a solemn responsibility to make as much money as possible. Because I’m investing on behalf of the teachers in the state of California.” There are plenty of people whose personal self-interest in making money gets fused with an identity with some kind of nobility of earning financial return, because of the identities of their investors.
The truth is, VCs were never all that risk seeking. It’s not like they’re doing these wild, crazy bets on the future. VCs are taking calculated risks based on what they think is going to return. Peter Thiel was like, “We wanted flying cars, instead we got 140 characters.” His most successful investment ever was Facebook. I mean, come on, buddy. That’s all bullshit. VCs pick up the things that can be advanced in 18-to-24-month chunks. And not everything in the world looks like that. Something that is higher risk, lower return does not make sense for anybody to fund.
I’m not trying to make as much money as possible. I’m trying to make as much money as possible while doing the work that I want to do. And the work that I want to do is serving very early-stage founders. It’s sort of like saying, “I’m a novelist who only writes a certain kind of novel.” Yeah, it means that I’m not going to be Stephen King. But it also means that I get to do the work that I want to do. And I’m really proud of it.