Slashdot Mirror
An Inside Look at Venture Capitalists
Christopher Thomas writes: "IEEE Spectrum has a scathing review of venture capitalists this month. Authors Nick Tredennick and Brion Shimamoto paint a devastatingly cynical picture of venture capitalism from the engineers' perspective." Funny to read, but probably 100% accurate. Wow.
One question I have is... is it truly ethical to use a non-profit organization as a front for your for-profit business venture?
One idea that I've had is to do this:
This would go along with my one-man jack-of-all-trades computer sales/web design/hosting/ISP/consulting/programming/but-wai
business. But, who knows. Maybe I'm biting off more than I can chew. (Nah...)
I've never had to deal with VCs so I can't comment on most of it, but there is one part I have trouble with:
Look, for example, at hard disks and floppy disks. In the hard-disk business, there have been as many as 41 rivals fighting for market share. Only three major manufacturers competed in floppy disks. The hard disk has improved much faster technically; the floppy disk is stagnant by comparison. I'm not talking about market size or market opportunity (the hard-disk business versus the floppy-disk business); I'm talking about rates of innovation.
Although his thoughts are noble, in the real world, who is going to willingly do something to help kill their own company? Will the engineers do that? If say I started a video game company, why would I HELP someone else start a competing video game company? Same with investors. Why would an investor put money in one video game company, and then fund a competing one? The conflict of interest alone could get him in serious legal trouble.
Really, we all want our society to compete and innovate. But that should be done on a legal level (anti-trust laws, for instance). To expect it from people on a personal level or a corporate level is totally ridiculous and will never work simply because humans are selfish creatures. We will always serve ourselves before serving others. To think that human nature can change without force is a bit naive.
Just think, if you had tomorrow's lottery number, would you tell the whole world about it or would you buy the ticket all for yourself? Now be totally honest.
eTrade SUCKS
Nope, there are, in fact, different kinds of geeks. There are the clueless geeks who think that they can make a quick buck by developing big sounding technology with expensive tools and on impossible deadlines. Sometimes they get lucky, but more often, they get f*cked.
Clueful geeks never participated in this game. They work steady jobs, save money, run small consulting business, and generally are having a much better time. If a VC contacts them, they just politely refuse.
You don't need millions of dollars in order to be happy. Engineering and software development is a decent way to make a living, and you can be quite well off without ruining your health on startup dreams.
Oh, as for the open source startups, the VCs that invested in them were fools. But if VCs are going to waste their money, they might as well waste it on something that contributes to the common good. I suspect many engineers working for such companies weren't dreaming on getting rich but just liked the idea of creating open source software fulltime. (Support of open source by companies like Sun and IBM, on the other hand, makes business sense for them.)
However, I do agree with you, to a point. People who have no idea how to spend money shouldn't be given large sums of money. But it's not just engineers... it's rock stars, actors, directors, and whoever else thinks they know more about economics than the guys who invested in them.
;)
I disagree. People who have no idea how to spend OTHER people's money to MAKE MORE MONEY shouldn't be given large sums of money.
But then one can also look at it another way. Those who can't manage other people's money wisely shouldn't be given large sums of money, UNLESS a FOOL equally incompetent GIVES his money for this moron to invest.
In the end you'll find these 2 idiots deserved what they both got from each other (unless there was fraud of some sort). Survival of the fittest my friend. Let Darwin into your home too.
eTrade SUCKS
I have to admitt, 100%, with the author of the article. The feeling I have nowdays is that when the VC are in over 50% of the company, the company is lost. They will drive the company to its knees and force the orignal enginners out. All that without really wanting it, just by pure incompetence or ignorance. The VC (pet) CEO will be changed within 12 month when, accoring to plans, the company has outgrown his set of competences (allthough not much may have changed in the company). They have no eye for talent since they really don't care for technology or development. The product is the company, not the technology put into to product of the company. Once a structure reminding of a company has been created it is due for introduction to more traditional investors that may buy the company on the basis of "track record" and build up of market presence.
/Jarek
So, lets see, Vulture Capitalists BAD, and engineers GOOD. Hmmm.
Personally, I'm a very very good engineer.
However the way our society works is that the best engineers are the ones that haven't had time to open their mouths and remove all doubt.
The way the engineering career path works is you very quickly sell out and replace the values of being a good engineer, with the values of deferring to authority and accepting "things" the way they are, so that when you are older you can take advantage of these values to maxime your own PERSONAL gain.
In fact, this extremely typical career progression and value development merely leads to being a Vulture Capitalist at the end. The only real complaint people seem to have about this whole situation is that others are at the top of the food chain and not themselves.
I'd love to be in their position and screw anyone I want (clueless engineer drones or management wannabes).
Want to come out on top? Then stop complaining about the existing hierarchy. There are easier ways to succeed then by "changing the system".
Want engineers to have more power? Screw the people who have the money - that will cause a quick transfer of money and power. Maybe not to you though.
Take this personaility test.
Female Prison Rape in NY
I've been ".COM'd" twice in 5 months. Both times I had a real good view of the financing process; the first time, because the CEO was very open with the company and took time to explain what was going on; the second time, because the company was very small and the CEO and I talked fairly regularly about it.
While the article in question has some obvious flaws, in general, it's on target. VCs are looking to screw you any way they can, in the hopes that it'll make them some money. It doesn't matter whether they're dealing with engineers or financially astute CEOs.
The general pattern looks like this:
1. Meet with the VC, present the business plan
2. The VC offers unrealistic terms -- like, grow the company by 1000% and we'll invest the money, and make financial assumptions on 1000% better productivity.
3. Lather, rinse, repeat, until you realize those are the only type of terms you're going to get.
4. Nod along, get the cash.
5. Hire like crazy, according to the "plan".
6. Money runs out in some short period of time (usually around a year). Nothing has happened, because growing a company by 1000% doesn't give you 1000% better productivity, even if you were hiring pre-trained employees.
7. VCs say, "gee, shucks, guess we need more money". BEND OVER.
6 and 7 get repeated a few times and all the original players get diluted to nothing (except the original VCs, of course). You go IPO with a horrible product and no cash inflow; the VCs make their cash, but your company is bound for failure, and your restricted options/shares guarantee that you won't make any money. Or you go under and the VCs swoop in and take the technology in an attempt to sell it to get some of their money back.
Welcome to high tech.
A few thoughts on VCs, Engineers, and Managements:
1) VCs, in general, are not very trustworthy. They are in business, they are looking to make money, and they are not afraid to step on some toes to get it. I don't think there is anything particularly shocking about this, but it is something to keep in mind when dealing with them.
2) "Your ideas, Your work, Their company" - let's not forget their money. As the author of this article himself points out, it is very difficult to raise money. The fact that VCs give people astronomical amounts of money and ask for something in return (i.e. a share of the company and a voice in how it is run to protect their investment) is not unreasonable.
3) VCs, like most people, and especially those controlling large amounts of money, tend to have a herd mentality. Do they take more risk than the average investor? Absolutely. Looking at the number of ideas that have been funded in the last few years and then turning and blaming vcs for not funding "enough" risky ideas to me seems pretty silly.
4) Good management is critical to the success of a company. This may be anathema to many of the people who frequent this site(or at least this topic), but one of the mantra's of VCs is "management, management, management." Now, I am an engineer, I started a company, but I am more than willing to admit that:
A) I am not well suited to managing it
B) If I don't find someone who is, the company will have real difficulty succeeding.
Now, obviously there are many examples of companies that have been run into the ground by bad management. Does this mean that management is evil or (perhaps even more absurd) unnecessary? No. Good management is critical to a company's success, just as bad management is critical to its failure. This may not be pleasing to our egos as engineers, and there may be exceptions to this, but having worked with some good managers and some bad ones, it seems to me to be generally true.
5) Engineers are often not good managers. Let's be honest here. Sometimes the guy from Wharton is a really lousy manager. But just as often (I would argure more often) the brilliant programmer is also a really lousy manager. Being a good manager is an hard-to-acquire skill, in some ways as nuanced and difficult to achieve as technical proficiency. Just as a cs degree does not assure programming competence, neither does an MBA assure management competence.
6) In general, I found this article to be whiny and annoying. Yes, I don't like VCs either. Many of them are "sharks"(as I was told before I got involved with them, and have generally found to be true). They are not necessarily (and I would argure are rarely) the best businessmen, the best partners, or the best engineers. They are though the guys with the money. And if your talking to them, you are most likely the guy who needs. Now, the historical balance of power in relationships between those having money and those asking for it does not need to be summarized here, except to say that one of them (I'll give the author of the article a hint, not the one without it) holds a significantly stronger position.
What would be nice is a more practical-minded article about engineers dealing with VCs(because there are many useful things to keep in mind, and are things to watch out for, even if you don't have an axe to grind), rather than the sort of flailing complaints that we have received here.
John
Look, if the founders of the company themselves do not fundamentally believe in the technology OR how they're approaching their targeted market(s), then they have NO business wasting other people's money. First, not every idea is worthy of investment. Second, and perhaps even most importantly, even if the idea itself is worth something, if management does not know where or how to execute, it is wasteful of everyones time and money. If you don't at least have a fairly clear plan, you have no business being in business, at least when you're playing with other peoples' money.
Furthermore, while it is true that high return investments almost always bear higher risk, that does not mean that every high risk investment will or can return a decent amount. For instance, I could loan a fugitive 1 million dollars, while this is certainly high risk, it's almost certainly a formula for ruin. This point being that some investments are simply bad investments, deserving NO investment because they do not offer a return commensurate with the risk, relative to what can be had else where. Fundamental to the field of finance is that at any given level of risk you want the maximum amount of return. This is why: some companies cannot get additional capital, why some shares are priced so low, why some land is worth so little, and so on.
Now, I'm sure that in the Real World it's more often that the IP would be worth $150 million, and the engineers brought in maybe $5 million, and the VCs only pitched in $50 million, and the engineers end up with a 15% share of something they conributed 75% of.
It takes money to make money. You might have a great idea, but generally great ideas need financing. I might make the world's greatest cheesecake, but without the hundreds of thousands of dollars needed to buy a restaraunt, outfit it properly, fill the pantries and larders, hire and train employees, purchase advertising, invite the media &c. my idea is worth very little indeed. Someone needs to finance me--and he's taking a huge risk. That costs me.
The best solution is to finance your activities yourself. If you cannot, sell the rights to your IP to others. You lose the opportunity to become the leader and known name in that market (which one needs to survive after the patents expire), but you turn your idea into cash. You might then use this cash to fund another idea, and this manner become the market leader. When the patent expires, it doesn't matter, because everyone knows and trusts the Smith family of widgets. And then you'll have a profitable corporation.
Remember, though, that it's more lucrative to have a 1% share of a $100 million concern than it is a 10% of a $5 million concern.
No. Tempting as it may be, don't do it. Otherwise it's just a shot in the dark. You might get lucky and discover a business that is sustainable and profitable, but then again you probably won't.
Why do you think the economy sucks right now? It's precisely because VCs are sheep and invested in any "business" that came along, whether or not doing so made sense (because after all, other VCs managed to do the same and made a boatload of cash on the IPO. Monkey see, monkey do). Worse, these same VCs encouraged many of these "businesses" to do stupid things, like grow the company rather than focus on being profitable. They did so because they wanted to cash in on a superstar IPO, even if the value of the company was doomed to drop through the floor soon afterwards. I know. I was there, and saw it with my own eyes.
Back to the economic consequences, however. The economy sucks right now because lots of VCs invested in lots of stupid startups whose "management" had no clue about how to turn it into a profitable, sustainable business, and the VCs didn't care about that, either. Again, they just encouraged the companies to grow to make them look good for IPO, so they could make a quick buck.
Because these companies grew, they bought lots of things: talent, equipment, etc. This caused a spike in the demand for talent and equipment, so salaries spiked. Equipment sales spiked. Equipment manufacturers ramped up production, thinking that the trend would continue (and, after all, if they didn't, then their competitors would get the business instead), and hired people to do this. Everybody grew, and everybody was happy.
Furthermore, you now had a lot of people (engineers, support staff, etc.) out there who were being paid a lot of money. Such people tend to spend that money, and they did. They bought houses, cars, went to restaurants, and bought lots of goods and services. The parts of the economy that service them grew to fulfill the increased demand. Again, everybody grew, and everybody was happy.
Then the inevitable happened. VC-backed businesses started to fail because they ran out of money. Oh, they did exactly what the VCs told them to do: grow and worry about being profitable later. Don't worry about spending the money to grow the company because that's what it's there for. Except the VCs were too stupid to figure out that if you don't worry about being profitable, then nothing else matters in the long run. They were concerned only about short-term returns (from an IPO) rather than being concerned about the health of the business, and the increased prices of goods, services, and people caused companies to burn through their money a lot faster than was anticipated. All the money these companies wasted on parties, doodads, etc. didn't help that situation either.
So VC-backed startups began to fail. VCs began to realize that a lot of these businesses wouldn't make them the quick buck they were after and stopped their funding. When the funding dried up, these companies went bankrupt, fired all their employees, and closed up shop. And, in the process, sold off all their equipment for cheap.
Which brings us to where we are today. There's a surplus of equipment on the market at bargain-basement prices because all these failed companies (or whoever acquired their assets) are selling it off. So as a result, equipment manufacturers are unable to sell their stock of equipment at a profit. And remember all those people they hired in order to ramp up production? They've had to get rid of them, and all the support staff they needed to deal with the increase of customer support calls and all the things associated with that (field engineers, etc.), since the number of customers who need support (and who can buy support contracts) has dropped through the floor.
There's a surplus of people in the market because they're no longer working for the startups (who went under) nor are they working for the equipment manufacturers (who are getting rid of people because demand for their products and services has dried up).
And the companies that provided all those goods and services that people were buying? They're starting to hurt, too, since there are now a lot fewer people with money to spend on such things. Worse, the supply of such things increased to meet the increased demand. But now the demand is down significantly. That means prices will fall through the floor and most providers will go out of business.
It's a self-adjusting situation, to be sure. But don't kid yourself: the adjustment hurts. And because the economy has a strong positive feedback component (think about it: drop in demand means drop in prices, which means more people with less money, which means further drop in demand), the downward adjustment can easily go a lot further than it should.
So no, he shouldn't have taken the money. You think the money grows on trees or something? That money represents the fruits of the labor of countless individuals. When it's not spent wisely (on things that people need now or in the future), bad things happen to the economy. As has been proven by the dot-bomb fiasco. The people who took VC money knowing that they couldn't achieve a sustainable and profitable business are at least partially guilty of causing the economy to go into the toilet.
If you want to do research, apply for a research grant. Such money is expected to be used for such purposes, and isn't expected to gain any real return (research, after all, is by its nature a very uncertain thing -- a shot in the dark). That's why it's a "grant" and not an "investment".
Use 'slashdot stuff' in the subject line in any email you send me if you want to get past the spam filter.
It is true that it is possible to start and run a company without raising venture capital.
... and decide whether they provide the type of rules by which you'd like to play.
The problems you list are the reasons most people don't do it, namely (2), (3) and (4).
Problem 2, restated, is "people generally need incomes, which pre-revenue businesses obviously cannot provide without being capitalized."
Problem 3, restated, is "stock in pre-revenue companies is a risky investment"
Problem 4, restated, is "pre-revenue companies often require equipment/plant [economic definition of CAPITAL, not 'money'] to get to break-even cash flow"
Congratulations, you've basically stated the need for venture capital.
Your credibility is further undermined by making statements like
1. "a skeleton crew of support staff (ie, people who will find paying customers)". Everyone position outside engineering, even in high-tech firms, requires a different skill set. If you think finding the first set of paying customers for a unique, new product is easy, you obviously haven't actually tried doing it.
2. "Minimizes contacts with lawyers, accountants, and other such creatures that add friction to the economy" Again, these people provide specialized services that are necessary overhead to having a largely functioning free market. For lessons on what happens when law is arbitrary or unreliable, accounting rules are vague or unenforced, just study Russia, China, Korea, even Japan,
I am actually an engineer / entreprenuer, and get annoyed when engineers with an arrogantly upturned nose for all they choose not to pursue attempt to lecture on how things ought to be. I mean really, you damage my credibility along with yours.