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.

Comments

Definitely right about sheep...

[cperciva]

One of the comments made in the article is that VCs are like sheep -- they flock about, and if one invests in electronic basket weavers the rest will.

I can attest to this from personal experience: I am one of a small group of people to have received the (questionable) pleasure of being cold-called by a VC firm. It didn't matter to them that I was still finishing my BSc in mathematics; all that was important to the VC was that 1. Distributed Computing was hot, and 2. I was responsible for a recent distributed computing project.

My name is [censored], and I'm with [censored], a traditional VC firm. I saw a press release regarding your recent accomplishment ... What particularly interested me was your use of a distributed computing system. This is an area that has been of interest to us at [censored] and we would like to speak with you ... We are currently investing a $1 Billion fund and our typical investment size is $5 to $15 million.

Of course, calculating Pi isn't likely to be commercially profitable any time soon; for that matter, distributed computing isn't either. So I wrote back explaining that I had no intention of helping them waste their investor's money on ventures doomed to failure.

Ever since then I've refered to that day as "the day I refused five million dollars".

Engineer incentives

[Salamander]

Reducing the engineers' share of the pie is counterproductive, however: they become demoralized; productivity suffers; eventually, they leave.

To be fair, some VCs do recognize this and do something about it. I have a friend who's been involved in a few startups. Not too long ago he described what had happened in one funding round. BTW, you're practically always involved in some sort of funding-related activity or another, all day every day. If you're a true techie you'll go insane wishing you could sit down and write code again. Anyway, this is basically what the lead VC said:

You don't have any business, so that's not your value to us. Your IP isn't that valuable either. [Ow, harsh.] What's valuable to us is the talent you represent, and if your people's share gets too low we know you'll start to defect. That share is already below our standard, so we will not participate in the next round unless in the process we can bring the founders' share back up to that standard.

What ended up happening is that some of the previous-round investors saw their share reduced so the founders' share could be increased. I'm sure they didn't like that much, but I'm also sure that if it was presented as a choice between that and losing the lead investor (with nobody else ready to step in) they would have gone along. Losing the lead investor like that at that point in time would basically have meant that the company had zero prospects of survival (in fact it did not survive).

The upshot is that a "vulture capitalist" really - for once - did try to do the right thing by the founders, and even leaned on other investors to make the right things happen. They're not evil people. They're ambitious, they're greedy, they're often ruthless, they almost always have goals that are at odds with techies' goals, but they do have honor.

I wish I could name the east-coast VC company involved, because I like to see good behavior rewarded. Unfortunately, I don't feel safe doing so. One character trait they hold very dear is "discretion"; it's not very discreet to tell stories like this one in a place like slashdot, and I might want to do business with them myself someday. ;-)