According to one of their own, the problem with venture capitalists is their “never-ending search for the next-big thing.” In baseball terms, instead of going for singles and doubles, many VCs seek nothing but home runs. Sadly, what VCs identify as the next big thing rarely is. They often reflect either investments they have already made and want to pump up, or areas they don’t normally invest in but want to see overfunded to diminish a competing firms’ asset.
Machiavellian enough for you? That’s the world a veteran VC says entrepreneurs are best to avoid, the same way they should avoid the highly promoted “name brand” venture capital firms. “Venture capital is the most expensive form of money you can get,” says Bob Stearns, a 30-year VC and former CTO of Compaq Computer. “And if all you need is a million dollars, it’s best avoided.”
Stearns said most of what entrepreneurs hate about venture capital can be traced to some of the best-known firms, who promote themselves to gain first access to startup business plans and investors’ money. “They like to distort reality,” he says. “The best firms keep their heads down and mouths shut. There is a lot of obnoxious behavior on the part of VCs.”
Not the Only Voice
Sour grapes from a VC whose name you don’t know? Hardly. Vinod Khosla, one of Silicon Valley’s most-respected venture capitalists, recently made news and fans when he advised entrepreneurs to listen politely to their VC funders and then do what they want.
“Maybe some percentage, larger than 95 percent of VCs, add zero value, and 70 percent of VCs add negative value in advising,” Khosla said in September at TechCrunch disrupt. “They give advice to board members as if they know, and they haven’t done shit,” he said. “They’ve never been at a startup, they haven’t been through tough times.”
A co-founder of Sun Microsystems, Khosla’s comments echoed what many startup executives say when their funders and board members aren’t around. “It’s hard going to people who really don’t understand what you’re doing to ask for money,” an experienced venture-backed CEO says. “You have to create the story that they want to hear – and fund – almost regardless of what’s really going to happen.”
Besides their big piece of equity, VCs generally demand something else: a seat on the startup’s board of directors. However, companies fortunate enough to get Khosla Ventures’ money shouldn’t expect to see the man himself at their board meetings. Not attending “saves me a lot of time listening to other VCs,” he said.
Stearns advises startups to raise their first money from personal credit, friends and family and other sources, and make it last as long as they possibly can. Such bootstrapping has become common in the mobile applications and services business, where the Silicon Valley legend of “two guys in a garage” has found new currency. It even works in hardware.
GoPro, the sports action camera company, was founded with $264,000 that CEO Nick Woodman got primarily from his parents. It has since taken outside investment in preparation for an IPO, but the company was already well underway when that money arrived.
When a company does need venture money, Stearns says entrepreneurs should research carefully to find VCs who have a track record of creating successful, independent companies, even if they aren’t the largest. Beyond money, they should look at VC’s network of relationships. That should include potential employees, strategic partners and customers.
However, as Khosla suggests, it’s not the VC that makes the entrepreneur successful. And Stearns says the “VC first” mentality has it backwards. “Invariably, it’s the entrepreneur and not the VC that makes a company successful,” he says. “VC’s don’t have a Midas touch.”