Does being a VC mean “trying to change the world?”
My friend Chris Dixon just wrote an interesting post titled It’s not East Coast vs West Coast, it’s about making more places like the Valley. It is very interesting and provocative, and as with all Chris’s posts, it’s a must-read. However, it honestly rubbed me the wrong way and prompted me to write the following comment:
Chris, I think it comes down to what being a VC really means. You seem
to equate the VC mission with “making things that change the world.” I
believe this is a narrow and potentially dangerous definition, and
actually highlights one of the biggest problems with the Silicon Valley
venture scene. It also, in my experience, doesn’t reflect the true
dynamics of how large-scale West Coast VC works, which is a lot less
sexy and entrepreneur-friendly than you indicate.
Should a good
VC be working to fund ideas that change the world? Yes. Should they
also be looking to back young companies working on important problems
that are, say, built on top of something else and very useful but not
transformational? I’d say so. There are lots of start-ups of value that
will never be the next Google, Twitter, Microsoft or Apple, but that
doesn’t mean they shouldn’t be funded and nurtured as any start-up
should. If one were to apply the “change the world” mission to venture
investing, the amount of capital being invested in such companies (or
even that should be invested in such companies) is probably less than
20%. To me the key is making sure that those 20% or so get the
requisite support and time to thrive from their venture backers, which
is the much bigger issue at hand.
I’d like to think that I back
worthwhile start-ups and am very entrepreneur-friendly without all that
negative financial engineering you ascribe to certain East Coast VCs,
but do most of my portfolio companies have a chance to change the
world? Not in the way I define changing the world. And personally, I’m
ok with this. I’m helping to create useful products, create jobs, and
foster entrepreneurial excitement and possibilities. This is what
venture investing means to me.
As it relates to large West Coast
VCs, many of these firms are structurally bound to trying to change the
world because they need those kinds of wins to return their funds. This
doesn’t make them paragons of virtue; it makes them rational. But
buying this series of far out-of-the-money call options has an ugly
dark side as well: if companies don’t appear to have the potential to
change the world (read: sell for $1 billion+, go public, etc.), they
often get squashed and orphaned since they are no longer worth the VCs
time. Now I’m painting with a broad brush here but you get the point.
Does this dynamic help create a favorable entrepreneurial culture? Is
this approach really making the world a better place? Not to me. Plenty
of companies that would have made it on the East Coast will fail on the
West Coast precisely because of the need to hit home runs to the
exclusions of singles, doubles and triples.
Chris, I certainly
agree that those investors who are heavily focused on metrics and
traction are noxious and ill-placed as seed stage investors (they are
really Series B, C and D investors). However, I would say that
entrepreneurs who combine vision with pragmatism are more attractive to
me than entrepreneurs who simply have vision. Might this pragmatism
keep the starry-eyed entrepreneur from changing the world, and only
building a really large, successful company? Yes. Is this necessarily
an indictment on the NY VC reputation of wanting to understand plans
for commercialization even in pre-revenue companies? I don’t think so.
Thanks for penning this, Chris. You’ve raised some really important points that warrant discussion.
Roger
These were my $.02. I’d be interested in your thoughts, too.
