VCs Are Not Your Friends

http://steveblank.com/2011/02/03/vc%E2%80%99s-are-not-your-friends/

by terrisv • 15 years ago

104 32 15 years ago

jdp233• 15 years ago

It's not as catchy a headline, but I'd phrase it differently: whether or not VCs are your friends, their relationship with you is a business one.

Imagine Steve had been in a somewhat different situation: a friend of his was running a company that was a potential strategic partner, and after an initial investigation decided that it didn't make sense. Would that mean they weren't friends? Of course not: it just means that the business relationship didn't work out in this case. Real friendships survive that.

random42• 15 years ago

He meant to convey, that person X, when acting as your VC, is not your friend.

More clearly noted here, when he writes about not confusing a VC's good behavior, as their personal trait.

... they add tremendous value to your startup (recruiting, strategy, coaching, connections, etc.) they are not doing it out of the goodness of their hearts.

... At the end of the day VC’s have to provide their limited partners with great returns or they aren’t going to be able to raise another fund. If you succeed so do they. Great VC’s do everything they can to make you successful. But just like your bank, credit card company, mortgage holder, etc. they are not confused where their long term loyalty lies.

mey• 15 years ago

From my personal previous experiences with VC's, my general issue with them is how they wish to make you successful. They are concerned with the short term success, pump and dump to a certain extent. If that is your concern as well, then excellent. If not, beware that your definition of success, and theirs are going to conflict at some point, and could end up hurting both of you.

jdp233• 15 years ago

> person X, when acting as your VC, is not your friend.

I don't see it that way. if person X is my friend, that's true whether or not they're acting as a VC in a situation. VC's who I am friends may well come to the same conclusion as a VC's I don't know but our interactions are likely to be different. Friendship doesn't have to get in the way with a business relationship; conversely, difficult situations in a business in a relationship don't have to interfere with friendship.

jgervin• 15 years ago

I might be wrong, but VC's are only friends to those contribute to the fund. So say the VC gets a $1 billion dollar fund, they take there 20% commission to run the fund (fly around, acquire space, etc...) then they go out looking for the biggest risk with the biggest return. They are making a killer salary with the 20% commission to run the fund. They don't have any friends at that point.... at least that is what I have come to learn.

sokoloff• 15 years ago

As I understand it, their "commission" is closer to 2%, not 20%. The 20% figure you're thinking of is the carry (think a VC-imposed capital gains tax on profits). So, a dollar invested gets the VC 2 cents. A dollar of net profit gets the VC 20 cents.

brudgers• 15 years ago

>"VC's are only friends to those contribute to the fund"

No, those are business relationships too. I know that in real-estate deals when the development entity needs to raise more money from the partners, those who cannot do so will find themselves "unfriended." In fact, it is not uncommon for raising additional funds to be used as a tool for increasing returns for remaining partners in that environment. I suspect that if VC's never do so, it is because of contractual obligations not a the kindness of their hearts.

damoncali4• 15 years ago

You are, indeed, wrong. 2% is a normal management fee, which is a nice, but hardly "killer" salary. That 20% is after the LP's get their return, and could very well be zero. VC's only get rich when things go very well.

j2d2j2d2• 15 years ago

I don't understand why financial relationship has to be perceived as a negative thing. A business relationship can be excellent, just like a typical friendship.

Expectations are different, sure. There are a lot of good things that can come from it in spite of that.

It's the people involved that make it crap or awesome.

dy2• 15 years ago

I think John Rockefeller said it best: "I'd rather turn my business associates my friends than my friends into business associates."

gruseom3• 15 years ago

Not to be glib, but did Rockefeller have many friends? I'd bet he didn't say this.

gyardley• 15 years ago

You could write a similar article called 'The CEO Is Not Your Friend' or 'Your Boss Is Not Your Friend' -- whatever your relationship with someone, when they've got a job to do they're going to have to do it.

A couple of my angels are invite-to-the-wedding friends, but I still expect them to make rational decisions when it comes to their pro rata in later rounds, and I don't automatically expect them to invest in whatever I decide to do in the future.

gordonbowman• 15 years ago

True. You could easily say this about all professional relationships:

"Don’t confuse being friendly with your ___’s with ___’s as your friend"

carsongross• 15 years ago

Given how inexpensive it is now to start a software company, and how costs can scale linearly with capacity as managed cloud-based capacity comes online and goes down in price, I'm not sure we (that is us software guys) need VC in a significant number of cases.

The recent blanket offer by Yuri, I think, adds credence to this line of thinking: money is getting cheaper for software startups as demand for it falls. (An alternative theory, which I am also sympathetic to, is that we are at the tail end of a reflationary credit bubble, set to burst Real Soon Now.)

But, regardless, why sleep with the enemy if you don't have to? You can build a POC on heroku or EC2 for peanuts...

jdp233• 15 years ago

I agree that funding models have shifted, but Yuri is a VC too. He just has a different and creative investment strategy.

lsc3• 15 years ago

"the cloud" has massively changed the cost model for hosting on the low end; which is a great thing, the low end of hosting has always been ridiculously inefficient.

However, "the cloud" passes on very little of the economies of scale involved on to the consumer, so while it's great to start in "the cloud" you want to be careful not to lock yourself in. It's a great place to start, but once it makes sense to start buying your own hardware, you want to be in a position where you can do so.

gfodor2• 15 years ago

Citation needed

damoncali4• 15 years ago

The interesting part of the story is not that they refused to fund the company. It's that they refused, and expected the CEO to continue to work at it.

If that signal truly meant there would be no follow on round, why would you expect the CEO to not throw in the towel as well? I've neve been in that situation - anyone out there who's been there care to comment on what it's like to face the world after your lead investors bail?

jonpaul• 15 years ago

I can't comment on the situation, but I think throwing the towel as a CEO is the wrong decision. Just because you don't have an upcoming round, your duty as a CEO is to the company in any condition that it's in, come hell or or high water. I would even argue that a CEO is almost married to the company.

Throwing in the towel when the going gets tough seems like a spineless move.

damoncali4• 15 years ago

Clearly there has to be some point at which the CEO calls it quits. Having a death-warrant placed on your funding seems like it might be one of those times - again, I'd love to hear from someone who has been there.

lylanm• 15 years ago

I like the end of the posting, as well as most of the comments in this thread.

VCs have a job to do, just like everyone else. Sometimes they need to make hard decisions.

It's important for every business professional (entrepreneur or anybody else) to understand the basics of other people's goals and incentives.

joshu• 15 years ago

one issue to be noted here is that he was funded in the first place because they were his friends and not because they looked at the business critically...

VCs Are Not Your Friends

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