Sequoia’s Doug Leone to Mike Arrington: Why You Want to Be a VC is Beyond Me

http://www.pehub.com/118285/sequoias-doug-leone-to-mike-arrington-why-you-want-to-be-a-vc-is-beyond-me/

by cHalgan • 15 years ago

45 12 15 years ago

ma2rten• 15 years ago

"Too much money is already chasing startups, including from Europe, Russia, and the likes of Goldman Sachs, Leone then told Arrington, “You’re joining the abundant side of market, instead of the scarcity side of the market…Why you want to join [the world of venture capital] is beyond me.”"

Is that really the case ?

ojilles• 15 years ago

Maybe from his perspective? I'm sure people with a startup idea may have a different opinion?

michaelochurch3• 15 years ago

Demand for founders who've already been through an exit is high, because (especially given how the past decade has been) the number of people out there who've done an exit and are up for a second go is small. These are the people who can raise $25 million before a launch.

Demand for unproven but capable talent is nearly zero.

NY_Entrepreneur• 15 years ago

No.

Mark Suster has some graphs showing VC returns over the past 10 years or so. Net, mostly the returns suck. VCs with bad returns won't be able to raise another fund.

Information technology (IT) VCs are nearly all quite poorly qualified to evaluate IT projects. E.g., they are nothing like NSF or DARPA problem sponsors. So, the IT VCs use criteria that are not much better than reading tea leafs.

Basically they ignore all planning and core technology and make their decisions based on what they can see and evaluate so far. So, for a seed round, they just play with the software and estimate how people will like it. For a Series A, they look at 'traction' and its rate of growth. For a Series B, they look at revenue and its rate of growth. For a Series C, they let the accountants evaluate the company and buy a piece of the 'earnings stream'.

Since early stage investors ignore all planning and core technology and just look at either the running software or the traction, they ignore nearly everything that could promise a big success and, thus, end up investing in a lot of tiny, near junk companies that have nearly no hope of becoming big. The VCs seem to accept this: Look at their investments and see lots of little companies have never heard of doing things nearly no one wants very much.

Most of the VCs claim otherwise, that they want "big ideas" and to "swing for the fences", but this apparently is just to make the entrepreneurs feel good and cover over the truth which is that they want an excuse to draw their 2% until the music stops.

The good news is that now it's much cheaper in capital equipment to start a Web 2.0 site than to start nearly any Main Street business, e.g., carry out pizza, grass mowing, roofing, ready mix concrete, insulation installation, auto repair, auto body repair, etc. Since none of these Main Street businesses get VC funding, why should a Web 2.0 startup?

Multiply it out: If a Web 2.0 startup can serve, say, 10 Web pages a second, 24 x 7, with three ads per page and $1 CPM, then quickly there will be plenty of cash to buy more servers and bandwidth along with pay the rent and buy a car. Then if the business grows, fine: The need for venture capital is highly questionable. Or, I will multiply it out:

     3 * 10 * 3600 * 24 * 30 / 1000 = 77,760

dollars a month in revenue, Do that for a year and pay all the bills and still have more cash than nearly any seed round.

The entrepreneurs who are doing well and got venture capital are a tiny minority. Instead, it's the successful Main Street entrepreneurs that grow to, say, 10 fast food restaurants who have the summer vacation homes in the mountains and a 60 foot yacht at the nearest large body of water.

Yes, the VCs have a tough time: They have to wait for e-mail from entrepreneurs. Then both sides of the table blow it: Only a tiny fraction of those e-mails are for a home run hit, but the VCs have nearly no ability to know which are those e-mails.

In particular, long the key to business success from technology has been some new, powerful, valuable, technically advanced 'secret sauce', and here the IT VCs are just hopeless and helpless, totally out of their depth. The NSF and DARPA problems sponsors can direct competent evaluations of such 'secret sauce', but one could count on one hand all the IT VCs who could.

What VCs would a technical founder want to hire for, say, Chief Scientist, CTO, CIO, DBA, network administrator? So, why want such a person on the Board?

Of course, the limited partners who supply the money are hoping that the venture partners are working really hard to make money. But, (1) the IT venture partners nearly never have serious qualifications in technology, (2) are rarely in their offices, (3) have a super tough time handling their e-mail, (4) insist on project proposals that are so superficial they are brain-dead, (5) show no good insight during communications (6) take a lot of vacations, etc. Conclusion: They are in the business for their 2%.

nirvana• 15 years ago

Maybe I'm missing something, but VCs take a management fee, correct? So, if you raised a $200M fund, and your management fee was %5 a year, then you'd be bringing in $10M a year before you even get started. If you have 5 partners, that's $2M a year each.

Then, if you make some good investments, your firm gets a cut of the returns, plus being on boards often results in stock options in the company, etc. etc.

It seems to me that being a VC is the catbird seat of leverage. You invest other people's money and get a cut of the results.

smanek• 15 years ago

Generally, the management fee is 2%, and you get 20% of all profit (known as 'two and twenty').

michaelochurch3• 15 years ago

The firm also seems to prefer investing in very young entrepreneurs. Leone said it typically invests in people who are age 25 or younger these days. [...]

Leone called the shift a thankful one, explaining that if you want a founder to serve as the VP of product or in a very important technical role or as the CEO, it’s possible to have such conversations, whereas it’s “different conversation” with a 45-year-old founder who’s “bent on being CEO.”

Read: We'd rather fund a young person who's thankful just to get funding and doesn't know his rights, because it's easier to ask for onerous terms and to boot him later.

sanswork• 15 years ago

I read it more as a younger founder is more likely to accept that at a certain point they might not be best in the CEO spot at that stage in their professional development(and at some stages of the companies development) while still retaining "creative control" through a more product focused role.

larrys2• 15 years ago

Also there is an aura with a younger person. Similar to real estate that is fresh on the market and hasn't been sitting. You can believe you have discovered something and are grabbing it before anyone else sees the potential.

erikpukinskis• 15 years ago

This quote too:

We know after many, many years that your DNA is set in the first 60 to 90 days, and we want to be there to assist you to create some of the best DNA that Silicon Valley has ever seen.

There seems to be a pretty obvious undercurrent of "We want to invest in people who we can muscle around" there. I can't blame them. They're making lots of money, so it's working. And entrepreneurs are getting their payouts too.

But god help you if you have different goals than your VCs.

michaelochurch3• 15 years ago

They're making lots of money, so it's working.

VC firms are making lots of 2&20. Mostly 2. Performance for VC firms has been poor since 2001.

larrys2• 15 years ago

Leone then told Arrington, “You’re joining the abundant side of market, instead of the scarcity side of the market…Why you want to join [the world of venture capital] is beyond me.”

Because by being a VC not only is someone else doing the work but you are spreading around risk over many possibilities rather then investing years in 1 idea you have.

And of course it makes sense which is why many successful entrepreneurs after their one or two hit wonders go into investing and don't start another risky business. They only need 1 hit to stay on top and can have many failures in the ideas they invest in.

Sequoia’s Doug Leone to Mike Arrington: Why You Want to Be a VC is Beyond Me

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