I've talked with Nick (the author) on several occasions, he was regular contributor at Microprocessor Forum. He is a really awesome guy.
That said, he's also got a lot of scars from the dot com era (many of us do) and I suspect if he rewrote this piece today, he might see it differently (or not). I've been told that it is easier to accumulate a lot of money if you are soulless. That allows you to take advantage of things that cause emotional stress and financial harm to others who are unable or unwilling to prevent you from taking their money in a "perfectly legal"[1] way. So when select randomly from the population of people who are very wealthy, your chance of picking someone who has your interests second to theirs is better than 50/50. It may by 3:1 (if you believe Vinod's comments at TechCrunch). To survive you have to not take it personally, and expect it to occur. Generally even the 'nice' VCs understand that it makes sense to take this position. You always have to compartmentalize dealing with people in "business" and dealing with them "socially."
[1] This phrase was often code for taking money from someone that may or may not have wanted to give you that money, and yet did not involve fraud or violating any laws. In the 90's it was "perfectly legal" to create a company and take it public to 'retail investors' where the first round cashes out the founders and VCs to the tune of several million while knowing the people reading the prospectus didn't "get it."
There may be some supporting evidence in book I read recently, "Wisdom ot the Psychopaths".
Wealth (and power) are apparently easier to accumulate if you do not suffer from unwanted emotional responses. The book lists several examples, and provides a number of potential reasons. I can dig the book out later today and find some proper sections to quote, if needed.
Interestingly enough, the author uses the term psychopath in context I have usually associated with sociopathy.
It is an interesting debate, mostly centered around the chicken and the egg, which is do evil people become rich? or do rich people become evil? And its an area I've wondered about as well as I've personally known lots of people who have gone from 'not rich' to 'rich' and was able to observe some before and after studies.
"One of the things that wealth and money does is it comes with a set of values, and if you want a deeper ideology, and one of them is, generosity is for suckers and greed is good. But it turns out, there are a lot of new data that show, if you're generous, and charitable, and altruistic, you will live longer, you will feel more fulfilled, you will feel more expressive of who you are as a person. You probably will feel more control and freedom in your life."
My observation over the years watching people become millionares and billionares is that there is a switch that people do when they go from 'not rich' to 'rich' where they have to somehow rationalize their wealth relative to their friends who are still not wealthy. My first exposure was at Sun (I joined on the Monday after they had gone public) and a number of people were thinking they were better off than before, but by the time I left nearly 10 years later many knew they were much better off.
One of the more common rationalizations was they 'deserved' it, there was something special about what they had done, or what they brought to the company that made the company (and them) successful. Lots of things to point too and remember to give some meat to that belief. I met people who were fired at Sun for being incompetent, got jobs in start ups that went public during the dot-com boom, became multi-millionares and got fired again and still believed it was their "specialness" that made them rich, not random chance.
My best guess is that when you are rich you become a target for people who want to be rich but aren't. This is a common fate of lottery winners who often lose all their winnings in a relatively short time for reasons that are not altruistic or fulfilling. Makes me wonder what divorce rates are for lottery winners compared to the general population. Being so targeted can make you cynical, and perhaps push you toward being evil.
There is lots of research into the topic, lately its been a bit trendy because the disparity between wealth and non-wealth in the Bay Area and elsewhere makes for good page views (and discussion).
From the perspective of VC's, which are a self selected group of people with money, they are often people who are rich and trying to get richer still, and it perhaps that trait which selects for soullessness. People who get rich, stop work, and spend the rest of their days doing things that make them happy are not in that group so the results skew.
Paul Graham has said that any company that hires you is, economically, acting as a proxy for the customer. The rate at which they value you (salary + equity + bonus) is an attempt to estimate your value to their customers. As an engineer starting your own company, you're appealing their judgement and opting to be valued directly by users.
But wait! The venture capitalist that invests in you is also acting as a proxy, only for the limited partners. Can you appeal the venture capitalist's judgement and opt to be valued directly by investors, angels or otherwise?
The article is interesting. More interesting is that it was written 12 years ago and about a period of time starting in 1987. It could have been (and probably a clone was) written this year.
Despite pretty much everything about how a startup is financed changing, the dynamic between the founders and funders has not. I think that means that it is more than an educational issue, it must be a structural one.
The structural and core part of the issue gets muddled due to poor education/know-how among engineers (partly due to excellent marketing by VCs). See below an excerpt from Alex Payne's article at https://al3x.net/2013/05/23/letter-to-a-young-programmer.htm...
"
...
As a VC at a top-tier Sand Hill Road firm told me during a pitch several years ago when describing a conceptual feature in Simple that would let users easily and regularly donate a portion of their savings to charity, “let’s not waste time on that stuff; we’re here to make money”
...
".
There are a breed of VC's who project themselves as if their sole purpose in life is to help entrepreneurs realize their dreams and that there is a higher purpose for their VC avatar. Some believe it and mean it, and some pretend (It is important to keep up the pretenses in this business lest you get shunned by all starry-eyed entrepreneurs who come to valley to change the world). VC's exist to help their investors make money. They have a fiduciary duty to do so. When you are giving away a good part of your life (sleep, money) in pursuit of a dream, and getting into a financial transaction with VCs to do so; It is vital for you to understand how they operate, how they make decisions, are incentivized to behave, and also be cognizant of their true (ulterior?) motives. VC's are a vital part of the startup eco-system. I am not against them or how they operate. They are smart enough to be politically right and make themselves desirable to entrepreneurs. All I am trying to say there is usually information/knowledge/expectation asymmetry (as pointed out in the article) when engineers are getting into financial transactions with VCs, and that they need to be cognizant and work on ways to mitigate this. [Edits for typos/grammer. Added two sentences at the end]
Well, funny you used that example because I was the first venture investor in Simple. I invested because of the founders' passion to change the world and rid us of the evil banks. But I knew that if they even made the slightest progress towards this worthy goal we would all make money. Making money and making customers' lives better go hand-in-hand, in the long run.
Anyway, that digression aside, I am not sure if the information asymmetry is the whole story here. These articles (and books and talks and etc.) meant to educate founders so that VCs don't screw another generation of them have been written since, at least, the 70s. Either nobody reads them or it just doesn't matter when they do. If the latter, maybe we need a better understanding of the problem so we can solve it.
I think the situation has started to get better with software start-up infrastructure costs going significantly down, angels and incubators eating traditional VC's lunches (to a point where firms like Sequoia had to initiate stealth scouts program so they could get in early into potential killer startups), founders getting better terms, a healthy founder friendly eco-system nurtured (carefully?) by newly minted successful entrepreneur turned angles. I am optimistically hoping that "Shark VCs" are a dying breed. Not sure how long have you been a VC; You probably have a better handle on this, and privy to a lot more than what keeps getting written. Not to put too much pressure on you but frankly I was hoping you would have a thesis on how to make it even better for engineers/budding-entrepreneurs.
I'm in NYC (which also means that my definition of not being an asshole might be a bit more lenient.)
I've worked with plenty of seed and A-stage investors in SV, though, and found most of them to be focused on being helpful to founders--you have to be, and have more opportunity to be, when you're working with people starting their first company. In my experience it's the later stage firms that are harder on founders. Their attitude--not to be an apologist--is that everyone at the table is an adult and can look out for themselves. The best thing you can do as a founder or startup exec when you start talking to Series B and later firms is
(a) Have a seed or angel investor who can give you good advice (and who, since they were early investors, has an economic situation closer to the Common than to the Series B Preferred) and ask them for advice; and
(b) Have options, including: other Series B firms, the potential to get a bridge or extension round from your seed and A folk, possibly being acquired, and extending your runway by cutting burn.
One day, you could all make money by tracking user's projected income tax bracket and charitable donations, telling you the result of an $X or $Y contribution to organization A or B.
There is a treasure trove of wisdom in this article for all starry-eyed engineers coming to valley with dreams to eventually start a company someday. I realize that starting a company by itself is a poor goal and slightly narcissistic but I am intentionally using it as I have heard many engineers say, "I want to start a company one day" instead of saying "I want to solve a problem because I am passionate about it, and my solution will solve a real-problem in the world today or make the world a slightly better place or makes it suck less"
Another thing I don't understand is why didn't they just slap a microprocessor and a simple interface on it and call it a day. Seems like that would be an easy value-add.
It's financial; it's not technical or personal. To the VC, the engineer and the ideas are commodities.
I believe this is the key. I'm not sure what the alternative might be. If engineers joined forces to raise a venture fund, I don't see why this fund would be any different. The engineer-managers would be subject to the same pressures that other VCs are - pretty soon they would operate just the same. (Why wouldn't they?)
> The VC connects wealthy investors to nerds. There are few alternatives. You can self-fund by consulting and by setting aside money for your venture. That doesn't work.
Not to blow the bootstrap whistle, but 2001 was a different time for starting companies. I'm seeing a lot of nerds just making money and self-funding, and I think the costs of starting have come dramatically down. It's an interesting change.
The costs have come down in many ways but one, labor, which is now going up.
For the last 5 years or so, we've seen a proliferation of startups that provide SaaS, PaaS and IaaS services to startups and other small businesses. However this ease of creating a startup has greatly increased the amount of competition in the market. As a result, you will end up paying more per engineer per year and you will probably end up needing more roles than 2 founders can fill on their own.
Gone are the days when a hacker and a hustler were all that were needed. Today, for many types of startups, you are also expected to have a solid designer, who either needs to be one of the founders or you need to hire.
What an amazingly true piece! I speak as one who has been an executive in several startups, and have seen the VC animal up close and personal.
I think if you are doing software (web or mobile apps - even enterprise if you do it carefully) today, and are reasonably smart, you have more leverage over the VC than ever before. Take the Google guys or Zuck - or any number of founders who understand how to win at that game. Smart founders take money on their terms, deal with VCs who respect them and stay in control of their destiny. Old school VC firms are falling away (albeit slowly) on Sand Hill, while the new breed (YC, AH, etc.) are dominating deal flow and results. Things have changed for the better.
My impression is that some of this has changed. The VCs I know are either domain experts or ex-engineers. Some are both. There also isn't a dearth of angel funding any more. Many angels are ex-entrepreneurs.
This doesn't solve some of the principal-agent problems, but it's not as dire as the dot-bomb bust.
This whole essay is from a pre-incubator era. Going through YC/Angelpad, etc and having the benefit of the structure and demo day dynamics changes the early part of the investor/founder dynamics greatly, where things aren't 'so' bad.
As an engineer, founder and now a VC I can see his side, especially from the lens of 2001. My hope though is that most see that some of the worst things he has to say are just not true anymore in the industry.
Crowdfunding will replace venture capital, and investing itself to a large extent. You don't need investment, you make the case to customers directly and they prepay you.
It would be nice if this were true. But it seems rather unlikely, as even the biggest hits of crowdfunding have been on the low side of VC funding amounts. Crowdfunding might eventually yield 100M rounds, but that doesn't seem likely to happen anytime soon.
> A good VC brings a lot more to the table than just money. Crowdfunding cannot replace that.
Crowdfunding replaces the money piece. The other bits are knowledge which the startup might need to purchase separately. Whether that will be more or less efficient than purchasing them together for startups that need both is, perhaps, unclear, but at least some startups will really only need the money (which, obviously, won't necessarily be the same ones that think they only need the money, but that's life.)
It probably also depends on what you are trying to build. His initial example of building chips would probably be nearly impossible without a pretty big up front investment.
If you are building something with software, it is a lot more likely that you could self fund.
This was in 2001 where just a single server colo would cost ~$300/mo. Other costs have come down as well, while technologies have developed to make a full stack web app development possible for a single person to do. The average dev is easily 10x more capable today than 12 years ago.
VCs are like the house in Las Vegas - they try to make lots of bets and take a disproportionate share of equity, so they usually make money (but not always). Most just follow the lead of VCs who do know what they are doing (in picking good companies).
Prospective starlets used to go to Hollywood and get literally screwed. Engineers now go to the Valley and only get metaphorically screwed. I guess that's progress.
That kind of nonsense is why I left VC-istan. Amazing how little has changed (in terms of VC behavior) over the past 12 years.
VC is in danger of becoming a second-tier avenue. As soon as a credible, scalable alternative comes in, no one's going to deal with that nonsense. The collusion, aggressive management, age discrimination (in a field where you don't know what you're doing until 10-15 years in at least), insistence on locating in an extremely expensive place, and disproportionate reward for degenerate risk-seeking (with others' money and careers) are going to doom them eventually-- although I have no idea when "eventually" will be.
Whatever happened to passive investors who were happy to let smart people work magic? I feel like most of the world is people injecting noise into already-working processes just to have it be their noise.
That said, he's also got a lot of scars from the dot com era (many of us do) and I suspect if he rewrote this piece today, he might see it differently (or not). I've been told that it is easier to accumulate a lot of money if you are soulless. That allows you to take advantage of things that cause emotional stress and financial harm to others who are unable or unwilling to prevent you from taking their money in a "perfectly legal"[1] way. So when select randomly from the population of people who are very wealthy, your chance of picking someone who has your interests second to theirs is better than 50/50. It may by 3:1 (if you believe Vinod's comments at TechCrunch). To survive you have to not take it personally, and expect it to occur. Generally even the 'nice' VCs understand that it makes sense to take this position. You always have to compartmentalize dealing with people in "business" and dealing with them "socially."
[1] This phrase was often code for taking money from someone that may or may not have wanted to give you that money, and yet did not involve fraud or violating any laws. In the 90's it was "perfectly legal" to create a company and take it public to 'retail investors' where the first round cashes out the founders and VCs to the tune of several million while knowing the people reading the prospectus didn't "get it."