(2003-06-04) Joel Venture Capital
Joel Spolsky just wrote the best article on Venture Capital and the Software Industry that I've ever read. Founders would prefer reasonable success with high probability, while VCs are looking for fantastic hit-it-out-of-the-ballpark success with low probability... The difference in goals means that VCs are always going to want their companies to do risky things... The trouble here is that the VC is now doing a perverse kind of selection. They are looking for the founders with business ideas where the founders themselves think the idea probably won't work. The end result is that VC money ends up being used in bet-the-farm kind of ways... In a small company, you regulate each of these curves (revenues, employees, public recognition, and code quality) so they stay roughly in sync. Why? Because if any two of those curves get out of whack, you have a big problem on your hand - one that can kill your company... VCs try to speed things up by spending more money. They spend it on PR, and then you get problem 3 ("PR grows faster than code"). They spend it on employees, and then you get problem 4 ("too many cooks") and problem 2 ("high burn rate"). They hire HR people, marketing people, business development people. They spend money on advertising. And the problem is, they spend all this money before anyone has had a chance to learn what the best way to spend money is... The second (problem) is the fact that VCs hear too many business plans, and they need to reject 999 out of 1000... When you have to Say No 999 times for every time you say "yes," your method becomes whack-a-mole... Many excellent entrepreneurs feel that their time is better spent pitching products to customers rather than pitching stock to investors. It's bizarre that so many VCs are willing to ignore these companies simply because they aren't playing the traditional get-funded game... VCs are reacting to the crash by demanding ever stricter conditions for investments. VCs feel like this protects their interests. What they're forgetting is that it reduces the quality of startups that are willing to make deals... VCs who make exploding offers are pretty much automatically eliminating all the people with good business sense from their potential universe of companies... This is not the correlation you're looking for. In fact, just about everything the VCs do to make their deals "tougher," like demanding more control, more shares, more preferential shares, lower valuations, death spiral convertible stock, etc., is pretty much guaranteed to be at the expense of the founders in a very Zero-Sum kind of way.