We’ve heard it ad nauseam: the VC model is broken. There is certainly no shortage of posts on the subject. At TechCrunch Disrupt, Fred Wilson called the VCs sheep, saying they all wait, then jump into a deal together, usually when it’s too late. Most VCs, said Fred, are not forward looking. Question: do they really have any special insight into the industry? Even the top VCs don’t always get it right, and if there’s any doubt in your mind that they have as many opportunities to kick themselves as to pat themselves on the back, we defer to Bessemer Venture Partners, who’ve enjoyed many successes. Ah, but then there is their famous anti-portfolio.
Investors are usually:
1. Entrepreneurs who’ve made good
2. Entrepreneurs who got lucky (right company at the right time – early hires as opposed to key players: we know a junior project manager who went to a startup. It was her second job out of school; eighteen months later, the company was acquired and she was a multimillionaire before her 25th birthday)
3. Investors who’ve invested well or again, were in the right place at the right time.
4. Those born with lucky sperm; no experience required.
Investing is about what you know and/or whom you know. Most firms hire young associates who do much of the legwork. They’re the boots on the ground, who are looking at newco’s and who are they really? They’re usually newly-minted MBAs from the top schools who (usually) have no entrepreneurial experience; little or no industry experience; and little or no real world experience. They’re probably in their first apartments and don’t even know the first thing about organizing/cleaning them (getmaid.com, and you’re welcome). Yet they are the gatekeepers, so is it any wonder? Still, these young associates do have their place in the zeitgeist.
What’s missing are the talent scouts, to take a page from professional sports, where the concept has been working forever. People who follow the industry – who really do go to the networking event, pitch events, mingle with founders, and who know the DNA of the industry, of founders – known or as-yet-undiscovered – and who are even aware of your as-yet-unknown competitors. Think reporters (case in point: MG Siegler). Recruiters (not the johnny-come-latelies who can’t find a job: the lifers who know who’s real and who has failed upwards – we always know the story; we check the references you never gave us).
Therein lies the disconnect.
We were at a networking event recently, seated next to an investor who asked our pick of the company most likely to do well. We told him, and our pick happened to be in a vertical with which he was very familiar. He disagreed, pointing out the company’s Achilles Heel. In our opinion, that so-called Achilles Heel was the very pain point the company was addressing, and their differentiator. He was surprised at our naiveté. We knew the company’s CTO and marketing director – and told him as much: our money was on this unknown team. Two weeks later, the company announced that they’d raised funding (that investor was not in on the round) – a multimillion dollar seed round from well-known investors. Incidentally, AlleyWatch covered the company long before the major news outlets. A few days later, we ran into that same investor again. He informed us that he was now planning on hiring a young associate, and once this person was chosen, asked if we would bring him/her with us to events and point out potential investments? Seriously???
I used to organize summer houses in the Hamptons. Multiple adults under one roof who somehow had to survive the sixteen weeks of summer together, hopefully without incident. All share houses have rules. I had one: Don’t be a jerk. I felt that that pretty much covered it, until an early member insisted that we needed at least one more rule – that one was insufficient – and so I complied.
Rule #1: Don’t be a jerk
Rule #2: See Rule #1.
To that investor we say (and he was not the first to ask us to provide this service, free of charge): Do you not understand where the model is broken? You need the young associate – and the more experienced talent scout. Happy to oblige, but expertise is worth something: Don’t be a jerk. If you need further explanation, see Rule #1.