Dear Dumb Venture Capitalist
I would say you know who you are, but by definition you don’t. After all, the average person thinks they are an above average driver.
You don’t realize you are going out of business
I don’t know the exact math, but I hear it again and again: the top 2% of firms generate 98% of the returns in venture capital. Once you’ve raised a fund or two, you are in business for a while.
It’s an industry where it takes fifteen years for a firm to die. What the data says (let’s look at the data Dumb VC!) is unless you work at a very small handful of places, your business isn’t viable much longer than that.
It reminds me of walking down the street, looking at retail stores. Many won’t be there in the long term, it just take ten years for the leases to come up, so it creates a false perception of who is actually going to make it.
So why would I want your advice on how to make my business viable, when you can’t do the same for yourself?
Dear Dumb VC, you are going out of business, but you work in an industry where mediocrity gets a long sunset.
You think you can help entrepreneurs
I recently spoke to a founder of one of the VC firms that is in the top 2%. I asked him how much he talked to his entrepreneurs. What this VC told me I’ll never forget:
It was one of the most humbling things in my career: the entrepreneurs who made me the most money are the ones that never called me back.
There is this idea that some VCs have that they are really hands on, and are really helpful to their entrepreneurs. The problem is the adverse selection of entrepreneurs who need the help are precisely the ones a VC should not want to back.
The top 2% have this amazing ability to win the great deal, followed by the humility to recognize they may or may not need to put their handwriting on what transpires from there.
Dear Dumb VC, it’s so painful to sit in meetings with you and hear your vision for what the company should do and what’s going to happen in the industry. Just so you know, Dumb VC, the top 2% never do this. They’re too busy using their superb judgment getting into great deals and bowing out graciously from the ones they don’t want to back.
Once they’re in, they’re spending their time making game-changing introductions and subtle suggestions, because they are so absorbed by all the great deals they are in that they don’t have time to waste on white board sessions which don’t create any value anyway.
You spend a ton of an entrepreneur’s time before deciding
One VC I met with six times over two years. He promised all kinds of ideas about what the future would hold, but never made an offer and never had the courage to turn me down. It was someone who I did research on, and learned that he had no influence at his partnership to get deals done.
Dear Dumb VC, we can research you, too!
When I finally did raise capital, I was sitting at the W Hotel Union Square when I serendipitously ran into him. He looked at me and said, and I quote:
I can’t believe you didn’t call me before you raised your round! After all the time we spent together…
Dear Dumb VC, it’s not my job to call you. It’s your job to call me. And the fact that we spent all that time together, and you never got me a term sheet is a strong indicator that you’d rather do what’s in your worst interests than what’s in my best.
I should be building the company, you should be deciding quickly whether to invest or not. The fact that you think I should call you, that you would take six meetings with me and do nothing, is precisely why I’m not taking your capital.
You have lots of advice about what entrepreneurs should do
The good board members know what they don’t know.
You on the other hand think you know stuff that you can’t possibly know.
Dear Dumb VC, now that you’ve invested, leave me alone! Did you know that the 2% never call their entrepreneurs? Their entrepreneurs call them! It’s a paradox: before you invest, you call often. After you invest, we call you.
You never tried the product
So let me get this straight. You wanted to meet me to talk about investing in my company, and you haven’t tried the product?
One of the reasons Jeremy Liew from Lightspeed is an investor in Bonobos is he showed up in our first two meetings wearing my pants!
Remember your business is cash-on-cash. Our business is the mission of what we do.
Dear Dumb VC, if you want to win the deal, show that you care about the mission. The top 2% do this all the time; it’s one of the tricks of their playbook.
Your portfolio sucks
How many companies are in your portfolio that have reached $1 billion of enterprise value? If the answer isn’t two, you are not good yet.
I once met with two firms on the same day. Both were investors in a company that sold the previous week for $150 million.
One investor didn’t mention the deal, and then when asked said this: “Could have been a great company.”
The other investor gloated: “We sold a company last week, X, did you see? It was a nice exit.”
Dear Dumb VC, don’t brag about your early exits. The 2% never talk about small- or mid-cap M&A, they talk about the companies that make it to $1 billion of enterprise value. You wouldn’t know, because you have never invested in two of those. I say two, by the way, because one could be luck.
You are late
If you are known to be world-class, and if having you on my board would mean that everyone thinks that our company is amazing, then you can be a bit late.
I’d be lucky to have you as an investor, so I’m willing to wait.