Venture capitalists rarely take their own advice when it comes to their own businesses.
There’s a common narrative that venture capital doesn’t scale. That narrative is so well accepted as truth that venture capitalists themselves don’t bother taking the advice that they generally dole out.
Here are some common truisms that are often passed down by VCs but aren’t applied in their own business:
Establish dominant market share and become the very best. VCs advise companies to find a niche and exploit it — and do not enter a super competitive space. But the venture capital industry is crazy competitive — often competing with 100 firms (that are usually staffed with super-smart people).
Have one CEO. VCs advise companies to have one core decision-maker. In the rare case, maybe there is a co-CEO. But many VC firms are run as a partnership with 3–8 equal partners (though some partners may be more equal than others). They’d never invest in a company run by committee.
Founders should demonstrate deep commitment to future value creation by taking low salaries. But VCs do not usually trade some of their short-term salaries for long-term upside. Most VCs pay themselves salaries out of their typical 2% management fees. If VCs took their own advice, they would be using most of that 2% fee to build systems and invest in the future. Or they would trade the bulk of the management fee for greater carry.
Companies should invest in growth and market dominance over profitability. But VCs themselves are extremely profitable. They do not hire aggressively, invest in technology, spend time on automation, or make any of the other investments in themselves that they would expect their portfolio companies to make.
Leverage existing advantages to expand into adjacent markets. VCs want companies to hire great people and continually level-up the management team. Yet the VCs grow their own businesses very slowly and do not take risks. VCs rarely move into adjacent markets, expand their brand, etc.
Keep expenses low — spend less on rent, fly economy, and generally be frugal. Yet most VCs do the opposite with their own expenses — often spending lavishly on rent, travel & entertainment, and more.
Companies should be long-term focused and should be doing things that outlast the founders. But many VCs set up their firms in a short-term oriented way. VCs often have much bigger key-man risks than the companies they invest in. And VCs, even successful VCs, rarely outlast their founders.
Governance structure in portfolio companies is a high priority. VCs think it is wise to have investors and independents on a company’s board. But VCs themselves often have much less oversight. Many thrive on potential conflicts of interest.
Companies should go public and being a public company is very good for the long-term. But venture capital firms themselves rarely go public.
Acquisitions can be accretive and strategic. The growth of a synergistic merger often can outweigh the dilution that comes from growing the firm. VCs rarely acquire other firms.
Venture Capitalists, as a class, are much less ambitious than one would expect.
Almost no venture capitalist would fund themselves. They are looking to fund people that are essentially the opposite of themselves. They are looking to fund outliers because their returns come in power laws. But for their own business, they are looking to play it safe and be conservative.
VCs generally do not want to rock the boat. They don’t want to do something different. They don’t want to change the industry. In fact, for many VCs, their biggest fear is that the industry will fundamentally change. They want to keep collecting their two and twenty.
That’s not to say there are not ambitious venture capitalists. There are. Many people are looking at changing the game. Naval Ravikant’s AngelList is a full frontal assault on venture capital. Tim Draper invented the venture capital franchise model. Masayoshi Son’s Softbank Vision Fund is changing everything in the late-stage venture capital (as did Yuri Milner’s DST before that). Sequoia’s amazing work ethic and competitiveness to be number one. Peter Thiel runs four large venture capital funds, a global marco hedge fund, and many other investing vehicles. Chamath Palihapitiya’s Social Capital is taking a long view on venture capital. Chris Farmer’s SignalFire, while yet unproven, is attempting to automate venture capital through data (like Renaissance Technologies and Two Sigma has done in the hedge fund world). Marc Andreessen and Ben Horowitz create a full-service firm which aims to have the best marketing, best recruiting, best conferences, etc. And the most ambitious people in Silicon Valley may well be Paul Graham, Jessica Livingston, and Sam Altman from Y Combinator.
Many readers may have an adverse reaction to some of the people above. They may think these people too bold or too reckless. And some of them may well be (time will tell). They will not all succeed with their grand ambitions. But their ambition is exciting. It is refreshing. And these individuals are acting more like the entrepreneurs they fund than the classic VCs that are the funders.
Most venture capital firms are surprisingly less ambitious than the entrepreneurs they fund. And they are also much less ambitious than their siblings who run private equity firms and their cousins who run hedge funds.
Private equity firms are run significantly differently from venture capital firms. As a recap:
- PE firms have 1 or 2 CEOs. VCs have 3-8 CEOs
- PE firms make large investments in back-office, consulting, and data science (Vista Equity has been so successful with this model). VCs usually don’t.
- PE firms create new products and become international fast (Blackrock spun out of Blackstone … and Blackstone also built up an incredibly successful real estate practice). VCs rarely create new huge products.
- PE firms focus on having succession plans. VCs have trouble making the transition.
- Many PE firms are public. It is extremely rare for a VC to be public.
PE firms are generally much more ambitious than VCs. They are often 10-100 times larger in size (both in the number of people they employ and in the dollars under management). And they generally have much larger dreams.
The most successful PE titans are more wealthy than the most successful VCs. And while wealth does not equal ambition … it is correlated. There are an order of magnitude more PE billionaires than VC billionaires. And many of the most successful VCs made more money founding companies before they became VCs than they did as VCs.
Lack of ambition among VCs could be feature (not a bug).
Many entrepreneurs like the idea that venture capitalists are less ambitious. A founder might not want want someone on their board that is crazy ambitious … because that VC might not be able to make time for the new founder.
So there is definitely a possibility that perverse thing could happen: a less ambitious VC might actually be more successful because it might allow them to get into the best deals. (Yes, this is a weird theory and there is a 58% chance I will disavow it in the future … in fact, there is a 38% chance I will disavow this entire post in the future).
Of course, there is nothing wrong with only wanting to be worth $200 million and not $2 billion. That extra zero is not going to change their lifestyle much. So why rock the boat for that extra zero? Why get everyone to hate you to get that extra zero? Why take huge risks for an extra zero that is not going to change your life?
Venture capital can think bigger.
A few random thoughts that an ambitious venture firm might think more about:
- Instead of ruling by consensus, VC firms could have a designated CEO (or co-CEO). While many firms do have this in practice, making this more explicit would add clarity.
- Fund-by-fund equity really creates short-termism and creates lots of conflicting incentives. Imagine if Amazon gave out equity in each of product lines (AWS, Prime Video, e-commerce, Alexa, etc.). Ultimately an evergreen fund (like Berkshire Hathaway) will lead to greater ambition.
- Passing the baton to a new generation should not completely wipe out the equity of the older VCs that founded the firm. But the older VCs can’t keep running the firm while spending most of their time at their winery either. Being a good VC should be intense and take over 60+ hours a week. The older VCs could maintain equity in the evergreen company while issuing new equity to new employees (and new LPs).
- Run the firm with the aim to go public. That’s how you run a company. Think about how to get big.
- Look to acquire other firms. And yes VC is a services firm — but services firms can be run well at scale. Think of Accenture which has $41 billion in revenues and market cap of almost $100 billion at the time of this writing.
- Defer more cash payments to equity. While layering fees has been a great way to get rich in the last 15 years, it does seem like this model is very fragile.
- Look to dominate a niche (rather than competing with the smartest people in the world). Look to build a moat and some sort of network effect. That might mean significantly changing the game (like AngelList or Y Combinator).
Summation: Venture Capital firms rarely take their own advice when running their own firm. Private Equity firms (like Blackstone, KKR, Vista Equity Partners, etc.) are actually much more like venture portfolio companies than VCs are.
This is modified from a Feb 2018 Quora post. Special thank you to Tod Sacerdoti, Jeff Lu, Tim Draper, Will Quist, Joe Lonsdale, Bill Trenchard, Ian Sigalow, Villi Iltchev, and Alex Rosen for their insights, thoughts, and debates on this topic.