Q: Is the venture capital industry doomed?

No. Venture capital invested in the U.S. is increasing and VCs are a critical part of the startup ecosystem—I’m grateful they exist.

The rate of innovation is increasing and that innovation needs capital to get in customer’s hands. Capital invested in startups is going to increase, not decrease.

It’s wonderful that you can start a web-based software company with little capital. But after that early stage, even these companies need significant capital to reach their customers and beat their competition.

VC is not doomed but it is changing: see Y Combinator, Idealab, Hit Forge, Squid Labs, and others.

Q: Do investors hate Venture Hacks?

No. Smart investors like educated entrepreneurs. But that doesn’t mean they agree with our advice.

Q: Who’s the best VC in the world?

A limited partner can tell you who was the best VC in the world with fund performance data from institutions like Cambridge Associates. He can also tell you that past performance may not predict future performance in venture capital; see Don’t Bet the Farm on Serial Persistence.

But entrepreneurs shouldn’t select their investors based on how much money they have made for their limited partners.

The best VC for an entrepreneur is a partner who doesn’t care what other investors think, doesn’t take up the entrepreneur’s time with a lot of diligence, doesn’t pull out his Blackberry in meetings, and doesn’t ask dumb questions.

The right partner makes investment decisions quickly, shows up to meetings on time, pays attention, lets management run companies, treats the entrepreneur like a peer, and conducts himself with humility and trust.

We avoid criticizing or applauding specific firms on Venture Hacks but I will give a shout out to Atlas Venture and their General Partner Jeff Fagnan who supports me while we write Venture Hacks. And a shout out to Naval, my Venture Hacks partner, and his Hit Forge fund. I’m lucky to be working with both of these guys and I recommend them both.

Q: Who works harder: investors or entrepreneurs?

Entrepreneurs and VCs both work hard before and after an investment.

Investors are typically personally wealthy and draw a very comfortable salary from their management fees, in addition to their potential carry in a portfolio of startups. Entrepreneurs are often strapped for cash and fully invested in a single startup.

In theory, investors prefer investments that require no work, have no risk, and have a tremendous return. In practice, investors are part of the team that makes a company succeed or fail.

Early stage companies should expect a venture capital investor to spend about one day per month on their company. Most VCs spend the rest of their time working with other companies, looking at potential investments, marketing their firm, and working with limited partners.

Note: These excellent questions are adapted from Ashkan Karbasfrooshans’s Venture Hacks interview.

Image Source: The Filter.

Topics Reverse Diligence · VC Industry

One Comment · Show

  • Denny K Miu

    I have great respect for venture capitalists. However, I have noticed that there is not much quality control in the VC industry and to the extend that even the VC business is governed by free-market dynamics, because of the nature of the relationship between the limited partners who provide the capital and the VC’s who manage them, even poorly performing VC’s can be around for a long time.

    The following site provides some commentaries from an entrepeneur’s perspective.

    Startup for Less – Survival Guide for Bootstrapping Entrepreneurs