DISQUS

David Semeria · 2 months ago

I don't know if you would admit it, Fred, but the VC industry is itself ripe for disruption. The focus on warm intros, founders with track records, existing high-profile investors etc has all the hallmarks of a closed shop. I know USV is much more relaxed about such things, but the majority of VCs focus more on form than substance, in my opinion.

Crowd-sourced selection (not investment) is not a bad start, but the downside is that you have to open up your proverbial kimono to the world.

It would be nice if there were some sort of middle ground.

fredwilson · 2 months ago

i'm trying to find that middle ground every day David

David Semeria · 2 months ago

I know you are. But you, Brad and Albert are exceptions to the general rule.

You'd be pretty surprised at how many C-list VCs don't even bother returning emails.

I recently sent a cold email to one of the most successful west coast VCs. He replied personally and asked for some additional info.

Anybody spot a correlation here?

fredwilson · 2 months ago

Never forget that entrepreneurs are the raw material of the venture business

kidmercury · 2 months ago

IMO middle ground = private community that owns the fund they co-create. we'll get there, sooner or later.

Mark Essel · 2 months ago

I think you're dead on about this one kid, even though I also believe you're bat shit crazy about the 9-11 conspiracy theories (no offense intended, just a statement that I can't connect the dots that you easily can). The juxtaposition hurts my brain.

valto · 2 months ago

I agree, a combination of both, something that starts with crowd action and then moves on to next level etc. as long as it keeps passing enough people of right audience in more organic than just "rating"

Mark Essel · 2 months ago

The guys and myself were discussing this very concept at lunch yesterday. I told them about a post I did a few months back on the idea, then I pointed them to folks that were working towards such concepts (Covestor in finance, but in venture funding there are some businesses working towards that goal).

David Semeria · 2 months ago

Go for it Mark! You just need to find a way to get smart people to screen ideas on the understanding that they'll keep the ideas to themselves, and not try to implement them.

You could sell the results of the screening process to accredited investors.

Obviously, the service should be free for entrepreneurs :)

Mark Essel · 2 months ago

My ideal model would take 0% off the top and just connect investors (big and small), with venture firms (you need folks who serve the role of reviewer, area/topic investor, and an accountable agent), and of course the bedrock of entrepreneurs that can't help but build new businesses to solve, create and serve us all.

I'm not sure how to manufacture such a social serving model, but web sites are cheap and http://beta.growvc.com/ is trying to pull it together somehow.

I'm just not 100% clear on their leadership / vision/ ultimate goal. Once the small investors are all pooled together and picking their favorite venture partnerships, and entrepreneurial projects I'd love to get out of the way and let nature take its course. I'd have to figure out a revenue model of some sort so at least the business can be self sustaining.

DaveinHackensack · 2 months ago

What about the companies that seem to essentially skip the VC phase and go right to the capital markets? I own a few shares of a couple of companies that I think have done just that. Is that only an option for businesses that have a shot at turning a profit without mass adoption by retail users? Both companies I am thinking of offer niche products or services to large businesses.

David Semeria · 2 months ago

Not all business can grow organically, like Microsoft. Some of the biggest recent hits (GOOG,FB,Twitter) require(d) significant investments to scale. All the best VCs say their money is not right for all companies (see Mark Suster's excellent posts on the subject).

The capital markets (whether PE or public) are essentially only open to companies of a certain stage and scale.

DaveinHackensack · 2 months ago

There have been some very small, very early stage companies that have gone public on the OTC Bulletin Board. The two companies I alluded to above are examples of this. Both are now profitable and growing, and have contracts with dominant companies in their respective industries.

David Semeria · 2 months ago

I know some people who have done a similar thing on London's Alternative Investment Market (AIM, not LAIM!). There are definitely pros and cons to this approach, but you're right, it is an option.

Mark Essel · 2 months ago

I'm curious how this takes place. As in how does the market even discover the business to buy shares in it and how does the business develop before that time. From my self centered view, how do I hire awesome web programmers to make my imagination of abstract tools become a concrete reality? One of the ways I can do that now is to borrow a hefty sum and hire them, and venture investors are a potent provider of liquid assets.

DaveinHackensack · 2 months ago

The primary market (i.e., the folks who buy the shares at the IPO) generally hear about the company when they get a phone call from their brokers. Those of us in the secondary market find out about the companies in our own, various ways.

How the companies grow before the IPO, I suppose varies as well. I just submitted a page and a half of questions from shareholders to the CEO of one such company, who was kind enough to offer to answer them, and I don't think I asked that question explicitly, unfortunately. But I did ask some general questions about how he came up with his idea, why he decided to start a company to manufacture the technology himself, as opposed to licensing it to a larger company, etc. If you want see his answers, I should get them back from him late next week, so check my blog then.

Mark Essel · 2 months ago

Thanks much Dave, always appreciate your first hand experience/knowledge. I'll definitely check in your blog (I don't know if I have before yet but can remedy that).

DaveinHackensack · 2 months ago

Great, my little 'bar' could use a few customers.

ShanaC · 2 months ago

You know, I just walked out of a class tonight where they were presenting PE data over the past 20 years (it's a history class.) One of the points made was the during the 07ish period, there were a lot of LBOs and therefore a lot of companies taken private that are on the large side. Even though I am way undertrained, I'm going to make a hedge that the OTC is not the place these companies belong at all just by looking at the charts.

DaveinHackensack · 2 months ago

What companies' charts are you referring to, Shana?

ShanaC · 2 months ago

It was aggregate data. It was an older version of this presentation, by Steven Kaplan of the Booth Business School, University of Chicago (note you are opening a pdf):

http://faculty.chicagogsb.edu/steven.kaplan/res...

Although My version is simplified- page 65 in a historical note as the debt drive for LBOs seems to also be linked to slide 19- where employment is mentioned (they cite the study, these charts about the drive for and the returns). I just get the feeling looking at the Late 2007 spike and slight dropoff that companies that were taken private should be public, since the way they were given the boost they were given was through an LBO.
Reality is that it should have been through organic growth or just change in the market (M&A) that drive buying/selling in an effort to adapt, rather than financial engineering changes. Up to a point, there is not much you can do. Having such a huge debt market is like having too much of a credit card, it is not a good thing, and will cost you more later on (ie, eventually you will need those workers to do something later on to drive growth somewhere).

ShanaC · 2 months ago

Better that I learned that here than somewhere else :)

ShanaC · 2 months ago

I agree with that statement. Which is why the "I need to buy" is kind of weird.

You don't need to buy anything in this world beyond food, water, and shelter. If you happen to make your money to do those things doing VC work, you should think about the fact that it's probably more similar to buying into a situation where you are providing for you LPs through the best quality, rather than trying to suck up space that will not in the end provide. it's like a caveman buying a small amount of large caves with leaky roofs because he "needed to buy" rather than than perhaps being more diverse in his strategy and getting more caves with better roofs.

kidmercury · 2 months ago

yes. VCs actually need to get on this train and roll their own capital markets, since the IPO markets they were banking on are done. too bad VC's don't have the courage to take the opportunity, and are betting on fear of political risk instead. but the trend towards new capital markets, niche and exclusive in nature, will continue.

ShanaC · 2 months ago

Just as long as you don't create any weird events like the mid '80s. The pink sheets have different disclosure rules, no?

DaveinHackensack · 2 months ago

Shana,

I know your comment was in response to the Kid, but I just want to point out that there's a difference between the OTC Bulletin Board and the Pink Sheets. OTC companies have to file (though some file the shorter "SB" forms). If they don't file on time, they get an extra letter tagged to their ticker indicating they're late, and then if the still don't file, they get booted to the Pink Sheets. There are also a handful of legit companies on the Pink Sheets that are there because they just don't feel like dealing with the requirements of other markets, but the companies I alluded to above are both on the OTC BB, and not on the Pink Sheets.

BTW, on Yahoo! Finance (my favorite at-a-glance stock site), Pink Sheet stocks are denoted by a ".PK" at the end of their symbols and OTC BB stocks are denoted by a ".OB" at the end of their symbols.

Carl Rahn Griffith · 2 months ago

Nicely put, David.

stone · 2 months ago

If you have the choice as a founder, you must apply a credibility filter to your prospective investor. If this person is asking for unreasonable things *before* the investment how will they act after the investment? There's no such thing as an integrity switch --- turn it off in order to negotiate a term sheet and turn it back on when you join the board. Does anyone really believe this is possible? I do not.

If a VC is going to make up stories in order to own too much of your company than you can bet that this person has it in him to screw you somewhere else down the line. For someone to try and "compartmentalize" these things is impossible in my mind.

Gotham Gal · 2 months ago

Bravo for calling this out! Each deal is different, each VC is different but the bullshit that we take 30% because that is how we do things is not very entrepreneurial of the VC's. If an entrepreneur tried to do the same thing back to the VC, they'd freak. VC's are in in the business of helping entrepreneurs, through capital investments, realize their dreams. In the end, economies are created, and everyone is rewarded handsomely even if you only own 10% of the pie.

fredwilson · 2 months ago

Each deal is different. And VCs are trying to cookie cutter this stuff and its not healthy

Carl Rahn Griffith · 2 months ago

... "Send in the Clowns" ... "Send in The Suits" ...

fredwilson · 2 months ago

Oh yeah!

David Smuts · 2 months ago

Spot on Fred- I've witnessed here in London that almost every Entrepreneur seeking Series A funding is told by the VCs "We need 40%, its the industry standard!" Some are even touting 50% would you believe? And there's no correlation to the amount being raised, whether its $1M, $2M, $3M it almost always is valued at 40%. Obvioulsy Entrepreneurs can seek other VC deals to create competition and the ones that do can get this % down, but in this economy and in a limited less sophisticated VC market as here in Europe, often the Entrepreneur has little room for manouvre on this. Valuations should be done on "value" and not a "industry standard" percentage.

fredwilson · 2 months ago

The 'we need to own disease' exists everywhere in the world. It knows no boundaries

Pascal-Emmanuel Gobry · 2 months ago

...Aaaaand that's why I'm bootstrapping.

Mark MacLeod · 2 months ago

Wish more investors thought this way Fred. I get the "we need to own 20%" thing all the time. In smaller markets (like Canada) with limited competition for deals, this will continue to happen. But in your market, I believe that funds like yours that are transparent, authentic and flexible will have an unfair advantage in terms of access to unique dealflow. And in your biz, it's all about unfair advantage.

Carl Rahn Griffith · 2 months ago

Mutual respect is worth a lot more than any % of the pie.

And will achieve a damn sight more success.

kidmercury · 2 months ago

"I am calling bullshit on it and will do it to your face."

LOL!!!! fantastic beefing, boss. and to all the VCs out there: after fred disses you to your face, i will roll up with my acoustic guitar and sing a song dissing you and publish it on the web for all to see and purchase. i did it to jdawg and mikey, i'll do it to your greedy ass too. and this is after fred humiliates you by dissing you to your face. damn.

kidmercury · 2 months ago

lol, thanks for all the compliments! avc.com is the one place where people of all political persuasions can cast aside their personal viewpoints and unite in hatin' on greedy VCs, mikey, and whoever else needs to be dissed that day. long live the avc.com community!

David Semeria · 2 months ago

Kid, as the Italians say: if you didn't exist, it would be necessary to invent you. (It's a compliment, btw).

fredwilson · 2 months ago

I totally agree. I the love the kid

brooksjordan · 2 months ago

Totally agree with that, David. The kid is one of a kind.

ShanaC · 2 months ago

And a gentleman for a rock star besides.

Aristotle · 2 months ago

Yet another great post Fred. You've shown once again what separates you from the rest of the herd.

What bothers me more than the greed, is the underlying perspective and view of the world that the statement "we need to own" sheds light on. The investor who says that is giving you a peek into how they see things, namely that startups and entrepreneurs are objects that are used to help them get where they need to be with regards to their fund. It's an impassionate, impersonal view that brings to mind how a hedge fund manager must view the stocks and commodities they trade. They most definitely do not see the entrepreneur as their customer in this case, nor do they understand that it is a privilege for them to have an opportunity invest in an entrepreneuers startup. It is this world view that I find most disturbing.

This greedy, self-centered, end justifies the means perspective can also be spotted through a few other VC tell-tale characteristics. One of the biggest is when VCs talk about their portfolio companies as options rather than an companies. No rational sane entrepreneur should let an investor who views their company as an option to invest should they succeed rather than as company they believe in invest in their company. Another is when the ratio of portfolio companies to partners in the firm is out of control, another indicator that the investor views portfolio companies as commodities or options rather than as real companies. When a partner is sitting on 10 boards or more, you're dealing with a greedy investor whose putting their greed before the needs of the entrepreneur. Lastly entrepreneurs should look for investors who don't invest based on the sectors that are hot today, or even using any of the data or information that's widely available today. They should look at huge market shifts and which companies are best positioned to take advantage of those shifts. Such original rational thinking leads to recognizing huge opportunities for themselves which helps great VCs understand what Fred is talking about with regards to huge pies.

Fred I think we all need to coin a new term for investors like you who get it. I think you're doing yourself a disservice by being lumped in with other venture capitalists. I don't have the best solution, or even really a great one, but here's one thought to help get things started: venturepreneur.

kidmercury · 2 months ago

i like your term "venturepreneur." i think as the VC industry evolves and as web startups continue to need less capital, VCs will need to rely less on monetary capital and more on knowledge, experience, and their connections to add value. this i think will result in the "venturepreneur" -- venture capitalists with a strong enough role as a consultant of sorts and at an early enough phase to be regarded as entrepreneurs of sorts. the key will be to make it scalable and efficient so that VCs do not have to do more work than they are currently doing, i think entrepreneurs, not venturepreneurs, will still need to do the heavy lifting and be on the front lines.

just my opinion fwiw

fredwilson · 2 months ago

Well I don't know if I pass that test. I am getting close to 10 boards and trying hard not to get there. But I love working with great entrepreneurs on exciting projects

Aristotle · 2 months ago

You do pass that test Fred, maybe not in the "letter of the law" so to speak, but definitely in its spirit. The fact that you're conscious of how many boards you're on and trying hard not to get over 10 proves that. (These were not meant to be a test by the way, more indicators that you might be talking to the wrong VC.)

I thought of a better way to articulate what I'm saying. Investors that are present in each moment with no cognitive or emotional bias, and understand and value what's important (personal relationships, team building, company creation, real value creation for users) in and of themselves for the pure joy of doing those things tend to have good outcomes. Those that view these things as something to managed and manipulated for personal greed or gain tend to have bad outcomes. It's pretty simple stuff but so hard to get right for so many people given the individualistic and ego-driven nature of our world today.

I know I'm sounding a bit like Jerry Maguire over here. Maybe someone should write the VC version of The Things We Think But Do Not Say.

fredwilson · 2 months ago

Wow. That second to last paragraph is a brilliant articulation of what makes a great VC

bijan · 2 months ago

Great post Fred. Couldn't agree more.

This "need to own" has become so integrated in our industry thinking that I often see founders say "we are going to raise $5m because we know the new VC will likely to 'need' that much"

instead the raise should be about how much the company "needs" to do their thing.

Obviously it's not the entreprenuers fault

they are just reacting to the VC mantra.

Ultimately it's about matching company needs, capital requirements and valuation at the end of the day.

fredwilson · 2 months ago

Bijan - there are several VCs who've gone on the record agreeing with this. So far, I've seen Feld, Kopelman, and Stuart Ellman from RRE in addition to you. That sounds like a growing chorus of reason in our industry

kidmercury · 2 months ago

this whole dysnfunctional complex you speak of can be found in every industry. for instance in the food industry, because of the immense and irrational corn subsidies, farmers have excess incentive to grow corn....this leads to the entire food industry being designed around corn, and food product developers being incentivized to make new corn-based foods.

all of this is a by-product of monetary policy. anyone who wants real change and a return to an honorable, sound economy rather than the piece of crap greed-driven complex economies we currently have needs to focus on fixing monetary policy. and finally through social gaming, which will result in gaming companies creatign their own game currency, we have the ability to create our own monetary policy without going through government. this will solve the problem of some folks having too much money and will allow the market, not monetary policy authorities, to determine and allocate the money supply.

Joe · 2 months ago

Where were you when we needed you.

You are not a real VC, but simply masquerading as one since you don't seem greedy, a jerk, don't appear to know it all and actually seem human and actually appear to show some empathy - all of which are anathema and not typical VC decorum

fredwilson · 2 months ago

whoa. is our industry's reputation that bad?
Bijan posted on that topic last week

http://bijansabet.com/post/208433065/paying-att...

AndreaF · 2 months ago

Not as bad as that of bankers but not the best.
I think the issue is that there are many very good VCs but also very bad ones and usually people tend to remember more the negative experiences than the good ones.

jhaidar · 2 months ago

My favorite part of the post: "I am calling bullshit on it and will do it to your face."

Just like others working toward their dreams, we believe we're working on something special. If we're ever in the need for funding I hope that we're fortunate to connect with investors as honest and candid.


I've been a long time reader but haven't commented much. Just had to on this one; great post!

Thanks,
Jaafer
@jaafer

fredwilson · 2 months ago

I was a little worked up when I wrote that!

JLM · 2 months ago

In business, as in life, we never get what we "deserve" --- we get what we negotiate. My favorite questions whenever someone says something as inherently dopey as described in Fred's comments is to ask them

Do you make exceptions to that policy?

Who made that policy?

Who has the authority to change that policy?

I usually just choose to ignore what I don't like and am often surprised by how something which might have been a deal killer or at least a point of contention evaporates by simply ignoring it. I try not to let energy or psychic investment pile up around something which otherwise irritates me or strikes me as patently unfair. I am fond of saying --- "oh, you really don't mean that".

Three important observations for which I have paid full tuition to learn ---

Everything --- EVERYTHING --- in life is negotiable!

Always remember to negotiate.

Give yourself a chance to get lucky!

fredwilson · 2 months ago

I can't help but negotiate. Its deeply ingrained. Even when my back is to the wall.
I love the 'you don't really mean that' line

I'll use that with the bank on my upside down real estate deal JLM. They threw some crap at me yesterday that deserves that response

JLM · 2 months ago

Or you can take a careful look at his hairline and say --- "Wow, the lobotomy scars have sure healed fast!" LOL

fredwilson · 2 months ago

that's a good one too!

karen_e · 2 months ago

I'm going to glue these notes on negotiation to my forehead, JLM.

Tyler Willis · 2 months ago

don't do that, then the other side sees 'em. write them on the inside of your wrist :)

fredwilson · 2 months ago

Yeah, me too

OMA · 2 months ago

Fred,
You were the one that wrote such valuations are needed. perhaps it's time to adapt that post to current times.

Some time ago you wrote about the VC math and structure.
You said "one investments pays the full return of a typical fund", and that in order to meet your LPs expectations you aught to have a 3X return (taking carry into account).

For a $100m fund, you should be investing in companies with possible returns of about $200m-$300m from that single company.
For a $1B IPO that's 20-30%.

We (entrepreneurs and VCs) are facing such harsh times because.
1. Syndication and risk sharing in almost impossible if everybody "needs" 20-30%.
2. Experienced entrepreneurs have almost no reason to work in a startup (and say no to a VP position in a "real" company), just to be C(E/T)O in their own company (for 50% of the pay and (the slim chance of having) 1% of the shares through IPO).
3. A company that has the potential to be a $300m company, can't raise any money, as a VC would need 100% of the company to have a $300m return.
4. Companies are forced to try and become a $1B company or die trying by their VCs.

We (entrepreneurs and VCs) need to find a better way to finance technological ventures, one that pays off for all of us and gives a nice return to investors.

Perhaps it's time to update your VC math post.
When I raise money now, I'm asked (by VCs) to reduce my budget from $2m/year to $1m/year, perhaps you should explore a possibility to reduce your carry so that there is no "need" for that 3X return, so people don't need their 30%, so that companies with the potential to be $300m can once again raise money.

How about that?

JLM · 2 months ago

You raise another interesting question --- how much should a founder own of a venture to ensure his undivided attention and proper motivation?

What we measure, we manage.

Ownership is the first measurement we make when evaluating the application of our time and efforts. That measurement prioritizes our temporal and intellectual commitments. Where we invest our time, the results are impacted favorably.

If a VC saw his role as ensuring the success of the intellectual well spring of the idea, how could he not make money?

OMA · 2 months ago

It's a balance act.
In the past (2000) founders got a really big dream (bill gates still owns a significant portion of microsoft) and worked on low salaries. The product of salary+potential bonanza was significantly higher compared to what they would get for a 9-5 job at Microsoft.

Today, I can't afford to give my co-founders a big enough bonanza as each investor wants to have 20% of the company, I also can't give the same "environment" as Google does. So I raise more money, to pay people their FMV salary+ a chance of a small bonanza. So I need more financing rounds until profitability.
It's a loosing game for everybody. Less commitment from founders and more money from investors.

ShanaC · 2 months ago

I have an acquaintance in stealth mode trying to avoid all of this. He went to b-school undergraduate and basically earned enough as an intern to self fund for a year, roughly, if it all goes well. Let's put the balancing act that way. A lot of people will do anything to avoid borrowing from anyone or raising money from anyone if they can. Because they know the pie is shot through of holes on the bottom.

OMA · 2 months ago

From an investment point of view, your acquaintance is investing about two year's worth of salary in his company. Alternatively your acquaintance could invest his money in other investments yielding 4-6% per year with almost no risk.

Most startups (about 90%) never get funded. Those who do get funded have an approximate 33% chance of yielding ~zero return, 33% of yielding 0-20% to investors, but not to founders and about return and 33% of yielding high returns.

From your acquaintance point of view, he's betting on ~3% chance receiving a nice return on his money and 97% of learning something, having some fun, and loosing his investment.

So, for this to be a good investment, they should be getting at least 50-60 years of salary return if and when you're one of the lucky/talented 3%.

With exits averaging at $50-60m this makes a lot of sense if the founder's yearly salary is ~40K or if your friends experience and capabilities shift the odds in his favor.

On the other hand, betting on 3% usually ends up bad.

ShanaC · 2 months ago

I never said he was going for funding at any point. (nor are his partners). If he can do a good product at a low enough price and sell it, he might be able to squeeze by. Might. I also don't know what the business plan long term, say five years out is. I haven't looked at the books, and probably never will. This is from walking around on Saturday afternoons in the summer, (because it is Shabbos and that's what people I know do when the weather is good), and me teasing him (because I can get away with it, since I've known him since high school). My impression is that he is trying to avoid funding at all costs and in instead trying to be completely self sufficient. It is totally possible that right now he isn't even drawing a salary, I don't know. Without having him and his partners letting me have a much closer look see, I can't even tell you what is or isn't possible for this idea. I just happen to know what the idea is, happen to able to listen to him complain while he is working on it, and happen to be a decent companion if you are going to go for a walk in a suburban neighborhood like the one I grew up in.

I'm sure he's familiar with the math (or at least I hope he is)- I know at one point he was a hedge fund summer intern geek, and I know in high school he spent far too much time in a Chemistry Lab in order to boost his application for college. I'm sort of curious what will happen to him, since we both remember each other in our more dorky phases of high school life. I'll pass it on to him though.

(and this is how you become, that Girl.)

OMA · 2 months ago

There's a trend now (and for the past 3 years) to try and start tech startups without VCs.
This is partially because VCs "need" to have 20-30-40-50% of the company, which leaves the other side feeling they are left with nothing.

However, if you follow that trend, I think you decrease the chance of your company to succeed while increasing your stake in the company.

For me, it seems that the focus should be on increasing the chance to succeed.
You do that by taking more good people which (sometimes) costs more money (available from VCs)
You do that by not allowing some pompous assholes (like some VCs are) into the company, and most important you do that by hunting down risks.

fredwilson · 2 months ago

You misinterpreted me on that. One investment should return the 100mm. The next two to three should return another 100mm. And the rest (rougly 20) should get you another 50mm to 100mm

So you can afford to own 10pcnt of a 1bn exit. Or 15pcnt of a 650mm exit. You don't need 20pcnt if your fund size is small

OMA · 2 months ago

Only there are not enough $1B exits these days. Do you still assume you will have at least 1 $1B company out of 20 investments?

ShanaC · 2 months ago

FYI, this clarification finally helped me get that post about how the math actually works. Ahh.

Mark Essel · 2 months ago

Same here Shana.

Here's my warped take on the venture market:



1) I see the limited partners as a hungry lot with a huge appetite for profit. They have to keep their dollars from losing value, but they have a HUGE amount of capital.


2) I see entrepreneurs as folks that are frustrated with the way things are, and see starting a business as a means of changing things, of molding the world around them.


3) I see venture capitalists as the folks who connect the circuit between the LP needs of wealth generation/maintenance and the Entrepreneur needs of making industries more efficient or reinventing them.



And of course everyone is interested in getting a payout. It all works out as long as value is actually revealed by the founders/venture partners. Sometimes it feels like our society just keeps getting lucky, saved from the brink of artificial expansive collapse by massive technological, business or social innovation.

I find all these roles pretty fascinating, because they're all concerned with value on some level. Whether it's quantified better, or the potential value of a business is better catalyzed, or a new market, methodology, or service is produced - each of these major players helps us take stock and put a price tag on the value of labor.

fredwilson · 2 months ago

Save that last thought. Its a hugely important one

fredwilson · 2 months ago

We don't need that because we do often own 15 to 20pcnt of our companies at exit. Its just that we don't draw lines in the sand and use the word 'need' when 'want' is the right word

jeremystein · 2 months ago

investors owning too much can really screw up the capital structure of the company-- especially if something goes wrong down the road and you need to restructure. it creates disincentives and can make it impossible to attract the people you need. ive seen this first hand.

Steven Kane · 2 months ago

Amen

and thank you, as usual, for your candor, and your courage to be a contrarian. ;)

Boiled down, the "we need to own" line is a direct indication of the VC industry's utter absence of self-confidence -- an absence utterly correct and justified and demonstrated by horrid returns

that is, it is a bastardized way of saying, "we don't believe in our ability to make profitable investments and create ample returns but still we are hogging LP money to pay ourselves outrageous managment fees and personal compensation, ergo we need to massively and if needs be cruelly maximize our exposure to any deal we are in and at the lowest possible cost".

the end result is entrepreneurs, portfolio companies and LPs getting hosed (decimated ownership for founders and entrepreneurs, tense stretched-thin financing for portfolio companies, and painful high fees on top of painful low returns for LPs

sigh



Which we know is the elephant in the room in every VC fund partner meeting

in a world where VC p[

hdemott · 2 months ago

I'll weigh in with a view that comes more from a traditional hedge fund standpoint.

Most investors don't ever have the chance to "own 40%" or whatever the magic number is - they simply buy a security interest (equity or debt) in a business they feel is worth more than they are paying - believing the risk reward is sufficiently in their favor to forgo other investments they can buy. In the public market - this means for every $1 put into one company - you are forgoing thousands of other potential investments.

That is the first screen that any good VC should decide upon: is this a good investment. Not, is this an investment that others feel good about, or that has a famous founder, or has other credible investors. Do you believe it is a good investment.

Once you pass that hurdle, then the rest is portfolio management.

I believe that the "I need to own 40%" makes sense if it is borne out of a portfolio management decision. If you are running a $100M fund, and you are doing start up investing and you are talking about a $5M pre money investment - then it would make sense that you might ask for a large % of the company solely because you would want the investment to be meaningful to your portfolio and thus worth the time and effort you are making as a board member (I assume that VC's invest because they want to help grow the company and not make passive investments - and if they are making passive investments they should just send in the check and not say a word about how much they need to own or would like to own).

Portfolio managers (VC partners in this case) only have so much bandwidth to offer companies (if they are doing it right) and so many bullets in the gun (funds are not recycled as in a hedge fund) so getting the portfolio balance correct is important - but it is secondary, in my opinion, to the initial investment decision.

Everything after that should be portfolio driven - but bent toward making sure you do not lose out on a promising investment.

I figure if you get to the point where you are convinced that it is a good investment, and you can't get enough $ to work in the business to warrant your full participation, you should make sure that the people that will guide the business are good board members and managers - and if you can deal with that - then invest.

fredwilson · 2 months ago

Harry - nice to hear from you. The 'we need to own' is driven by portfolio mgmt. But its because the fund sizes are too large. And why are they so large? Greed

hdemott · 2 months ago

No argument there. It is like when hedge funds or other investment partnerships get too big. It is a fantastic business model for the owners of the fund - but generally deprives the LP's of good returns by forcing the funds to look at larger and larger investments - or in the case of VC firms either asking for a higher % ownership of a firm, or going later stage (which should lower the reward in the risk reward relationship)

The key is being happy to live with a small team at a reasonable fund size

fredwilson · 2 months ago

Amen

Mark Essel · 2 months ago

Great advice/decision theory Harry. A pleasure to catch your input here. Do you regularly blog elsewhere, if so I'd love to subscribe.

andrewwatson · 2 months ago

Aren't the funds also so large because they're looking for too many home runs? It's a kind of vicious cycle... The bigger you are the more home runs you need so you grow bigger to maximize the return on your home runs....

It seems like the trend towards earlier, smaller investment is the only "diet plan" for that so I'm glad to see that emerging.

ShanaC · 2 months ago

A big fund also is the only kind of fun that can scale up for certain kinds of companies past a certain point. If everyone only does "diet plan" funds, then those large companies that need the last stages of funding and deserve it could be killed off. It's a fine balance of what constitutes a diet, just like with real people. Some people have fast metabolisms, some slow, and should eat and exercise apporpriately for their body types. Same with funds, except with fund types?

ShanaC · 2 months ago

Unfortunately they exposed at least two, three generations to Gordon Gekko. I want to throw Barbarians at the Gate at the wall, because I know from my notes a couple of discussions that my history of Late 20th century business clss that they are hiding the more advanced information about the approintness of said security in said situation for the Sake of trying to be slightly more slippry slope-ish over the question "Greed is Good" Too glib.

kidmercury · 2 months ago

the fund sizes are too big because the fed created too much money. the analogy used in kook circles is like spiking the punch bowl at a high school party. yes the stupid kids are responsible, but what about the person who spiked the punch????

gov't is who is really greedy.

Mark Essel · 2 months ago

Or desparate, or both.

gstar · 2 months ago

I recently had a management consultant tell me that he needed to own 7.5% of our company in exchange for his services, plus a fee of £750 per day.

Now that debt is hard to raise, this sort of thinking is getting more common than ever.

andrewwatson · 2 months ago

Hopefully he wasn't injured when you had him removed from the building... :)

Mark Essel · 2 months ago

Well then you won't scoff at my offer of management consulting for 0% of your company, and $0 a day. What's your specific business, what direction are you headed, and what are your major hurdles?

Best case my free advice helps you move forward g, but that other consultant->
1) he's either a goose that lays golden eggs
2) or out of his mind

charlesday · 2 months ago

Mark - have you ever found a consultant worth that kind of money? I have a vested interest in your answer. I am one.

Mark Essel · 2 months ago

Worth 7.5% + $750 per day, no I haven't met one. I suppose if the company is valued at $10, well then yes I am one :D

But if the company is valued at $5e6, then no.

I'm curious what consulting an individual could bring to an organization at that rate? Is it basically a founder swap, (aka there are strings to stick around). Otherwise 7.5% off the top sounds like a YCombinator cost and we haven't been able to measure if that has been a good tradeoff yet (I'm a huge fan of Paul Graham, but the portfolio of blow up YC successes doesn't exist yet)

charlesday · 2 months ago

I think any outsider asking for 7.5% of an existing business needs to have a compelling set of metrics that justify that kind of cost. And those are hard to demonstrate empirically. Largely because you're asking for a piece of something that somebody else created. Financially and emotionally, that's a problem.

We've established a model that compensates us for the company's growth. If you're valued at $5MM and we help you get to $6MM, what's that worth to you? Some companies are happy getting a 5x return on the cost of getting there. On that basis, a consultant can be as valuable as a vc at certain points in a company's evolution.

Like a lot of things, it's about value. And I agree, 7.5% off the top of an existing business doesn't offer much.

Mark Essel · 2 months ago

Hell yeah Fred, this goes along with the concept of value, and value creation. Ten percent of a freakin' breakthrough awesome business is much greater than 30-40% of nothing.

Seal the deal with a very promising business first. Then do everything in your power to ensure that business grows steadily and sustainably. Those are what I imagine make the most powerful venture firms/capitalists. Many roles are needed by great investors, none of them require owning 99% of the businesses they back.

Of course there are few things other investors can learn from your years of blogging Fred
1) advertising your investment strategies
2) being transparent and available
3) supporting your investments by continually looking for value adds to their business concepts (this is a biggy)

I mean who wouldn't want to land a deal with US ventures?

fredwilson · 2 months ago

you'd be surprised. we've lost plenty of deals to other VCs

Mark Essel · 2 months ago

I expect that's part of the game. What were some of your biggest missed opportunities if you don't mind me asking?

fredwilson · 2 months ago

Missed or lost?

Mark Essel · 2 months ago

What is the difference between the two (maybe it should be another post or I should do some searching through your archives to catch up)

Pascal-Emmanuel Gobry · 2 months ago

Great question but I don't think you're getting an answer. ;)

Mark Essel · 2 months ago

Better not to dwell I suppose, but remember/learn and fight another day.

Pascal-Emmanuel Gobry · 2 months ago

I hope when Fred retires he writes a tell-all memoir. Should be interesting.
Although you could argue AVC.com is it (still remember that post on
GeoCities).

fredwilson · 2 months ago

I don't want to write a book for two reasons

1) It has an ending
2) It doesn't have a comment thread

DaveinHackensack · 2 months ago

Great comment, and great analogy, about the blog as a never ending book where the readers interact. I know you've made this analogy before, but it's still a great one.

Michael Lazerow · 2 months ago

The other bullshit phrase I'm hearing a lot these days from big companies that we're negotiating contracts with is "It's not our corporate policy to change that." My reply, "It's not our corporate policy to agree to it so I guess we're at a standstill." Couldn't agree more with this post. I always call it out when it comes up.

fredwilson · 2 months ago

Did you try 'its our coporate policy not to work with unreasonable people?'

Jonathan Deamer · 2 months ago

I like the extended pie-metaphor of the penultimate paragraph...I'd love to read a post taking that idea further, comparing the whole VC business to competitive eating ;-p

fredwilson · 2 months ago

i didn't mean to suggest that VCs are all pie eating pigs. but i think i've got pigging out on my brain this morning. we are going with some friends to the April Bloomfield/Fergus Henderson "head to tail eating" fest at the spotted pig tonight.

Mark Essel · 2 months ago

Oiy, that's a lot of eating. You gotta get in some good exercise to prep your hunger proper.

fredwilson · 2 months ago

Just got back from the gym :)

gbattle · 2 months ago

"Head to tail eating" = "From the rooter to the tooter". Enjoy!

Adrian Bye · 2 months ago

don't we have that now with ycombinator and techstars?

fredwilson · 2 months ago

They are not 'the solution' but they are part of it

Matthew Wensing · 2 months ago

I think YC will end up generating more YC's (not just competitors, but alumni).

Meanwhile, what about crowd-sourced investment/fundraising, e.g. kickstarter and fundable.com?

fredwilson · 2 months ago

I think kickstarter is awesome. I'm not familar with fundable. I"ll check them out

Jonathan Deamer · 2 months ago

Of course, didn't assume that insinuation, just thought your wording was kinda poetic ;-)

fredwilson · 2 months ago

I'll take it as a compliment then

valto · 2 months ago

Maybe one way of replying to that need would be: "if you really think you need that much at this point, it tells us that you don't really believe what can achieve with this venture, together with all of your resources, expertises and help you can offer"

mikemcgrath · 2 months ago

Love and agree with the spirit of the article but I, in turn, call bullshit on "We are putting our needs before the needs of our portfolio companies and the entrepreneurs who form them." I'd venture to guess that a VC's only fiduciary responsibility is to limited partners/portfolio companies, then themselves, and entrepreneurs are a distant 3rd. Your reputation precedes you, and I have no doubt you think this way, but expecting investment pro's not to use heavy handed "we need to own" sales tactics is a bit "pie in the sky."

fredwilson · 2 months ago

I believe entrepreneurs are our customers and LPs are our shareholders. If that is so, then we need to work for the entrepreneurs and make them happy and they will produce the returns the LPs need

Charlie Crystle · 2 months ago

oh dear, not again. LPs are your customers and...well, forget it. We'll agree to disagree.

Toby · 2 months ago

If LPs are the VCs customers, does that mean VCs are the startups customers?

Charlie Crystle · 2 months ago

not at all, beyond the transaction of purchasing shares, at which time investors become partners, consitutents, and stewards of the startup. The startup's customers are the ones paying for a product.

Toby · 2 months ago

That looks a lot like the relationship between the LPs and the VCs. LPs invest in VCs, VCs invest in startups, startups use the investment to acquire customers and make transactions, value flows up the investor chain. I think the startup's customers ARE the VC's and LP's customers. The investors just spread their resources (capital+time) and delegate customer management to the startup (as it should be).

Charlie Crystle · 2 months ago

The VCs are compensated by the LPs. The startup's customers are absolutely not the VCs or LPs unless they buy the startup's products. Once the sale of the stock is complete, the relationship changes.

Otherwise, why give stock at all? I don't give stock to my customers (though I wish I could sometimes). If the startup's primary goal is to produce shares with value, they'll never produce shares with value. Focus on the real customers, serve them with what you make or do, be amazing, and the money will flow, increasing your value, increasing investment interest, and creating demand for your shares; once those are purchased the owners are partners, not customers.

VCs sell future, potential IRR to LPs prior to investing LP money in any startups. Given the 10-year history, most VCs aren't delivering on what they purport to sell (according to a vague memory of a Calpers report).

I just don't buy that Startups are the VCs customers. Fred feels great about saying that, and if that helps him interact with startups and go to work every day, that's great, but I think it clouds the reality. I love his attitude and love the ideas he expresses when he talks about the relationship with startups, but he is the steward of his investment of LP money, for which is gets 2 & 20, and he is a partner to the startups to make that 2 and 20 and LP stake deliver the IRR he represented during his raise.

Toby · 2 months ago

I think you misunderstood me:

"I think the startup's customers ARE the VC's and LP's customers."

not

I think the startup's customers ARE the VCs and LPs.

Charlie Crystle · 2 months ago

oh. well. nevermind. http://bit.ly/2KKgPp

Adrian Bye · 2 months ago

"We took 10pcnt of a company a few years ago that has become our best investment."

Sounds like twitter to me? :-)

fredwilson · 2 months ago

We own more of twitter than that

RacerRick · 2 months ago

zing!

Mark Essel · 2 months ago

More than 10% of a business that just valued at 1e9. Jeez I hope their revenue machine starts moving for your sake Fred. That could be a monster deal as long as a steady stream of cash starts growing.

My recent playing with real time RSS feeds, and now Google Wave's with:public stream leads me to believe twitter's role won't be as a centralized real time data holder but something else altogether. There will be many real time pipelines in our near future, and the businesses which can help us filter, curate, and manage the streams will be perfectly positioned for unlocking information market value.

ShanaC · 2 months ago

You realize I watch y'all. I think this portfolio is very strong if you consider that twitter is as much about a forced data stream as anything else. The question is, how to do you keep people making data. The fact that 10gen is in the porfolio next to twitter should give some idea of what kind of predictions of market value we're looking at. Apparently data moves like water- at varying speeds at various times. You probably could run the same sort of Engineer's projections about water over data and it's movements would look fairly similar, if you talk about content creation...

That's why Google Wave goes for bredth and depth, whereas twitter goes for narrow, yet deep, whitewaters. Very Big difference.

GiordanoContestabile · 2 months ago

Which means, if I'm not wrong, that you believe that less than 10% of Zynga will bring you larger returns than a bigger stake in Twitter. I fully agree, as Zynga has a good shot at becoming a central part of the social media economy, using social games to build a very large captive audience that can then be monetized across all digital media (not only games, but games will be a large part of that), and that will likely be inclined to use Zynga virtual currency for most of their online spending. That's a huge opportunity right there.

fredwilson · 2 months ago

"From your mouth to god's ears" giordano

Pascal-Emmanuel Gobry · 2 months ago

You're talking about Etsy, aren't you. ;) You love Etsy. It's one of your few investments I don't understand.

anonymous coward · 2 months ago

I'm going to guess that it's Etsy, not Twitter.

gbattle · 2 months ago

Fred, though it does represent thinly veiled greed, do you believe the "we need to own" dictum is driven by the investment mandate agreed upon with LP's (ie. at X stage of investment "we need to own" Y% at minimum)? From my previous life, I know that hedge fund offering memorandums often have investment programs with maximum percentage provisions for names both within the company and within the portfolio (ie. we can only own up to 10% of XYZ's common shares which can only take up to 5% max of the portfolio). Do some VC's have similar provisions?

fredwilson · 2 months ago

Maybe, but if they do, it was the VC who came up with the model, not the LP

csertoglu · 2 months ago

For the sake of clarification, this is different than the need to deploy X amount of capital per deal, right?

fredwilson · 2 months ago

It is related, unfortunately

Mark Essel · 2 months ago

Funds too big problem?

im2b_dl · 2 months ago

Bijan had a great post about VC image callede "Paying attention to AntiVC Opinions" on one level I think these two posts are related. On another as someone who has taken money in past projects and learned... depending on what you need, the resources that are there and the risk (and I am a film guy) you give away a lot. I most likely will never get "married" again because I have been there. In some ways I like a person who takes a little more to give a simpler deal...where I have clarity of mind on decisions. The less they take the more it seems there is some other unknown ... obviously it sounds you and Bijan and others seem to be trying to correct an image pretty encrusted in other VC fields. Just a short note Fred..
In entertainment in the 90's there was a feeding frenzy on small independent filmmakers etc. Sundance became it's capital like Cambrudge and SF is to web development now (no offense to NYC, et al). Some multi-millionaires came out of those early days. Soon everyone on both the creation side and the investment side looked to that place as their saviors. A feeding frenzy that lasted a decade where the choices were so many and the math was not so clear and deals changed...many from people who came from a different investment mindset. The standards slowly changed... discreetly.
Although it is a completely different industry on so many levels I watch a lot of young indie creators in Cambridge, NYC and SF...gathering now and see a lot of shadows of those days. I am glad that you and Bijan have forums like this to discuss it out in the open in such a large venue. Wish we had it then. But I wonder if the numbers and the image stuff that Bijan talks about is an uphill battle because of the swamping of the industry and the math of what will make a successful company is not the same as it was even 5 years ago.

Mark Essel · 2 months ago

Great connection to the film industry, my cousin works as an associate producer for small films and has lived and breathed film production for the past 20 years. I believe his current role is akin to a venture partner, and he receives a small cut of film fund raising. He only backs films that he believes in 100% and knows whether the budgets are reasonable and safe for outside investors.

Bruce Upbin · 2 months ago

You'll also have much more motivated entrepreneurs if you allow them a bigger piece of the pie.

fredwilson · 2 months ago

And demotivated if they have too little

Mark Essel · 2 months ago

I would think many entrepreneurs would hit a wealth level where money wasn't as important as creating long term value, and a stellar business. Certainly after creating one big liquidity business, they'd be going back at it with a different measure of success.

I like to believe that entrepreneurial minds can start out with that mindset, by setting their lifestyles at a bare minimum, and understanding exactly what they need. Long term thinking places me out of the picture in 50 years, which really isn't that huge of a stretch of time. The most valuable long term contribution we can make is leaving a legacy of inspiration to future generations.

Value isn't really created by a single founder, the trick is revealing latent existing value in the market. Making an industry more efficient (disruption) is a pattern folks like to discuss, but style, art, and personalization all heavily influence the final value of business venture.

Thanks for mentioning motivation Bruce. Even though it was a brief comment, I'm very passionate about value creation, and inspiration in the work we do.

nathanking · 2 months ago

I am wondering if the 'venture downturn' has not led these firms to believe that their money is more valuable since there is less investment right now. Is this something that you have seen throughout your career in in the industry or has it just begun?

fredwilson · 2 months ago

That always happens in a dowturn and it is natural. But if valuations come down then it makes sense to advise entrepreneurs to raise less money and dilute less

ShanaC · 2 months ago

So then wouldn't it be logical to try and project a valuation that would be even keeled, that balances the extremes of the upturns and the downturns, since we now know they are screwing things up?

fredwilson · 2 months ago

Honestly I see my job is to get the lowest fair price

stuartellman · 2 months ago

wow, thanks for saying that Fred. I feel exactly the same way and have been hearing that crap since I started in the business.

fredwilson · 2 months ago

Hey stuart. Nice to hear from you on this. I think we owe it to ourselves to speak up on this one. Thanks for doing that

stuartellman · 2 months ago

Thanks for saying that Fred. I feel the same way and have been hearing that crap from other vc's since I started in the business.

DaveinHackensack · 2 months ago

We took 10pcnt of a company a few years ago that has become our best investment.

Which one is this, Fred?

fredwilson · 2 months ago

I'm not naming names. I don't want to jinx it

JLM · 2 months ago

Excellent! Never tempt fate or go all in on karma! My view exactly!

kidmercury · 2 months ago

has to be zynga. i'll bet anyone $10 it's zynga. if not already that company is going to be a money printing machine, quite literally.

ShanaC · 2 months ago

I need to thank them actually. I just won a laptop from them.

Mark Essel · 2 months ago

I think Giordano would agree with you on that one kid

Elie Seidman · 2 months ago

Amen!

BTW, the other offensive VC comment is "we own Company X". Even if a VC has legal control of a Company, it does not own that company. It's an investor in the company. The entrepreneurs who pour their heart and soul into the companies are the ones who own them - even if not legally, then certain spiritually. It's in poor taste for a VC to say "we own" instead of "we are shareholders of" or "we've invested in".

DaveinHackensack · 2 months ago

Shareholders in public companies use the same phrase. What's wrong with it? It's just a shorthand for saying you own a piece of a company, which is true; it's not a value judgment about the relative merits of outside investors and entrepreneurs.

fredwilson · 2 months ago

So true. I have learned to say 'our portfolio companies' instead of 'our companies'

JLM · 2 months ago

Wow, pretty sensitive feelings here?

I like to think of the management, investors, customers, vendors as a team --- a continuum of business relationships which make an integrated and rational whole. The individual ownership of an attractive large entity --- "myEbay" as an example --- is a shrewd but very simple marketing ploy to create a sense of community which is leveraged into psychological ownership and thus patronage.

Elie Seidman · 2 months ago

The vast majority of the successful entrepreneurs that I know take a deep personal pride in what they are building. A personal dedication without which that venture would simply not come into successful existence. There is room - and need - for many others to make a venture a success but a shareholder (or business partner or customer) is different from being the owner. Polite comments about continuum of relationships and integrated wholes are all well and good but don't negate any of what I am saying. What myEbay does to make their customers feel a part of the business cannot be compared to what I'm talking about here - the relationship between an entrepreneur and their sense of ownership in what they are building. By analogy - the largest community on the web - Facebook - would not exist were it not for all of who use the product. But we are not the owners or the creators of it even though we are critical to it. Mark Zuckerberg and his core team are. The venture investors who made it possible though their belief in Mark Zuckerbergs vision are critical partners in his endeavor and their role should be appreciated. But that does not change the idea that he is the owner anymore than it reduces a Nobel laureates ownership over their prize even though, undoubtedly, many others contributed along the way.

JLM · 2 months ago

Pretty sure we did not start talking about the same thing here nonetheless I could certainly suggest that possessive thinking about who "owns" an idea is a a surefire way to underwhelm an opportunity. Having made it to the pay window a few times myself, I am always willing to divest myself of all credit, titles, public note --- cause I am really just interested in the equity.

Your Nobel laureate example is particularly awkward given the current mystery as to what our President has ever done to receive his recent award. I found his obvious discomfiture and bemusement to be particularly endearing. Even with his wizard gifts for communication, he was dumbstruck to explain it let alone "share" the credit. There is something funny about the most powerful man in the world saying essentially --- WTF? No?

I suspect that real success does not require too much wrestling about who really gets the credit or owns the idea --- the success speaks for itself even if the audience is difficult to identify. Maybe a bit of maturity?

Kinda like that cave man who invented fire, eh? You may never know his name but, damn, he sure was a player! LOL

A lot of success is built on mediocre ideas with excellent execution. And many times the execution itself is just glorified "shop keeping". But somebody has to keep things tied together.

And if nothing else, give me luck!

Elie Seidman · 2 months ago

I think we are talking past each other because I don't disagree with your comments about credit, execution, luck and success speaking for itself. As for the Nobel peace prize, unfortunately, that award was made a mockery of a long time ago and this years, while not in the same league as the most shameful issuances of the award, was certainly perplexing. All that being said, I think that there are owners and there are others and it's worth respecting the difference.

JLM · 2 months ago

Well said, I could not possibly agree with you more.

Entrepreneurs are blessed and cursed because the very act of independent thinking which is at the core of self fulfilling entrepreneurial zeal is an opiate, a currency, a seductive siren which only a select few understand and appreciate.

A true entrepreneur would rather command a rowboat than be the second mate on an aircraft carrier.

fredwilson · 2 months ago

Blessed and cursed is exactly right. And that is a big part of why I love working with them

JLM · 2 months ago

The curse --- lying in bed at 2:00 AM thinking about your business

The blessing --- lying in bed at 2:00 AM plotting to change the world and to shoplift its riches

The reward --- the confidence of having eaten only what you have personally killed, the sentiment of a truly free man

The burden --- recognize "it", preserve it, pass it on --- keep the flame burning

Pascal-Emmanuel Gobry · 2 months ago

"A true entrepreneur would rather command a rowboat than be the second mate on an aircraft carrier."

Amen to that. So true.

Someone once asked me why I started a business. I said "because I'm congenitally incapable of having a boss -- so I'd rather have dozens of bosses: customers, shareholders and suppliers!"

fredwilson · 2 months ago

Yeah but bosses of your choosing, hopefully

sass · 2 months ago

Great point Fred. "Percentage" is all too often confused with "value." A controlling interest in zero is still zero. A tiny stake in Mr. Midas would still return plenty of gold...

traviscooper · 2 months ago

agreed.

Bram Cohen · 2 months ago

Having gone through some funding, this line is one I've never known how to argue against, because it's so bullshit on its face that there's no obvious place to start bringing in logic.

Next you can talk about how 'real' CEOs are supposed to make x%, where x doesn't go down when the company is worth more.

fredwilson · 2 months ago

'There's no obvious place to start bringing in logic'. I like that line. That's always a bad place to be

Jerry Neumann · 2 months ago

After the "getting to yes" phase of any negotiation, I've found every zero-sum ask phrased as some illogical "I need" or "I deserve", when all it ever is is "I want more." That's one thing when it's two investors arguing with each other, it's something entirely different when it affects the equity ownership of the ongoing management of the company.

Fred, you and your partners have a healthy attitude towards keeping management and employees significant owners, and that's been great for your business. It always surprises me the VCs that don't align their incentives with those of the founders. How the heck do they ever have a successful investment?

amandamari · 2 months ago

There seems to be a step missing in the "not the biggest piece, but the bigger pie" logic. Rather than "getting involved with very big pies," how about starting with your smaller slice of a smaller pie and commit to growing the whole size of the pie. To me, it's more about creating value than claiming it; I find that more personally satisfying.

fredwilson · 2 months ago

That is our model actually. We don't grow the pie, the entrepreneur does. But we can grow our piece of the pie overtime if we are willing to continue to invest, which is our normal approach

Speed · 2 months ago

Nice post. And what about the entrepreneurs, who hold their firm to close to the heart, and wont' give up equity to neither VCs nor employees? Would'nt you rather own a small stake in something big as opposed to 100% of nothing..

fredwilson · 2 months ago

We don't have any companies in our portfolio where the entrepreneur has not shared the equity with the team. I can't imagine we'd ever invest in a deal set up like that

FlavioGomes · 2 months ago

Its been a while since I've posted here. It observations like this that drive so much credibility to Fred and the Union Ventures brand.

Look, getting a fair deal is simple. Assuming you have all the usual check boxes covered (good product, reputable honest team and a believable market opportunity; be as unrelenting as you can on articulating how you're mitigating risk. Accept that greed and risk are proportionate to how expensive the money will be and realize the choice is yours. If you're faced with a deal that just seems unbalanced then you either you have a really greedy counterpart or the risk is high.

Fred why did you accept only 10 percent of the above mentioned company? I'm betting you knew there were risks but that the management team demonstrated their understanding of them with good plans of attack.

Flavio

fredwilson · 2 months ago

Actually I negotiated for 20pcnt but offered half the deal to a very good friend in the venture business who has earned his share in spades on the deal

Pascal-Emmanuel Gobry · 2 months ago

This, right here, is why I respect you. I know you do this stuff all the time. And the reason why I respect you over it is not because it makes you a "good person" (I wouldn't judge that), but because it makes you shrewd -- you understand that good business deals are always about win-win and non zero sumness.

FlavioGomes · 2 months ago

I also need to add that while there maybe some institutional VC's that are blatant vultures I find it rare in reality. Its usually loan sharks masquerading as angel/private venture syndicates that target the short term ass reaming opportunity. Just watch any deal making show on tv such as Dragons Den or Shark tank and you'll see it plain as day.

Kuldeep Kapade · 2 months ago

I wish even VCs in India thought the same way as you do, but I know its going to take decades for that :(

kidmercury · 2 months ago

i don't think it'll take decades. the wealth transfer is going back to the east. my parents moved from india to the USA for a better future, i am thinking about going back to india for the same reason.

ShanaC · 2 months ago

Frred, Measure you influence in the Ny school of web Tech by how far it reaches on the planet.

AndreaF · 2 months ago

Fred, I'll hold you to the 10pct treshold when I'll (hopefully) pitch to you my next venture.... Just kidding.

fredwilson · 2 months ago

Well that is the risk I took by writing this, right?

AndreaF · 2 months ago

Right.
Although you can always chose not to let me pitch to you.
That is the risk I took.

fredwilson · 2 months ago

Well if I refuse, it won't be because of your comment. I promise you that

AndreaF · 2 months ago

Ok, but can I still use it publicly as an excuse in the (very unlikely) instance that you do refuse?

fredwilson · 2 months ago

no, because nobody gets blackballed for saying what they think on this blog

AndreaF · 2 months ago

Fair enough.

kidmercury · 2 months ago

true dat! you can even roll up and talk about 9/11 truth, aliens, and the devil. freedom of speech in da house!!!

eCommerceCircle · 2 months ago

If we don't pay to pitch, you need to own 40pct.

I'm glad guys like you and Jason are being very vocal about these type of things. Hopefully there will be a major shakeup soon.

--M

df · 2 months ago

Very good article! I (sheepishly admit) watching "Shark Tank" on TV and the "sharks" almost always ask for 50-51% saying they "need" it to help the company.

Of course I can separate a Mark Burnett ..cough.."reality"..cough.. show from the real-world, but I know it goes on.

Your blurb hits it on the head. It is greed and puts investors needs before the portfolio company / entrepenuers.

Charlie Crystle · 2 months ago

Isn't the 20% rule also related to control issues? 20% with pro rata rights...by the next round Series A and Series B likely come awfully close to controlling interest.

fredwilson · 2 months ago

I've never heard anyone use control reasons as an argument on this subject

TDKlein · 2 months ago

Typically, what drives this is a vc's fund size rather than control desires. VC's need to deploy a certain amount of capital per deal in order to deploy a fund into an appropriate number of companies within a specific range of time. The tail clearly is wagging the dog when this happens. The 20% minimum ownership becomes the standard proxy for trying to stuff more money in a deal than it would necessarily justify. It's yet another example of how the institutionalization of the venture market had several bad unintended consequences.

fredwilson · 2 months ago

Yup

sammysez · 2 months ago

It's not said openly, but it is one of the hidden reasons, especially for subsequent rounds.

I had this happen with my company. The B round "marquee" VC was adamant at owning 23%, but willing to move on the actual $ and/or valuation. And in my naivete as a first timer, I didn't get it...but the reason was that this 23%, added to the earlier A round stake of the earlier VC (smaller, hence easily dominated) , gave the preferred 51% control.

And yes, they used that in the end to install their own "consulting" CEO (who ended up sucking the company dry with his fees) and forcing a sale.

And it's not uncommon to see this in other places as the "secret" agenda. As a start-up consultant, I am constantly warning my clients to keep an eye on this "little" detail.

fredwilson · 2 months ago

Wow. Why didn't they just tell you they wanted control and to pick their own CEO?

That's what I do if that's how I feel. Most entrepreneurs say no thanks. And we part friends most of the time

sammysez · 2 months ago

And that attitude of yours goes back to why you are so well-respected.

They were fine with me running the show at the time of the deal. And I did run it for another 1.5 years. But it was a back-o-the-pocket card for them, and they used it when they felt it was needed. To both change the mgmt (which I was fine with, btw, if the right person was found) and to force the sale since they could convert and become the common-share majority as well.

Nat Kannan · 2 months ago

Fred,

This is an entrepreneur friendly post. But you raise a fundamental question about valuation of any deal at early stages not knowing how it may evolve. Is it not the flip side of the coin of percent ownership? I am curious how you set valuation ignoring the spreadsheets and bogus forecasts, especially in deals involving social media and other high risk consumer internet ventures. No matter where you set the valuation it quickly translates into percent ownership. How do you avoid this dilemma, given your very enlightened approach.

Nat Kannan

fredwilson · 2 months ago

I'm a fan of investing a small amount at an early stage and scaling up the investment (and the valuation) as the risk is taken out of the deal. So I think valuations should be what they are and VCs should invest less and own less if that is what the entrepreneur wants

Mrinal Desai · 2 months ago

Fred - thank you.
This is the same logic that should be applied to a business - you dont need to increase shareholder value but you need to increase customer value (+satisfaction+delight+'happyness').
IMHO, the business exists in the first place to serve the customer.
If that is the focus, the shareholder are bound to get their big returns... collateral success.

Alan Peters · 2 months ago

Do you think the pie slice metaphor holds true for markets as well as companies?

fredwilson · 2 months ago

Yes I do. If competitors cooperate to grow a market they could do better than if they just focus on taking share from each other

FlavioGomes · 2 months ago

So instead of price fixing you're hoping more for "pie fixing" ha ha ha

nicheVC · 2 months ago

Maybe we should focus less on portfolio nomenclature and more on the "need" of the end user and the markets they serve. If companies "need" to raise a capital efficient $2-$5M round because this achieves well scripted milestones, then small funds are the answer. Unfortunately, due to a lack of long term vision for what's best for the private markets, there just are not enough small funds. Create a robust exit market where companies are acquired, or heaven forbid go public, at $50M to $200M and you have a VC game changing environment.

itamarw · 2 months ago

Fred- amazing post. I remember in my earlier pitching days being very confused as to why a bigger slice of a mythical pie was more important to some than a smaller slice of an actual pie. It eventually just became a "tell" that the person usually wasn't a serious investor, and probably planned on taking as big of a chunk as possible, and not bringing much actual value to the table.

And you're making some of us entrepreneurs very jealous of such clear-minded thinking, coming from a VC ;)

Christian Brucculeri · 2 months ago

I love your pie analogy from a strategy perspective. I would guess that any start-up that gives 44% of its company in order to finance it's initial growth will end up DOA- it's suffocates everyone involved.

michaelreines · 2 months ago

All of the good people who used to work for me when I outsourced are now owners who contrubute their time and receive payment for their services from a percentage of the deal they worked on. In addition the value of their ownership increases and they receive quarterly gross profit distrubtions.

Name · 2 months ago

Specifics Fred! Please share specifics. Sunshine benefits us all. Will you please share the specifics of your 10% deal and the others in your portfolio so we can have a genuine free, informed market?

fredwilson · 2 months ago

I go very far to be transparent and open. But I'm not naming names on this one

Matthew_Trifiro · 2 months ago

"Word"

alan p · 2 months ago

I had always assumed that in VC investingthe key is in a pportfolio ie the probability of any one investment hitting a home run is low so have a lot.

To that end the stake is not a first order issue apart from protecting ones interest with a board seat.

In fact I'd expect probability of success to fall with a high stake as it gives control and this temptation to meddle with the business.

swilson · 2 months ago

I agree. "Bullshit!" But I'm standing behind Fred b/c he's bigger than me. Or maybe b/c I'm a female founder & CEO that's walked away from a few VC deals b/c they were bullshit, I should jump in front of him. Either way, well said!

Michael B. Aronson · 2 months ago

I agree with you that I hate Vcs who spout out axioms like this but I think you are missing the "downside" part of this. As an early stage like you and Josh K. (who has a great blog follow up to this post), I do find myself "sometimes" having to literally choose which of our twenty portfolio companies I'm going to work on at any point in time. Like you guys, we get very involved in strategy, product development, building and coaching the management team, hiring outside advisors and consultants, raising folllow on capital, exits, etc etc. I think I work as hard as you and Josh (although being older I do have to get some sleep) and I simply can't do everything for everyone of our companies as much as I would like to. We have a great team at MentorTech but it's not the same as when I show up at a company meeting or visit an important customer. We do triage especially on the downside where we are looking to recover capital, it simple math that x% of a small exit is pretty meaning less to our returns. There comes a point where we have to limit the time we spend with the companies that are not going to return capital.

I do completely agree that you can have a huge return from a smaller percentage. We own Diapers.com, starting with small $350,000 investment. They have been extremely successful and as we they raised additional funds (B, C, D and Mezz rounds) we have been able to particpate more than our pro rata and should be able to have 5% of what will hopefully be an IPO in a couple of years and consequently return all of the capital in all of the funds. We were willing to do this as we were so impressed by the founders and the company's early results that we were willing to do a smaller stake initially after "failing" to get our 20%. Another example of this is our investment in Yodle. From what I know of the Sequoia/KP investment in Google, I think it was similar circumstance.

fredwilson · 2 months ago

Great topic michael. Triage and time management is something we struggle with all the time because we wish we could 'love our children equally'

We don't use ownership as a metric to manage time though

We use opportunity.

There are some companies in our portfolio that are real businesses and have created value but will not be big return generators. We are there for them when they need us, but we don't wake up thinking about them. And we own big stakes (greater than 30pcnt) in some of them

We do wake up thinking about companies we own less than 10pcnt of

Peter Cranstone · 2 months ago

Finally, someone who calls it as it should be. It's NOT about the percentage. VC's don't make money on the exit by owning a percentage. They make money based on the difference between what they paid for the shares and what they are selling them for. The delta is the "value" they all collectively created. Every meeting I'm in that I hear a VC say that I head for the door. They are not the partners I want.

Peter

dst907 · 2 months ago

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bfeld · 2 months ago

I just caught up on a week of blogs and completely agree with this. The right word is "want", not "need". When a VC says "I need" at the starting point of a discussion, they are lying. Or, they have created what in my mind is an illogical construct, especially if they are an early stage investor.

fredwilson · 2 months ago

or as bram cohen says somewhere else in this thread, it means you cannot
even bring reason into the discussion

paramendra · 2 months ago

"But please don't use the words 'we need to own' around me. I am calling bullshit on it and will do it to your face."

I like the attitude.

Too many VCs want to kill the hen for the golden eggs.

thehighwaygirl · 2 months ago

Right on.

As a startup it's hard to know your worth and oftentimes we're at the mercy of the VC's valuation. This leads to a larger percentage of ownership for them, since they probably value us low until the deal is done. You're right though. It doesn't serve them or us in the end.

Thanasis Delistathis · 1 month ago

I agree with you. We also had one of our biggest hits in our last fund with an investment where we owned a small %.

I don't think this talk is about ego or screwing the entrpreneur. I think it is simply altering the math to make the hurdle for the LPs. In the early stage market, with a 15-20% owenership, in our experience, a fund will lose all its money on 40% of its deals, marginally return money on most of the others and really make money on a few big hits that may return the fund. Under certain assumptions around these parameters, a reasonably sized fund can get to return 3 times its size to the investors, which over 7-10 years is something like 20% net to the LPs, which should be an expected return for the risk.

When the fund gets bigger, the math is not as easy. Disproportionately larger exits are not easy to come by. Something has to give. Either high hit ratio (fewer losses), or you have to own a bigger chunk of each company..... So i hear the same thing again and again as you do: we need to own XX%, and I think it is partially driven by this math.

fredwilson · 1 month ago

Exactly

Sarah · 1 month ago

It´s true that th need of possesion took over the business world and it is not always the most profitable way to do business. Even so, if more peple start thinking this way maybe things can change after all. Check out the 4500 investors from www.vcgate.com , not all of them will want to own as much as possible.