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Venture capitalists stymie innovation

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… or so says Vivek Wadhwa in a recent TechCrunch article on the uselessness of venture capital.

Vivek, if you’re reading, let me tell you, you’re officially a marked man by the industry. Not so much for insulting everything VCs believe they bring to innovation, but for doing it with more than just a modicum of truth. (However, I also think you went a bit far with “VCs at best have little to no impact on these companies and at worst have a negative impact.”)

Sand Hill Road SignFirst up, I agree with Vivek that it’s important to make the distinction between Vinod Khosla et al., who can draw upon their own operational experience, and the rest, who can only draw on their experience investing in and servicing operational companies.

The fact is, experience matters. We all know this, but many of us rationalise it away. Would you go with the guy who founded Sun Microsystems or the guy who negotiates tough liquidation preference terms? Enough said, at least in my book.

So, to focus the discussion a little more, I suspect Vivek has issue with the latter group, the group that signs checks, loves to draft legal agreements, and doesn’t understand the difference between a bit and a byte.  On this, Vivek says:

My VC friends complain over drinks about a new breed of VCs who are crowding out the really smart and experienced. These gold digger VCs bear MBAs and have no real operational experience but plenty of taste for IPOs. (Interestingly, if they don’t have an MBA, they have a law degree. Go figure.)

My point in bringing up Vivek’s article is that I see a similar trend in private equity: lawyers, consultants, bankers, MBAs, etc.,  taking over the industry with financial engineering and very little operational or strategic value-add. They will quote years of experience servicing businesses, but to me, that’s like a bookmaker advising a horse trainer on strategy. Sure, they may have a few tidbits of good info, but I’d hardly call a bookmaker an experienced horse trainer.

So, back to my previous argument: experience matters. If you haven’t ever founded a startup, are you absolutely the best person to be advising a startup? Likewise with private equity, if you’ve never run a business, are you absolutely the best person to be advising a mature business?

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Posted in Firm & Fund

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  • AV
    Thanks... not sure of the exact stories, but I know the DFJ guys are big on investing in innovation and are pretty outspoken so it wouldn't surprise me. Anyway, whether or not they claimed ideas for themselves or not, we know that the bottom line is that the true innovators are entrepreneurs. I agree with Sam that the best VCs are those that manage funds and investor expectations well (but whether or not they have an MBA is irrelevant) AND have operational expertise.
  • AV: nice blog. Good points too.

    Your point about VCs not claiming to be innovators is probably mostly true, but I do remember stories of certain DFJ partners claiming ideas for themselves.
  • Hey Sam... let me start by saying that most people who "bash" MBAs actually have MBAs (no exception here), so it's not so much a matter of jealousy or revenge or whatever.

    Secondly, what does "manage money" actually mean? And, how do MBA curricula help do this? If you're thinking portfolio theory, CAPM, etc., well, we all know that was a waste of time.

    An MBA is a short-course for some, a badge of honour for others, but it's a tool in the toolbox and nothing like years of experience building your own business.

    As for private equiteers working for investors rather than entrepreneurs (or ourselves)... it's true, but it's certainly not our focus. We can't invest without their capital, but once the capital is committed, we forget about LPs until it's time to raise the next fund. The consolation is that if we make money for ourselves, we make money for them too. It's just the way it is.
  • AV
    Here's my response to Vivek's piece: http://bit.ly/iPpEE You can't say that VCs stymie innovation without really examining the role that they play. Interestingly, what we're now seeing is VCs engaging in more seed stage investing (I took a look at this yesterday: http://bit.ly/3haHr3) which means there's going to be reliance on operational expertise and company building... maybe we'll see once and for all what newer VCs are really made of.
  • Sam S
    PE/ VC's work for their LP's (i.e. investors) who value their ability to manage money NOT for entrepreneurs

    This argument should target investors. If you have experience in operation but can not tell me how you will manage my money, why should I give you my money.

    That is why the best VC should be those who have BOTH operational experience and an MBA. Bashing the MBA here made no sense.
  • Hey Arun, great to hear from you.

    I may have been high when I wrote that; can't quite remember, it's all a blur. But I don't quite understand your argument either.

    I suggested that "the best" advisor of a business is likely someone with direct business experience. You quoted me and suggested I said they are "the only" worthwhile advisers of business. Big difference between the best and the only.

    Maybe this warrants a different context: say I want to break the world cave diving depth record, but I need a mentor. Do I look to schools with professors of speleology or do I contact the current world record holder? I'm not looking for any old mentor to guide me on my pursuit, I'm looking for the best available. The same goes for my startup, I want the best I can reasonably get. If the best I can get is a lawyer or consultant, then I've got other issues.

    TPE
  • Arun Srini
    "if you’ve never run a business, are you absolutely the best person to be advising a mature business?"

    Seriously, were you high when you wrote this? He's a teacher, would you expect einstein to be the only guy to teach the theory of relativity or armstrong to discuss about the moon's land?
  • Thanks for your comments. I agree I did add a lot spice to the article, but was as factual as I could be. On the issue of whether VC's make an impact. Here is a study by Prof. Masako Ueda -- http://ssrn.com/abstract=1242698.

    I have also written about the age/experience issue -- http://www.techcrunch.com/2009/09/07/when-it-co...

    Kauffman Foundation will soon be publishing my next paper titled "Making of a Successful Entrepreneur" which discusses how company founders rank experience as the #1 success factor.

    Regards,

    Vivek
    Twitter: Vwadhwa
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