Host
Gail Sullivan
Podcast Content
In the UK, £6.7 billion of private equity and venture capital was invested in tech deals in 2016, while Silicon Valley startups raised $2.5 billion in equity last year. Critics of the venture capital industry have long observed that the industry provides one dubious start-up after another with a gigantic injection of cash. In such worlds, startups throw insane sums at stupid, untested companies run by founders with no experience.
After burning PS14m of funding, the company was bought out by one of its main investors. A Japanese technology conglomerate handed over all remaining money to the start-up's founders. The founders made a pilgrimage to Sand Hill Road, looking not only for money, but also for valuable advice on how best to make it available.
In today's start-up industry, mergers and acquisitions are the fastest-growing exits for venture-backed companies. According to a report from Pitchbook, a company that provides industry data, five of the top 20 venture capital firms have completed more deals than last year.
Venture capitalists receive their money from limited partners and traditional investors such as banks, institutions and pension funds. In their eyes, $100 million in a fund for startups is a much riskier business than other options such as the stock market or real estate, which are inexpensive and liquid and can return 7 to 8 percent of revenues annually.
As soon as VCs finance a start-up, they start spending the money they have at breakneck speed. Founders need to understand that the more you earn in one go, the more money you can't sell. It can take several rounds of financing, even billion-dollar valuation rounds, before you give up more than your stake in your start-up.
The VC industry is based on the idea that it doesn't matter if most of the companies you fund go belly up as long as you hope one of them turns out to be the next Uber and does more to pay for your losses than the rest. Founders expect VCs to help companies when they are weaker than normal and useful investors. The capital they bring in is rarely good, leading to resentment among entrepreneurs and founders when VCs try to do more than hold everyone else accountable.
It's great if your start-up has slow, steady growth, but that's of zero interest to most VCs. When an opportunity arises for $100 million in revenue, many VCs encourage founders to turn it down, hoping that if the start-up continues to grow, it will eventually become a unicorn. Companies are investing in seed and Series A companies that are still in the idea phase or are still under construction and seeking $50k in financing at the earliest.
If the company lands another round of financing, it gets the money and hires you. Indirect knowledge of startups "failure will discourage investment in similar companies. Startups will complain and leave the company as an outsider in the capital raising scene.
Richard Titus, a tech investor and entrepreneur, agrees that toxic VCs are a problem in technology but acknowledges that it can be difficult for founders and investors alike to go up the road and decide to finance their dreams while doing the right thing. Founders often point to making money, but never for the right reasons, such as finding a company that doesn't have high salaries to get people through the inevitable dark periods startups face.
Eric Paley, the managing partner of VC firm Founders Collective and co-founder of the 3D dental imaging company Bronte took aim at venture capital industry in a recent article for TechCrunch, detailing why VC financing is bad for startups and why it is toxic. Jeffrey Epstein, the disgraced financier who committed suicide in prison earlier this month, was a limited partner in a venture capital fund that invested in startups. Similar incidents have happened to investors Chris Sacca and Justin Caldbeck, co-founders of venture capital funds like Binary Capital.
There are horror stories about startups that make a lot of money. There are many useful products launched in this way, such as Spotify, Netflix, and Facebook, but most technology companies start with a founder and a backer, and there are better ones to discuss.
Benedict Evans is analyst at Andreessen Horowitz, one of the best-known venture capital companies investing in startups. During a meeting with a well-known Israeli start-up investor, Pivot Seed, who is actively looking for startups, I talked about the macro perspective of venture capital and why it doesn't make sense.
When venture capitalist Tom Perkins, whose Kleiner Perkins company made its first $100 million investment in the 1970 "s, called Genentech for a seat to help invent synthetic insulin, the board began spending an afternoon a week in startup offices to review spending reports and to seize inexperienced executives. When I shared this with others on the net, I was contacted by a company that had been trying for several months to take over the founders of a small start-up.