VCs and Startups: A Counterpoint to Andy Dunn's Scathing Post

This article delves into a recent post by Andy Dunn, a known entrepreneur, where he criticizes the venture capital industry. It provides a counterpoint to Dunn's assertions, highlighting the benefits that VCs can bring to startups and entrepreneurs, while also acknowledging the challenges and realities of the VC investing landscape.

The Industry's Evolution and Returns

Dunn argues that the venture capital industry is dying, with only the top 2% of firms driving 98% of the returns. While it is true that a handful of top-performing VCs have significant impact, the assertion about the 98% return figure is inaccurate.

• The data suggests that the top 2% of VCs account for a significantly lower percentage of industry returns.
• Early-stage investing consistently outperforms later-stage investing, as evidenced by data from Cambridge Associates.
• While some funds generate exceptional returns from a handful of successful companies, investing in VCs involves diversification, similar to entrepreneurs investing in a portfolio of startups.
• VCs need to consistently outperform alternative asset classes, taking into account the higher risk and illiquidity of their investments.
• The industry is constantly evolving with new players emerging, highlighting that yesterday's success doesn't guarantee future dominance.

The Role of VCs in Company Growth and Success

Dunn's criticism extends to the involvement of VCs in companies, suggesting that they only focus on deal sourcing and not on helping entrepreneurs. However, many successful companies benefited from active VC involvement.

• Facebook: VCs played a crucial role in persuading Sheryl Sandberg to join the company.
• Google: VCs were instrumental in hiring Eric Schmidt and guiding the company towards a sustainable advertising model.
• Twitter: The placement of Dick Costolo as CEO was a significant factor in Twitter's long-term success, with significant VC involvement.
• Amazon: Jeff Bezos, a renowned tech leader, acknowledged receiving VC coaching in the early years of Amazon.
• Tumblr: VCs like Bijan Sabet, Fred Wilson, and Albert Wenger acted as mentors to David Karp.

The author argues that successful VCs contribute to the fabric of their success by backing the best entrepreneurs and actively assisting them in leveraging their businesses.

Navigating the Challenges of Decision-Making and Investment

The article acknowledges the challenges entrepreneurs face with VC decision-making processes.

• VCs often take time to make decisions, which can be frustrating for entrepreneurs seeking quick funding.
• The author emphasizes the importance of understanding the entrepreneur through numerous interactions before making an investment.
• VCs often receive hundreds of pitches but invest in only a handful, leading to a limited number of board seats they can effectively manage.
• A successful investment is often a combination of good timing, market trends, and the entrepreneur's ability to execute.
• The author advises caution to entrepreneurs feeling pressured to rush into deals, as seemingly great companies may not always succeed, and unexpected companies can become big winners.

The Value of VC Mentorship and Involvement

Dunn criticizes VCs for not being involved with companies after investing. The author counters this by stating that the best VCs actively engage with their entrepreneurs.

• VCs provide a valuable sparring partner, challenging the entrepreneur's perspective and offering different viewpoints.
• Entrepreneurs benefit from the expertise and connections of VCs, particularly in the early stages of a company's development.
• VCs can help navigate acquisitions and connect startups with potential buyers.
• VCs are not just investors but also mentors, providing guidance, advice, and support to entrepreneurs.
• The author emphasizes the importance of VCs understanding the products and markets of the companies they invest in.

The Realities of Timing and Success

The article addresses the issue of punctuality and expectations of entrepreneurs.

• While acknowledging that being late is disrespectful, the author shares his own struggle with punctuality, attributing it to personality traits rather than a power play.
• He encourages entrepreneurs to be understanding of the time constraints and schedules of VCs and other professionals.
• The author stresses the importance of allocating the agreed-upon time for meetings, regardless of any delays.
• He highlights that the most successful companies often take time to reach their full potential, making early-stage investments a long-term commitment.

Conclusion

The article concludes by emphasizing the importance of understanding the realities of the VC industry and the role of VCs in supporting entrepreneurs.

• The author draws a parallel between the challenges of being an entrepreneur and a VC, highlighting that both roles require hard work, dedication, and commitment.
• The article acknowledges the frustrations entrepreneurs face with VCs but argues that both parties are essential to the success of startups.
• The author encourages empathy and understanding between entrepreneurs and VCs, recognizing that neither side is inherently evil.