The problem Marc has is that he is in a position to better understand a VC issue, but then has less credibility if reporting on it comes from him.
This is true in many other situations as well, and indeed I personally have been in the same situation. Often the nuances of some business are best understood by those competing for that business. And let's be honest, for most of us the nuances of the VC world are poorly understood outside of actual VC companies. Sure, the basics are understood, but as with any business the specialists know more than the generalist.
So let's hypothesize that Marc understands this nuance, and wants to alert people to the issue. Clearly the warning benefits him at the same time as benefiting those being warned. Does he then speak out, or keep quiet?
To frame the question in a general sense, in situations where you have a credibility problem, do you go ahead anyway, or keep quiet and let others take the fall? What would you do? As far as i can tell it's a no-win situation.
I was in a similar position last year, and chose to write the warning anyway. I disclosed the conflict of interest - even though, like in this case the connection was obvious. To those being warned. Predictably I got a fair bit of negative response, but I like to think, if nothing else, it helped people at least take a bit more time to evaluate the situation.(I got some positive responses as well.)
So hats off to Marc. He'll get pilloried here, and elsewhere, but maybe one day if I go looking for VC funding, this is one more tidbit of knowledge that I'll have, which I probably wouldn't get anywhere else unless I learned it the hard way.
Full disclosure: I have no connection to Marc or any other VC. I don't know what his motive is, suffice to say that it could be either, and assuming the worst is not necessarily valid.
Well said. More generally, it is often difficult to disentangle someone's motives & beliefs (and therefore the things they say) from their occupation. After all, the more deeply you believe in something, the more likely it is you will try to make it happen, the limit of which is making it your primary career.
Suppose someone working at a travel website writes a post about the problems with the existing travel industry. A large percentage of commenters will then pipe in with, "of course she'd say that, she works at a rival firm!"
But is that the causation? Suppose an "independent" person writes the same blog post. The reactions to the blogpost would have been different in that case, even if that person later goes on to start a travel firm.
In other words, is the causation:
1. start/work at travel firm -> try to encourage people to switch to them -> write blog post
2. dissatisfaction with travel firms -> write blog post -> decide to start competitor
(And of course there are many other possible causation chains.)
Yet most commenters seem to assume that (1) is not only the most likely option, but often the only possible explanation.
The problem is that the two possible causations can and very often are intertwined.
If you personally profit from something, then it becomes very hard not to fall victim to massive confirmation bias, where you want something to be true, and any evidence that supports it is viewed favorably while anything to the contrary is held to impossible standards.
Let's be clear here. He's not saying "do this, it's in your benefit." That would be cause for skepticism because Mark is a VC in competition with other VCs. What he's saying here is that some firms engage in a particular type of unethical behavior. This is reporting on an industry trend. It's even a falsifiable claim despite the fact that we are tremendously unlikely to have access to the information that would confirm or refute his claims.
There's always going to be a battle between VC money/specialists and Much-much-bigger money/generalists (ala hedge funds, asset managers, private arms of big banks or corporations). Some of these 'big money' folks actually don't need as high IRR as a VC, or can pitch to their own management the type of synergies or 'track record' they are building by paying a premium now.
Marc's "heads up and watch out" falls short in one key respect: it doesn't give any color. It doesn't let the newbie startup CEO understand what bed he might actually get stuck with before it's too late. It doesn't provide any detail about what to really look for or the types of terms and conditions that get discussed 'in more detail' when the offer and final paperwork start getting hashed out.
And from that perspective, it is a bit of a disservice to a newbie because if such a CEO starts to immediately take Marc's words at full value (and it's hard not to, given the legend that he is), that creates a negative bias and an air of skepticism if that newbie CEO is approached in the future by big money and overly large valuations.....
and that, would be a clear negative to the startups, and a clear positive to the VCs.
We're not talking about newbie CEOs here. The big-money "outsiders" are not coming in and wooing inexperienced entrepreneurs so that they can invest in their seed or Series A rounds. We're talking about CEOs of growth-stage companies. These are folks who, even if they're relatively young, have been running their companies for years and have the counsel of experienced advisers. The notion that they're haphazardly and naively choosing to negotiate exclusively with a single investor is laughable.
Andreessen Horowitz's latest $1.5 billion fund is big by venture capital standards. You can't manage a fund of that size by doing tons of small deals. My read on Marc's comments is that he's very concerned about players with bigger money using their leverage to push firms like his out of the type of deals that his firm needs.
In essence, he sees that bigger capital has the potential to disrupt his business in big bank take little bank fashion. For anyone who doesn't know what big bank take little bank is, I'm sure you can find the definition on Rap Genius. The irony.
Well put. Also the advice he's offering doesn't even seem to be that self serving. The takeaway is be wary about getting to a point in a VC-deal where you have no leverage and the other party may still change the terms. That's good advice in general. And what Marc appears to be doing is making the public aware of a trend he has seen in the industry rather than offering tactical advice or opinions.
After all if what he's saying here is not true, then he is a liar and the investors he's talking about know it.
Comments
The problem Marc has is that he is in a position to better understand a VC issue, but then has less credibility if reporting on it comes from him.
This is true in many other situations as well, and indeed I personally have been in the same situation. Often the nuances of some business are best understood by those competing for that business. And let's be honest, for most of us the nuances of the VC world are poorly understood outside of actual VC companies. Sure, the basics are understood, but as with any business the specialists know more than the generalist.
So let's hypothesize that Marc understands this nuance, and wants to alert people to the issue. Clearly the warning benefits him at the same time as benefiting those being warned. Does he then speak out, or keep quiet?
To frame the question in a general sense, in situations where you have a credibility problem, do you go ahead anyway, or keep quiet and let others take the fall? What would you do? As far as i can tell it's a no-win situation.
I was in a similar position last year, and chose to write the warning anyway. I disclosed the conflict of interest - even though, like in this case the connection was obvious. To those being warned. Predictably I got a fair bit of negative response, but I like to think, if nothing else, it helped people at least take a bit more time to evaluate the situation.(I got some positive responses as well.)
So hats off to Marc. He'll get pilloried here, and elsewhere, but maybe one day if I go looking for VC funding, this is one more tidbit of knowledge that I'll have, which I probably wouldn't get anywhere else unless I learned it the hard way.
Full disclosure: I have no connection to Marc or any other VC. I don't know what his motive is, suffice to say that it could be either, and assuming the worst is not necessarily valid.
Well said. More generally, it is often difficult to disentangle someone's motives & beliefs (and therefore the things they say) from their occupation. After all, the more deeply you believe in something, the more likely it is you will try to make it happen, the limit of which is making it your primary career.
Suppose someone working at a travel website writes a post about the problems with the existing travel industry. A large percentage of commenters will then pipe in with, "of course she'd say that, she works at a rival firm!"
But is that the causation? Suppose an "independent" person writes the same blog post. The reactions to the blogpost would have been different in that case, even if that person later goes on to start a travel firm.
In other words, is the causation:
1. start/work at travel firm -> try to encourage people to switch to them -> write blog post
2. dissatisfaction with travel firms -> write blog post -> decide to start competitor
(And of course there are many other possible causation chains.)
Yet most commenters seem to assume that (1) is not only the most likely option, but often the only possible explanation.
The problem is that the two possible causations can and very often are intertwined.
If you personally profit from something, then it becomes very hard not to fall victim to massive confirmation bias, where you want something to be true, and any evidence that supports it is viewed favorably while anything to the contrary is held to impossible standards.
The easiest person for you to fool is yourself.
Let's be clear here. He's not saying "do this, it's in your benefit." That would be cause for skepticism because Mark is a VC in competition with other VCs. What he's saying here is that some firms engage in a particular type of unethical behavior. This is reporting on an industry trend. It's even a falsifiable claim despite the fact that we are tremendously unlikely to have access to the information that would confirm or refute his claims.
There's always going to be a battle between VC money/specialists and Much-much-bigger money/generalists (ala hedge funds, asset managers, private arms of big banks or corporations). Some of these 'big money' folks actually don't need as high IRR as a VC, or can pitch to their own management the type of synergies or 'track record' they are building by paying a premium now.
Marc's "heads up and watch out" falls short in one key respect: it doesn't give any color. It doesn't let the newbie startup CEO understand what bed he might actually get stuck with before it's too late. It doesn't provide any detail about what to really look for or the types of terms and conditions that get discussed 'in more detail' when the offer and final paperwork start getting hashed out.
And from that perspective, it is a bit of a disservice to a newbie because if such a CEO starts to immediately take Marc's words at full value (and it's hard not to, given the legend that he is), that creates a negative bias and an air of skepticism if that newbie CEO is approached in the future by big money and overly large valuations.....
and that, would be a clear negative to the startups, and a clear positive to the VCs.
We're not talking about newbie CEOs here. The big-money "outsiders" are not coming in and wooing inexperienced entrepreneurs so that they can invest in their seed or Series A rounds. We're talking about CEOs of growth-stage companies. These are folks who, even if they're relatively young, have been running their companies for years and have the counsel of experienced advisers. The notion that they're haphazardly and naively choosing to negotiate exclusively with a single investor is laughable.
Andreessen Horowitz's latest $1.5 billion fund is big by venture capital standards. You can't manage a fund of that size by doing tons of small deals. My read on Marc's comments is that he's very concerned about players with bigger money using their leverage to push firms like his out of the type of deals that his firm needs.
In essence, he sees that bigger capital has the potential to disrupt his business in big bank take little bank fashion. For anyone who doesn't know what big bank take little bank is, I'm sure you can find the definition on Rap Genius. The irony.
Well put. Also the advice he's offering doesn't even seem to be that self serving. The takeaway is be wary about getting to a point in a VC-deal where you have no leverage and the other party may still change the terms. That's good advice in general. And what Marc appears to be doing is making the public aware of a trend he has seen in the industry rather than offering tactical advice or opinions.
After all if what he's saying here is not true, then he is a liar and the investors he's talking about know it.