It was another beautiful day yesterday. Part of it for me was spent in Cambridge re-connecting over coffee with a rock-star entrepreneur. There we were, sitting outside and riffing about some fun topics.
I like meeting with him because he is insanely sharp and speaks his mind. He stopped me in my tracks when he said, “It’s inevitable that VCs become arrogant.”
This person is incredibly smart. In fact, two people who know him well referred me to him years ago as someone I should get to know. He was at a start-up for a long time, rising to a senior level, and which then sold for over $1 billion. Some of his friends have entered the VC business. He knows a lot of the older VCs personally. So, his opinion is informed.
Now, I’ve been in the VC business since 1998, and I agree with him that quite a few VCs are arrogant (most are not arrogant IMO). But, he is the first person to say that the job of a VC naturally makes you arrogant. So, his 2 cents: VC arrogance is made and not born.
Here is his logic:
- VCs run in tight circles that are reinforcing. They move out to the suburbs, they buy expensive houses, they spend lavishly on vacations, etc. In other words, he says they “form to the norm.” It’s not that they’re bad people, but their view on life becomes narrower and narrower over time. Gradually, they lose touch with the real world.
- Being in the business of saying “no” forces short-term thinking. VCs see more investment ideas than they possibly can handle. So, for that coveted investment spot, they will wait for “traction” as opposed to going for the really big home run idea.
- Many entrepreneurs call on VCs, and the VCs incorrectly ascribe this popularity to their personal traits. He says that VCs get called on because they have money people need. People are spending time with VCs not because they’re witty, good looking and charismatic. Those are bonus items.
- The management fee structure, particularly at the big funds, ensures huge salaries regardless of performance. As I’ve written before, VCs get paid a fee as an asset manager (more here). This person’s argument is that big (and stacked) funds lead to big fees that lead to a sheltered life and lifestyle.
I could go on, but I think you get the idea.
His observations I think are spot on, and I’m still mulling over them. It was a very worthwhile meeting with him, in more ways than he can possibly imagine.
Some of my reactions:
- How does a firm proactively create a company culture and navigate it over time? IMO, a VC is in a service provider business, and his customer is the entrepreneur. It would be awful if a VC becomes arrogant and alienates customers. A VC basically then shoots himself in the foot over time.
- How does a VC firm handle success? I remember in 1998 and 1999, during the Web 1.0 Bubble, how so many lives changed among both entrepreneurs and VCs. My partner Eric Hjerpe has commented that a surging stock price at Siebel Systems, where he was a senior executive, led to a lot of divorces. I had assumed it would be the opposite, as financial freedom and flexibility made people happier. He said it wasn’t always the case.
- How does a VC avoid arrogance as he gets busier? Nearly all experienced VCs are very busy. Some are over-extended: more funds have led to more investments and more board seats per VC, but the “rate of exit” for start-ups is well below the “rate of investment.” So, there’s an early-stage indigestion problem (more on that here). Being this busy means the VC has an incentive to rush meetings or not promptly make decisions on investment proposals. This can lead to a reputation for arrogance. The arrogance is usually un-intentional, but the entrepreneur perceives it nonetheless. “I met with the VC and I cannot get him to say yes or no on an investment” is a common statement from entrepreneurs.
- How do I as a parent make sure my children have a work ethic? As many of you know, I’m an immigrant. I spent 7 years in a rough part of Brooklyn after we moved here with $1,500 and a few suitcases. My wife and I live in a nice town and our children are at great schools. Now, we live modestly relative to other VCs (we don’t want or have a summer house, we live in the same house we bought when I was an Associate at a VC firm, we give to charities anonymously and avoid the charitable events that are really “hot,” etc.), but it’s still a very privileged lifestyle nonetheless.
- When have I been arrogant to entrepreneurs and my family? I started counting up the times. Too many too count. I’m embarrassed now as I look back at those moments and resolve to do better.
Lots to think about this early Friday morning.