At the risk of sounding like a jerk, it's ironic that VCs have hugely difficult time of picking winning teams. One wonders who the losers are here: the entrepreneur who can't pitch a VC, or the VC who picks teams based on guessing how well they can perform and only hits one in ten.
I wonder if this is due to the friendly doctor effect? That's where one doctor is kind and takes her time asking you questions. The other doctor is gruff and terse. Studies show that patients naturally judge the quality of the doctor by their personal perceptions of how kind they are -- which is the only thing they have to go on. i.e. in a brief presentation and interaction with a team, only superficial qualities at best are going to be demonstrated.
"One wonders who the losers are here: the entrepreneur who can't pitch a VC, or the VC who picks teams based on guessing how well they can perform and only hits one in ten."
Huh. As an exercise, take the next batch of YC companies and try a ghost portfolio. See if you can pick the ones that will provide enough of a venture return in 7 years to pay for the losers PLUS 7 years of salaries for everyone at a small VC firm.
I've never done it. But these guys are trying to effectively predict what markets are going to do AND how they team is going to work together in 5+ years. AND they have to hope that nothing catastrophic happens to the business in 5-7 years (key founder falls ill, has a bad divorce, etc) -- startups are fragile.
You don't sound like a jerk. You sound like the guy on the couch yelling at the football coach on TV: "How hard can it be to call the right plays?"
I know it's hard, almost impossible to find good teams.
My question is: how much stock are you going to put into a general feeling you have about character based on a few short interactions? Is "gut feel" that reliable? Or should you use some other criteria.
Lord knows it's tough. That's why your general feeling about the team probably isn't such a good thing to go on, right?
Ah! I think a better way to describe VCs focus on teams is this: "A great team is a necessary but not sufficient ingredient for us to be willing to invest." The thing the OP is saying that the team is usually the first/most obvious problem with the startup. It takes about 10 minutes to get a sense that a team sucks (bad salespeople, abrasive, confused, misguided, insane-- whatever), while due diligence on a product/market can be a pretty big task.
Most investors judge the whole package (market, timing, traction, product, team).
Whether general feeling of team quality is a measure of anything useful is an interesting question. Most of these guys have pretty endless deal flow. Like a company that has way too many applicants for way too few job openings, they look for early ways to thin the herd.
Being able to accurately get a feel for people and their character is a skill. From what I'm told, after a while, a few short interactions can tell you a lot. Apparently Jessica Livingston is extremely good at it. Women in general tend to be pretty perceptive, but I also know some men who are truly great at reading people.
I think there's no doubt that VC's will have an inherent bias towards people of similar backgrounds to themselves. Which I think is the biggest problem they have. Sometimes a complete outsider or wacko is what's called for. My favorite example of this is "Moneyball" - there was the conventional wisdom in baseball that was never really examined - it took a complete outsider (Billy Beane and/or Bill James) to really rethink it.
I think that is an oversimplification. Everyone has biases, some people may actually feel more comfortable with a gruff no nonsense doctor.
It is a VC's job to assess whether they want to work with a team. In the end the VC has to work with you and that one in ten hit is supposed to bring in a high return to make up for the the nine loses. If the VC is getting the return and enjoying working with everyone, even the people who fail in the end, then it's still a favourable situation.
This fits with other advice I've heard: investors invest in teams, not ideas. To raise money, you need a kickass team.
In practice, we also found that mention of the "core team" came back again and again in our fundraising discussions (though they weren't with VCs).
What would be very interesting is to know what are the key indicators that VCs look for. If, for example, they look at things like degrees or "demonstrated industry experience", as someone mentioned on #startups, then I would think there's a huge opportunity for someone with good hacker recognition skills to bypass them and get to all the good deals that no other VCs want to touch. Thoughts?
I think that it's very very hard to predict which team is the best to pull off the creation of a hugely successful company.
Bill Gates and Steve Jobs would initially have failed all tests, having no experience and no prior successes to lean on. Ars Technica is (at least according to Philip Greenspun) a great example of how a supposedly excellent and experienced outside CEO manages to run a company into the ground.
It's interesting to note that you can get a good idea of the market, the idea, and the founders ability to pull it off technically: Are they good hackers or not, do they have a working prototype, etc. But you can't really test whether they'll be able to grow the company to a multimillion dollar business. The pallette of succesful founders of software companies seems to be incredibly varied, from the arrogant but stylish Larry Ellison, over the nerdy and introvert Bill Gates to the frat boy that is Kevin Rose. I don't see many correlations that would be obvious, or even detectable, at an early stege in their careers.
Maybe what makes a company rise to the very top isn't the leadership but external factors. Luck basiccally. Surely a company needs good leadership, but beyond a certain baseline it probably isn't the defining factor of ultimate success. The best VC's can do is to weed out the people that are obviously unqualified to run a company, they obviously can't accurately pick the ones that will win the lottery.
Bill Gates and Steve Jobs both had experience and prior (minor) successes. Bill Gates had rigged - excuse me, programmed ;-) - the course scheduling program at his prep school to seat him next to all the pretty girls, and had done decently as a consultant doing traffic-light control software. Steve Jobs had a prior profitable business with Steve Wozniak selling blue boxes.
The thing is, many readers of this site have had successes of similar magnitude. And very few, probably none, will ever create something like Microsoft or Apple. So a VC might see someone who created a bunch of websites, some even mildly successful - but lots of people created a bunch of websites, and the vast majority of those won't grow into a billion dollar business.
"Bill Gates had rigged - excuse me, programmed ;-) - the course scheduling program at his prep school to seat him next to all the pretty girls, and had done decently as a consultant doing traffic-light control software. Steve Jobs had a prior profitable business with Steve Wozniak selling blue boxes."
Notably, only one of those things (traffic-light-control software) is considered a socially acceptable use of one's talents, though rigging the course scheduling program is more of a prank than a crime.
It was "Ars Digita." And Kevin Rose doesn't really fit there, at least until there's an exit. And probably not even then (the others were CEOs, Kevin is not).
This article finally discloses the elephant in the room.
It's so true that very often, the VC just doesn't like you. But they can't tell you that. So you get frustrated...
I am realistic: for every entrepreneur who dreams of funding, how many really should get it? I have seen good friends pitch lousy plans. But for some, although they are friends, I just don't see them as successful CEOs. But who am I to tell them to stop dreaming?
Plus beauty is in the eye of the beholder. So you never know.
It's quite normal to have people not believing in you or your idea. Jeff Bezos wasn't able to pitch the online book store, google was turned down by yahoo and for me more tangible, my professor Goetz Werner, was turned down by his former boss and consequently started his dm drugstore chain. It's now a multibillion dollar business for him. He has since then passed on daily operations and is now teaching entrepreneurship at our uni (Universitaet Karlsruhe, Germany).
Just like ideas, people evolve. The trick is to not feel too depressed about rejection. Practising helps :)
That's when you need to find someone like me - a serial startup CEO who is probably not as good at you as coming up with great business ideas, but is certainly better than you at pitching VCs - there was a post on HN recently about finding co-founders that might be helpful.
Its important to point out that this is not an overall judgment of the presenting team as people, only the VCs impression that they will be able to work with them. This does not often require more than a cursory interaction and the confidence to trust your opinions. I don't think the VC has any obligation to see past their own biases and plumb the depths of your personality. If they don't think they can work with you, thats for their purpose.
The reasons listed are "ability to market the product, produce the technology, manage/recruit a team, think strategically etc". It's good to see he didn't list crap like confidence, firm handshake etc.
I think it's valid to not fund teams/founders who don't have these skills. Going to a VC for money is basically a CEO interview; you've got to at least be able to talk the talk :).
But the article could have been more objectively titled instead of saying "You are the problem."
I hate reading about bullshit a VC might be thinking but not saying. Either it is generally true and VCs aren't honest, or it isn't and there is either a personal problem with the VC or founder writing the post.
I tend to think there are enough VCs that you can't generalize easily. Just the other day I made the mistake of generalizing VCs saying they suffered from short term expectations that hurt innovation. Then I recalled how biotech is funded.
I don't think this is really specific to VCs -- it's just usual social stuff. You don't tend to tell people you think they suck to their faces. I wouldn't call that dishonestly so much as, well, just normal human interaction. You wouldn't tell a job applicant, "Sorry, but we just don't think you're very good at what you do."
This is compounded by the relative oddity of the venture capital business. You're basically asking people you don't know to trust you to a pretty amazing extent and to drop more money on you than most people make in a decade or two. Imagine how jittery you'd be screening job applicants if you had to pay 20 years salary in advance. And imagine that there was also a steady stream of application coming for that same job -- so many in fact that you couldn't even really look at all of them. That's kind of the mental image I use for the VC evaluation process.
Edit: One amusing postscript to that -- the second job I interviewed for after college they didn't think I was good enough for. I didn't let it put me off too much and eventually became good friends with the guy that didn't hire me. I could easily have gotten that job later if I'd wanted it. I suspect it's not too different with VCs. A rejection isn't a rejection until the end of time; it's their snap assessment and they'll miss sometimes.
This is not a problem limited to entrepreneurs. It's an ego problem and entrepreneurs have a lot of ego -- they have to -- so I can see that it is a big problem for VC's.
Have you ever tried telling someone they are wrong? It's not easy. Most people don't like to be wrong. Most people don't like knowing there is something about their character or their outlook on life or their past or their perceived future that is going to stop them from achieving their goals.
It can be a dramatically "dejecting" feeling to be told no. That is painful enough. To be told no because, you're too arrogant, or your vision isn't big enough, or you are going to burn out, or your family problems are going to get in the way or you aren't smart enough...
These are painful things to hear. As a self-preserving individual, the natural response is to recoil, to lash out at the messenger. We do it because we have to believe we will be successful... without that hope, that faith in ourselves, we may give up.
Add to that, the issue of internal motivation and external motivation. Say for example, a perceived lack of internal motivation is all the reason the VC needs to say no. It takes a lot of internal motivation to see a company through and if a VC notices there isn't enough, that's also an indicator the entrepreneur is going to attack the VC for trying to help them understand the personal changes in their philosophy of the world that may be required to make the company succeed. The VC is an external factor. For the externally motivated, there is something wrong with the world -- in this case, that's the VC. It's very difficult for a person to even understand the concept of internal vs. external motivation, much less change it, so it's probably a waste of time to even mention it. It just won't do the entrepreneur any good.
I'm not pro at this by any stretch of the imagination, but I have conversations all the time with people who have some great idea or a patent on the way or something like that and they don't have the desire to understand that none of that stuff matters. It's a lot of work too and it takes a lot of reading and experience and research that person just hasn't done yet.
Sometimes in a situation like that, little clues and signs tell me, this just isn't going to work. Just from the little experience I have gotten from people as a software developer, it's kind of the same. They have this great idea to do blah blah blah and they don't even know that there are already 5 of those websites out there. Or you can tell just by the way they formulate sentences that they aren't going to "get it."
Sometimes you can tell they have been told in the past and they just refuse to believe it, so you don't bother telling them again. You can tell they are driven by the hope that one day it is going to succeed. For them it's about that idea succeeding rather than the company succeeding or they themselves succeeding. Sometimes you have to start over. If they have to start over -- in their mind -- they are a failure and who wants to be a failure?
That's hard news to hear and some people don't react so well to it. I would say the majority of people don't react well to it. Unfortunately for those few people who will react well to it, they get passed up. They don't get the good advice they need to improve and move beyond the problems because of the negativity received by all those who lashed out at the teacher in the past.
I suppose that's the issue, not everyone is a good teacher and even fewer are good students. If you are going to start a startup, especially your first startup, you are going to have to learn a lot and be taught a lot and not let your ego get in the way of your success. You gotta have ego, arrogance and all of that stuff but those things are tools just like any other part of human character and you have to know how to use them appropriately.
Sometimes knowing how to use a tool appropriately takes experience and training and some people believe that comes naturally. If it isn't, they are less than perfect or whatever.
Remember Kill Bill? If you haven't seen it and want to, then stop reading here, because I am going to spoil some of it for pedagogical purposes. Anyway, there's a part where the old guy took the student to the teacher in the mountains. That teacher knew the 5 step punch trick and Uma Thurman's character didn't like him at first, but she stuck it out and she learned a lot. She checked her ego at the door and because of that she learned some very valuable martial arts skills.
The other student with one eye, she wasn't such a good student. She had a lot of ego and was determined to "show up the teacher." She wanted to show that she was better than the teacher, rather than take the opportunity to learn from someone widely regarded as the best. All of us in the audience of course saw from the outside that she was only hurting herself, but would you be the one to tell her she was too arrogant to be the best herself? She'd probably kill you with one punch.
VCs seem to start with whether they like you and get swept up in your vision, and work backwards from there to come up with reasons why they should or shouldn't invest. The same probably goes for any supposedly rational decision founded on human interaction.
There have been a lot of stories saying the same thing recently, but it really just comes down to common sense - You're marketing your product, and yourself. It's human nature for an investor to put a lot of weight on how much they trust your abilities.
Because there is not nearly enough value there to make it worthwhile to "buy" something - you've probably heard again and again that the idea is relatively worthless, it is the execution that brings value.
VCs doing this could also get a bad rep - "Yeah, I pitched those guys - they offered me $50 if I'd give them the company and quit so their guys could run it" - not good for the deal flow the VCs need.
Just to make something clear here: the VCs are not the ones with the special stuff. The special stuff is the next Apple II, Tesla car or what have you.
Get real: how many people are there that wouldn't be "the problem" by these "measures"?
Justified or otherwise, this is simply descriptive. We've heard this before, and it didn't slow us down. On the contrary, it motivated me at least twice as much to prove them wrong.
This is why I think if you're a first-time founder it's best to not show up empty handed. The best way to convince an investor that you can pull something off is by already having measurable progress on the way to doing so.
It's true that investors aren't the say all and end all of technology. They're trying to catch the wave, not make it. But understanding how they think, if you're planning on dealing with them, is definitely a good thing.
I wonder if this is due to the friendly doctor effect? That's where one doctor is kind and takes her time asking you questions. The other doctor is gruff and terse. Studies show that patients naturally judge the quality of the doctor by their personal perceptions of how kind they are -- which is the only thing they have to go on. i.e. in a brief presentation and interaction with a team, only superficial qualities at best are going to be demonstrated.