0/ VCs benefiting from offering bad advice to founders is such a tired canard. But it’s repeated enough that it’s worth addressing in some detail (a thread)
1/ VCs avoid investing in companies that don’t have potential for venture economics. We vet heavily for this. Founders' intentions is a huge part of the calculus. If there is early misalignment in vision and expectation, something went very wrong during the investment process.
2/ Different investors have vastly different risk tolerances and return expectations. There are many funds that invest in smaller TAMs or focus on efficiency over growth. It is incumbent on both sides prior to investment to ensure alignment.
3/ For the upside case, both founders and VCs are incented to aim for the highest expected value of the stock price that the company can reasonably execute towards. Most mid-stage VCs prefer predictable growth to very low-probability, high value outcomes.
4/ For the downside case, VCs work very hard to avoid bankruptcies. Not only are they costly, they consume tremendous firm resources, including GP time which is often the limiting resource. And they are reputationally damaging if mishandled.
5/ Unequivocally, VCs will vastly prefer a 1x return to a bankruptcy, and a 2-3x to a 1x. No rational investor would risk these outcomes on the chance of a better outcome where the expected value is lower (probability of outcome x value).
6/ This idea that VCs will push for growth at all costs is also untrue. Most experienced board members (VC or not) know that premature scaling can kill a company. In fact, VCs tend to be less optimistic than founders about PMF and often caution against GTM scaling.
7/ Of course, there is a large middle ground between the downside and optimal upside cases where the utility of an outcome differs between stakeholders. For example, $20m can change the life of a founder, yet isn’t a meaningful return for a fund.
8/ There are a lot of mechanisms for aligning investors and founders. Secondary is a very useful one (I sold secondary as a founder). And there is a lot of post investment flexibility on comp and common grants that aren’t afforded to investors.
9/ VCs are far from a unified class. And alignments change over time. For example, early stage investors are often more aligned with founders than they are with later stage investors.
10/ VCs or not, misalignment is common among stakeholders. It can exist between members of the founding team. I had it in my company which I co-founded as a poor grad student with a successful serial entrepreneur.
11/ Many founders prefer to take less money and retain more control. Investor guidance is tempered by this, as well as the cash position. A rational VC knows advice blinkered to these boundaries is ineffective and doesn’t benefit anyone.
12/ Yes, VCs give a ton of bad advice. Yes, there are many cautionary anecdotes of VC largess. But we also sit on a lot of boards, and across our portfolios have broad visibility across the industry. And there are good lessons to be drawn from that.
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