I asked some investor friends to share, as the title suggests, one thing they wished people better understood about venture capital. There were no ground rules other than to specify that ‘people’ could be founders, politicians, LPs, etc and that it would be default attributed but anonymous if they desired. Reporting out in batches of five. Here’s Part III:

The term “VC” is a convenient, encompassing term, but it is an ambiguous categorization. For better or worse, “VC” is a disorganized, unruly, messy set of people and firms whose emergent behavior about important things does not converge. When folks want to vent/disparage VC they should feel free to use the ambiguous category. When people want to better understand it to raise capital from folks who can help, they are best served accepting the annoying bespoke/boutique nature of it and handling it accordingly. [Anonymous/Large Multistage VC]

[Hunter: I don’t believe this was specifically what they were referring to but I’ve noticed VCs hate when the press says/implies “all VCs” and press hates it when VCs say/imply “all reporters” ¯\_(ツ)_/¯ ]

I wish more people understood that VC’s have investors too. Called “LPs” or Limited Partners. The VCs will invest on behalf of a group including individual investors, endowments (like universities), financial institutions (like Banks) or Non-Profits. With a few legendary exceptions (like Hunter and Satya) most VCs haven’t had the personal success to deploy millions into startups. They have to fundraise just like startup founders. In exchange for managing LP money, a VC firm will get up to 20% of the amount raised as a management fee (even if every startup they fund fails) and on top of that, will earn 20% of any profits. For example, if a VC fund has $100M dollars under management, the firm is getting paid 20M over the course of 10 years just for setting it up.

You must follow the money to understand incentives! VCs are investing other people’s money – employed by a firm, taking a salary…working a JOB. They usually don’t have the same risk tolerance as a founder. A VC firm’s fiduciary responsibility is to their LP. When you read a thought leadership blog post from a VC – is it actually advice for founders… or is it to establish expertise so LPs keep giving them more money? Founders should not put VCs on an unnecessary pedestal! If you are relying on a VC’s insights to build your startup, you are playing with fire. Don’t take their advice too seriously, and don’t take it personally if they don’t invest in you – there’s an unseen set of stakeholders at play. All money is green. [Maya Bakhai/Spice Capital]

[Hunter: Incentives make the world go round! Sometimes folks will say VCs’ true customers are LPs, not founders. I’ve always thought about it a bit differently: LPs are my partners, not my customers. I wouldn’t be in business without them (historically) and value their needs, but I have the agency to run my business the way I want to, and work in service of our investments.]

So much has been written about venture-backed startups and particularly about the most successful outliers. Yet despite our collective fascination with those awe-inspiring stories, it’s still under-appreciated to what extent power law governs venture capital. It’s not always intuitive, but a small number of companies, led by exceptional entrepreneurs, determine the financial performance of the entire industry. Finding and investing in those select few is an obsession and ultimately a craft in its own right. [Paris Heymann/Index Ventures]

[Hunter: I think there was some data which showed that every fund they tracked which hit 3x net returns had at least one 20x outcome. As Paris suggests, slugging percentage tops batting average.]

I wish more founders understood that the power law and power law style growth drives all behavior from VCs. Accordingly, if you’re building a venture backed startup and/or want to raise venture funding in the future, you have to architect your company for a growth rate consistent with a power-law style business in mind. Of course, foundationally strong unit economics are critically important for a business to be durable, but growth and ability to paint a larger-than-life future for the startup lead to more excitement from VCs than every other factor. 

As an extension to this, I’d urge all founders to read Paul Graham’s post: Startups = Growth. To quote PG from his famous post: “If you want to understand startups, understand growth. Growth drives everything in this world.” [Nakul Mandan/Audacious Ventures]

[Hunter: I put this one next to Paris’ because they’re so similar. Founders who take traditional venture capital should assume their goal and expectations are these sorts of outcomes. At the same time, venture investors need a degree of patience and conviction to support companies as they figure themselves out, and the grace to be constructive even when it doesn’t seem a specific investment will achieve outlier results.]

That the act of investing — esp. if building a firm vs. a GP in established platform — is often a very small % of how a VC spends their time. 

Raising capital, recruiting talent to the firm, managing people, investing time + resources into brand-building (still the single most important moat in venture), etc. — all take place *in addition to* partnering with and supporting founders. 

Necessary to understand the firm and who they want to be — that will dictate how they spend their time. [Eric Tarczynski/Contrary]

[Hunter: One of the reasons we never wanted to grow Homebrew very large -and- in 2022 declined to raise a traditional next fund (investing our own capital instead), is that our goal is to spend as much time as possible with founders we’ve backed and founders we might back. Plus time togerther as a partnership working on getting better, not just operational overhead. These choices come with different tradeoffs but they’re our north star. ]

Part I: Andre Charoo, Bill Clerico, Ryan Hoover, Amy Saper, and Dan Teran.

Part II: Victor Echevarria, Chris Neumann, Micah Rosenbloom, Alexa von Tobel and Roseanne Wincek.

Part IV coming soon….