Why I Don't Trust Most Venture Capitalists
I always recommend that entrepreneurs bootstrap their businesses until they have a demonstrable and reliable business model. Early in the life of a business, getting a loan from a traditional lender is unlikely because the business doesn’t have a proven track record of success and relying on venture capital is most often a waste of time. Additionally, in my experience, there is a whole host of reasons not to bring venture capitalists in as partners to your business. I don’t trust venture capitalists and I’ve shared a few of the reasons why below.
1. They don’t demonstrate a deep knowledge of running a business or specific industry.
In my experience, they tend to spout off platitudes and euphemisms. I have found many of my conversations with them to be reminiscent of business school, where generalities and non-specific knowledge reigned.
Entrepreneurs require deep, specific knowledge of a product or industry to be successful but most venture capitalists are MBAs with cursory knowledge of the subject matter at hand. They know enough to have something to say, but their knowledge is not deep enough to provide any meaningful guidance. The best ones (and there are definitely good ones out there) know when to listen and when to say something.
2. Few of them have ever developed a business from scratch.
They tend to gloss over this fact by telling people the boards on which they’ve served. But, when you drill down, few venture capitalists ever started a business themselves. I don’t know what it takes to run a medical practice, so I’m not on equal footing with its doctors. I imagine that the lead doctor at a practice probably has a medical degree. I am hopeful that a partner at a CPA firm is a CPA. Hopefully, an NFL coach has played football at one point in his life. I don’t find much value in people who tell other people how to run a business when they haven’t done it themselves.
3. I find that most venture capitalists are oriented toward trends and fads.
Artificial intelligence is popular now, therefore, I will invest in it. Crowdsourcing is a popular term and phenomenon, therefore, I will invest in it.
That thinking rubs me the wrong way for several reasons. Truly innovative business people (entrepreneurs) don't wake up in the morning to follow what everyone else is doing. More objectively, I’m not sure it’s a good investing practice to follow what’s popular at some point. By the time you get in, it’s probably too late.
Of course, this isn’t always true; the internet obviously wasn’t a fad. Crowdsourcing may not be a fad either. But I don’t think there’s as much diligence on the investing side as there probably should be, by people who ought to know better. I guess I also have a personal bias against a group of people who are just following one another around without being independent in their decision making.
There are obviously great venture capitalists, but I haven’t met many. When we were originally raising money, I met with about 20, and probably would have taken money from only a couple of them if we had decided to go that route.
My friend, Stan Pratt, a legend in the venture capital industry, counselled me a long time ago to be very careful with whom I partnered. I didn’t really understand the implication of this until years later, but Stan is definitely right in his advice: be careful what venture capital firm or people you are working with. Nothing is worse than trying to run your business and make good decisions and having a bunch of noise around you that just distracts you.