The VC's paradox: We can't all be black swans
In the past 30 days I’ve had sad and unfortunate conversations with around five entrepreneurs about the reality that their venture funded companies are headed toward their eventual end. Some are indignant. Some are accepting. Others are openly sad. All of them have lost the passion that they once carried in their voices that I had admired just a few years ago. But if you looked in their eyes, the twinkle remains. “I’ll be back,” they all said to me without fail.
I have yet to find the investor that is either comfortable or empowering. I build products, markets, and companies. You might think I’m talking about MuckerLab, but really I’m just talking about myself, my career, my love. For my entire life never once did I make a career decision simply based on some calculated odds of success. It seemed cold, robotic, mercenary...inhuman.
Perhaps that is dumb and naïve, but I doubt Steve Jobs ever thought that hard about the probability of turning around Apple, or that FDR thought about the probability of winning WWII. Men who achieve great things (perhaps different from great men), believed in more than math -- they believed in their passion, their destiny, and their moral obligation to strive for the impossible. Without these men, who didn’t believe in just the odds, where would all of us be? What would our lives and the human condition be? In fact, beating the seemingly impossible is the only reason we are all here. (Whether you believe in Darwin, God, or both.)
So here is the conundrum and paradox. While entrepreneurs are by definition foolhardy men and women who defy the impossible to chase their dreams, the investors who back them seem to be obsessed with weighing the odds rather than bending the odds.
They (we?) think about how to mathematically optimize their portfolio size and diversification for returns in terms of chasing for the mythical billion dollar home run (also known as the black swan ) because given their hundreds million dollar funds, these rare animals are really the only thing that drive an impactful financial outcome. (which help pay for their Maseratis). They carefully “prune” their portfolios to double down on black swans and put to bed both failed companies as well as ones that they believe will never “turn” black. Fundamentally, failed ideas deserve to fail – it's Darwinism – but putting to bed “healthy white swans” seems like a cruel and disrespectful act.
Are investors supposed to treat entrepreneurs as just numbers, a series of bets, a stack of chips on the roulette table? Doesn’t every entrepreneur’s dream deserve the chance to be fulfilled? While some venture capitalists get rich on their management fees, entrepreneurs are asked (and gladly volunteer) to empty college savings accounts, give up the most lucrative portion of their careers, live off ramen, and bet it all on black. There is no portfolio. There is no turning back. There is no alternative outcome. It's a game where the heroes are asked to kill King Wart with just three lives while everyone else gets to hit reset over and over again.
But venture capitalists have to answer to their investors as well – and the only outcome these investors care about are financially driven. This is a business after all. So where is the middle ground?
We all fall in love – at the wrong time, to the wrong person, in the wrong circumstances. Sometimes a choice was made for us rather than by us. And regret could be 5 to 10 years of our lives lost. Or even worse, a walk down any one way road toward an endless horizon. Ending up with an investors can be scarily similar.
I try telling entrepreneurs in my unguarded moments to find venture capitalists that care about the same outcome as they do. If they will never settle for anything less than $1 billion, then find guys that are aiming for the home run. If a nice fishing boat will do, don’t hook up with gals that plan to upgrade their yachts.
Entrepreneurs need to surround themselves with people that respect their dreams with no judgment on the grandness of their ambitions (financially, socially, and emotionally). It is easier said than done -- because there is no level playing field. Venture capitalists drive better cars, have more zeros in their bank accounts, and (I’m sorry) generally behave like rich douche bags more often than not. Because the venture capitalist survival math favor those who calculate the odds, have a portfolio, and prune companies ruthlessly. Most first-time entrepreneurs will never have the leverage to find someone that respect their aspirations and dreams beyond the financial returns that it represent.
Lots of people talk about how the venture industry is broken from the financial returns perspective. I think it is broken for the people that matters the most – the entrepreneurs who empty college savings accounts, give up the most lucrative portion of their careers, live off ramen, and bet it all on black. Unfortunately we can’t all be black swans.
[This post was originally published on the MuckerLab blog, and was republished with permission of the author.]