VCs want to blow you up, in one sense of the phrase or the other

By October 16, 2015Venture Capital

I love this from Paul Graham:

Plus founders who’ve just raised money are often encouraged to overhire by the VCs who funded them. Kill-or-cure strategies are optimal for VCs because they’re protected by the portfolio effect. VCs want to blow you up, in one sense of the phrase or the other. But as a founder your incentives are different. You want above all to survive.

Emphasis mine.

I’ve written ad nauseum about the dangers of raising too much money and premature scaling but I’m doing it again because it’s so common. It’s important also to recognise the misalignment between founder and VC interests. It’s tragic when good companies blow up in a bad way due to investor pressure, although at the end of the day the buck stops with the CEO.

  • Andrew Hall (sumdog)

    Paul Graham also says:

    “[3] I would not be surprised if VCs’ tendency to push founders to overhire is not even in their own interest. They don’t know how many of the companies that get killed by overspending might have done well if they’d survived. My guess is a significant number.”

    Is it possible that VCs are so focused on the next Airbnb that they’re missing a whole category of opportunities that do not grow as fast but have a proportionally higher probability of success, and hence are actually more valuable?

  • Regarding “opportunities that do not grow as fast”. If an investor push capital to a team that tries to tackle a big market, I would probably find 4 main reasons why growth might be slow:
    #1 Founders focus on the wrong things:
    – excesive product development(if the product is awesome, users will come)
    – slow growth channels
    #2 Low/moderate hiring expectations and lack of procedures.
    #3 They got to late to the party or fail to diferentiate.
    #4 The market is not yet prepared for your product.

    #1 and #2 can be fixed pretty fast but, in real life, things might get complicated 🙂

  • Andrew Hall (sumdog)

    On point #1, in some markets I believe that there is not a simple elegant solution (like Airbnb) that just wows the market instantly. An extreme example of this is voice recognition – this is only just becoming good enough to be useful, however will no doubt be ultimately be very profitable for Microsoft and Google.

    Many entrepreneurs will under-estimate the cost of product development. However, they may still be onto something big and simply need an extended runway to demonstrate this.