So, he thinks it's best for entrepreneurs to ramp up the volatility, because a 90% chance of failure with a 10% chance of $100M is the way to go. Advice from a guy with his own risk spread over a portfolio of such companies to a guy whose whole net worth is invested in one company that has a 90% chance of wipeout.
Hmm. Maybe there's something to that estimate he makes about how harmful VC advice tends to be.
Ironically, VCs prioritising "10% chance of $100M" as the way to go was exactly what I thought of when I saw the headline suggesting they actually tend to reduce the potential of the company
There's no shortage of perfectly viable $xx million businesses pushed into chasing an [ultimately optimistic] hypothesis there was a 10% chance of breakout success which, when the mass market turns out not to exist, leaves them with the potential to achieve nothing other than failure.
If life were only so simple, now it seems VCs are pushing founders to make the following bet: .1% chance of $5B+ and 99.9% chance of failure.
In short, lots of potential $100MM companies are being done in by VC greed.
This is only one data point, but I know an entrepreneur who was turned down by a blue chip VC because the VC said he saw a clear path for the biz to $100MM, but the path above that level was much murkier.
The Greenspun article on his experience with VCs back in 2001 is interesting if you're in to that stuff and have not read it http://waxy.org/random/arsdigita/
VCs have some sort of superstar economics going. The highest potentials hit the superstars VCs first, and get picked up. Second tier goes to second tier VCs and so on. The market sorts itself out.
So when a first tier VC disses lower tiers for 'not adding value', he is probably stating the truth, but sadly there is no alternative. The superstars can't scale up without lowering the bars somewhere, so they don't. The companies looking for VC can't be too picky since no capital is no chance of traction. So in the end, you'll settle for the capital you can get and take the reduced value as a given. Remember that the outside option (no VC) gives no value, and the negative value is relative.
His criticism isn't that 2nd tier VCs have lower returns. It seems to me your point would make sense if his criticism was of 2nd tier VCs for lower returns. Since that isn't a fair comparison if they don't get a shot at the best deals.
I think his criticism is pretty obviously that VC often don't add value (no matter what tier they are at). The things mentioned in the article seem be criticisms of business as usually (not of some performers getting lower rates of return).
It strikes me he realizes some VCs provide great help. And sure the cash is often helpful in growing though the growing quickly may well not really be good for the business when it distorts the companies focus to making huge financial bets to get huge returns.
@dhh provides lots of good criticism of VC funding, in my opinion. Watching his activity or going through his history would provide more details on the problems created by accepting VC funding. Of course, lots of people with lots of money don't see things the same way he does.
This dynamic will tend to make "superstar" VCs look as if they're better (relative to other VCs) than they actually are. (Because every startup will want to be funded by them, so they get to pick the most promising ones, and if VCs have any ability to distinguish good prospects from bad then the superstars will tend to get better results than their rivals who funded the startups rejected by the superstars.)
Wow, was surprised to find the beach comment on the top :-) Amongst people who know Vinod I have heard a common theme but he is included in the list of inhibiting potential for second guessing everything, and creating an unhealthy tension in the founding teams. But isn't that the way of things? VC's want their investment to thrive, and because they have money and you don't they will always assume they know how to make it thrive and you don't. The only difference is how much leeway they give you.
Why are you surprised? This issue is still outstanding, Vinod layers are still trying to block access to this public beach. Also it looks like he is violating the judge decision by "only opening the road sporadically".
What amazes me about VCs is how passive they are about the whole process. Why sit and wait for talent to come to you? Why not go out and hire the best people and then put them to work with adequate funding and see what they come up with? If every start-up ends up pivoting as soon as they get funding why not bypass the whole process and just put a great group of people together and let them come up with something fantastic.
The problem is in identifying the best people, especially when there might not be a strong correlation between things like academic performance or and entrepreneurial success.
It seems like screening for people who can build an MVP and a compelling pitch deck could be one of the best ways to do this.
I run an exponentially growing fully automated business that is limited by my available operating capital. If VCs are useless (or finding a good one is a lottery), what are the other reasonable ways to raise capital (that don't eat all the profits nor want to control everything)?
I would prefer Vinod's brutal honesty to fake politeness any time.
Assuming that your question is not rhetorical, there are multiple ways to address this cash flow problem. You can focus on collecting revenue faster, offering new customers less generous payment terms, demanding payment up front or in advance, taking out loans against your receivables, asking vendors to finance your spending, converting a portion of employee compensation to a profit share that is payed out on a later date, finding strategic partners to provide financing or resources, etc. I hope this is helpful. There are many possibilities, but none are necessarily better than selling equity.
Talk to a non-VC person with money to invest and who has shown that they are willing to take a risk. If what you have is real I am happy to talk to you about your business and if things stack up put my money where my mouth is.
Wealthy entrepreneurs or entrepreneurial/investor families (think family offices) can be good, if you want to raise third party capital. They usually take a longer term vision than a VC would, since they're basically one of the groups of people VCs raise from.
I'd prefer working with those over a VC any day of the week if possible. They're usually bring a lot more value to the table.
Say what you want about Vinod Khosla, but that doesn't make him wrong. Disproving what he said would make him wrong.
I'm not a fan of the man personally, but I think he's right--and it's not surprising. When you bring in a VC, you get a team which is personally, emotionally, and temporally invested in the project, and you bring in an outside person for whom this is only a small part of his larger financial investments and give him a significant amount of control. Of course taking away control of a project from the people who are most invested in its success is going to decrease its chances of success. I'm not sure why this would be a topic of debate.
Because it doesn't matter how personally, emotionally vested you are in a company if you don't understand how to run one, how to monetize, to find new customers, hire good managers and leaders, or a whole slew of other things which your team at a startup hasn't done before but a good investor knows how to advise on, or has connections with advisors who do. Success of a company is determined by a lot more than how invested your team is in the project.
I sense a strong dislike for Vinod Khosla the person himself in almost all the responses irrespective of his actions. Are a few incidents like the martin's beach and some statistics which he pulls without references the only reason for it. The responses to beach discussion and statistics themselves are very hostile like "If he dosen't like shelling out $500k for maintainence of a public property he should not have bought it" which I think is unfair and "my best dev is an english major" when he clearly meant that for Business consultants and Journalists etc. And can't one pull a number based on a lifetime of personal experience without backing it up with statistical data? Don't we all do that in everyday lives? Even when someone mentions having a good personal experience with him, it gets discounted.
I have never been to the valley. Genuinely interested in knowing what makes a person so universally hated on this fourm. Unless he is the Donald Trump of the Valley. In which case I understand.
one of my best devs was an english major. So ....I don't discount ANYONE for being an english major.
edit, another point: I wish there was more advice on how to separate good from bad advice based on more than what is described in the article text - english major, not having been a CEO etc.
I've noticed that some of the best devs come from the humanities, too. I think a lot of it has to do with a certain calm, centered approach to learning. If you watch a young CS major "learn" something, they approach it with a manic, wild-eyed approach where they try to do things as fast as possible because their time is so valuable, they don't read docs because they don't need them, and so on.
Confession: I approached Docker like a maniac before humbly working my way through the official Docker user guide slowly and methodically, without distractions, doing all the exercises (and taking notes with questions). When I look back, I've done this with Maven and git, too. In every case my frantic scramble up the learning curve left me with broken, incomplete and unreliable knowledge that had to be repaired later. Lesson learned!
Regardless of your attitudes towards VCs, purely from a statistical perspective this makes sense. If you consider only a small percentage of individuals are capable of running or leading a high-growth company to millions or billions of dollars of revenue, then for every VC you add to your board, you have a greater chance of adding someone who isn't capable of adding value. Say only 1 out of every 10 individuals are rockstars in the startup/investing world. Assuming you and your co-founder are those rock-stars, the other 3 people on your 5 person board are only going to drag you down ;-)
Most VCs could be safely ignored as toxic (if not useless) if they were restricted to investing their own money. The fact that they're allowed to gamble with retirement pension funds (which are sometimes insured by the state) is troublesome.
Sometimes you learn about a person implicitly more than his explicit intentional declarations. This is the same Vinod Koshla who seized a public beach, and a beautiful and rare one, to his own utility against the law. This says a lot about attitude to others, maybe in business too.
> Khosla bought the 53-acre property for $32.5 million in 2008 and kept the beach open to the public for two years despite the fact that he was paying $500,000 to $600,000 a year in maintenance costs and liability insurance.
> In 2010, after receiving county court orders -- which he believed were unfair -- to keep the beach access open 24/7 and charge visitors $2 for parking, Khosla ordered his property manager to close the gate permanently.
Seems like it's not so clear cut. I mean, he was eating 500-600k a year without complaint maintaining the property for the public. That's pretty generous. Seems it was a dispute over parking and fees...and considering how trivial $2 is compared to the 500k+ he was already paying it just feels like there's a bit more to this story than "Koshla is an evil 1%'r".
edit
So, it was exceptionally hard finding anything from Khosla himself on the issue. But I did find a few more details on why the beach was closed.
So, when he got the property he allowed the same access as the previous owners. Which was generally accessible during the day, but typically closed at night, during bad whether (often during winter), and when "inconvenient" which I assume is when property managers were on vacation or whatever. This level of access has been confirmed by the previous owners, the Deeney's, in their court testimony.
So, for some unknown reason, the county issued an order to the property manager for them to a) reduce parking fees to $2 (which is what they were in the 1970's) and b) to keep the gate open 24/7.
Khosla's managers/attorney's/whatever thought this was a significant historical change in access policy and so fought it, closing the property until the dispute was resolved.
and sometimes you learn about a person by working with them. Long ago, Vinod was an investor and director of two of my early companies. He was helpful, supportive, polite and wonderful.
The article also indicates he was paying a very large amount in liability taxes and maintaince for a road he possibly owned (it says $500k), and was only offered the ability to charge $2 for parking to offset that. Given, I'm not sure where the $500k comes from.
It also seems he was trying to restrict access to the road, not the beach.
Maybe he didn't own the road, but it seems you should be able to restrict access to a road you own, but that no one owns a beach, and it didn't actually say he restricted the beach.
Maybe that was the intent, but maybe it was due to problems with the cars parking along the road after leaving it open for two years.
I do believe most VCs can reduce the potential of the company when the founders have a cohesive vision for it already and know how to run it, and they do have an interest in saying they are better than the others :) So it is a lot about finding those that give good advice, but don't force it, and that's incredibly hard to judge in initial conversations with any of them.
I'd recommend talking to companies they are invested in and their fellow board members (i.e. the founders who created the tech) that work for companies they have invested in.
What I gather from that is that this guy does not know how to monetize a road and/or run a public beach.
Build something along side the road. Build a strip mall and rent bays to surf shops and restaurants. For the amount of money the article claimed he spent he could have afforded to build a hotel or resort.
[+] [-] SiVal|10 years ago|reply
Hmm. Maybe there's something to that estimate he makes about how harmful VC advice tends to be.
[+] [-] notahacker|10 years ago|reply
There's no shortage of perfectly viable $xx million businesses pushed into chasing an [ultimately optimistic] hypothesis there was a 10% chance of breakout success which, when the mass market turns out not to exist, leaves them with the potential to achieve nothing other than failure.
[+] [-] jgalt212|10 years ago|reply
In short, lots of potential $100MM companies are being done in by VC greed.
This is only one data point, but I know an entrepreneur who was turned down by a blue chip VC because the VC said he saw a clear path for the biz to $100MM, but the path above that level was much murkier.
[+] [-] danieltillett|10 years ago|reply
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] tim333|10 years ago|reply
[+] [-] coleslawfail|10 years ago|reply
It's amazing really how much this guy subs the press. He acts as the entrepreneur's friend when the truth in the Valley is the exact opposite.
Beware.
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] wjnc|10 years ago|reply
So when a first tier VC disses lower tiers for 'not adding value', he is probably stating the truth, but sadly there is no alternative. The superstars can't scale up without lowering the bars somewhere, so they don't. The companies looking for VC can't be too picky since no capital is no chance of traction. So in the end, you'll settle for the capital you can get and take the reduced value as a given. Remember that the outside option (no VC) gives no value, and the negative value is relative.
[+] [-] curiouscats|10 years ago|reply
I think his criticism is pretty obviously that VC often don't add value (no matter what tier they are at). The things mentioned in the article seem be criticisms of business as usually (not of some performers getting lower rates of return).
It strikes me he realizes some VCs provide great help. And sure the cash is often helpful in growing though the growing quickly may well not really be good for the business when it distorts the companies focus to making huge financial bets to get huge returns.
@dhh provides lots of good criticism of VC funding, in my opinion. Watching his activity or going through his history would provide more details on the problems created by accepting VC funding. Of course, lots of people with lots of money don't see things the same way he does.
[+] [-] gjm11|10 years ago|reply
[+] [-] mpdehaan2|10 years ago|reply
[+] [-] s73v3r|10 years ago|reply
[+] [-] ChuckMcM|10 years ago|reply
[+] [-] dchichkov|10 years ago|reply
http://martinsbeach.blogspot.com/search?updated-min=2015-01-...
If you feel that this is not how it should be: http://martinsbeach.blogspot.com/p/get-involved.html
[+] [-] danieltillett|10 years ago|reply
[+] [-] jonas21|10 years ago|reply
It seems like screening for people who can build an MVP and a compelling pitch deck could be one of the best ways to do this.
[+] [-] ido|10 years ago|reply
I worked in several companies bootstrapped by very wealthy founders.
[+] [-] malchow|10 years ago|reply
I know one who hosts his/her own 'career sessions' for selected Stanford students -- mostly to identify and build new teams after seeing interactions.
[+] [-] acabrahams|10 years ago|reply
[+] [-] bitL|10 years ago|reply
I would prefer Vinod's brutal honesty to fake politeness any time.
[+] [-] bmh100|10 years ago|reply
[+] [-] danieltillett|10 years ago|reply
[+] [-] charlesdm|10 years ago|reply
I'd prefer working with those over a VC any day of the week if possible. They're usually bring a lot more value to the table.
[+] [-] s73v3r|10 years ago|reply
[+] [-] copsarebastards|10 years ago|reply
I'm not a fan of the man personally, but I think he's right--and it's not surprising. When you bring in a VC, you get a team which is personally, emotionally, and temporally invested in the project, and you bring in an outside person for whom this is only a small part of his larger financial investments and give him a significant amount of control. Of course taking away control of a project from the people who are most invested in its success is going to decrease its chances of success. I'm not sure why this would be a topic of debate.
[+] [-] mirashii|10 years ago|reply
[+] [-] tlrobinson|10 years ago|reply
[+] [-] melvinmt|10 years ago|reply
[+] [-] rdrock|10 years ago|reply
I have never been to the valley. Genuinely interested in knowing what makes a person so universally hated on this fourm. Unless he is the Donald Trump of the Valley. In which case I understand.
[+] [-] coleslawfail|10 years ago|reply
Vinod Khosla: Be Wary of “Stupid Advice”
that's like saying:
Donald Trump: Be Wary of "Gold Diggers"
[+] [-] andyidsinga|10 years ago|reply
one of my best devs was an english major. So ....I don't discount ANYONE for being an english major.
edit, another point: I wish there was more advice on how to separate good from bad advice based on more than what is described in the article text - english major, not having been a CEO etc.
[+] [-] javajosh|10 years ago|reply
Confession: I approached Docker like a maniac before humbly working my way through the official Docker user guide slowly and methodically, without distractions, doing all the exercises (and taking notes with questions). When I look back, I've done this with Maven and git, too. In every case my frantic scramble up the learning curve left me with broken, incomplete and unreliable knowledge that had to be repaired later. Lesson learned!
[+] [-] bsbechtel|10 years ago|reply
[+] [-] Enzolangellotti|10 years ago|reply
Tell that to Jack Ma.
[+] [-] coolandsmartrr|10 years ago|reply
http://rickyreports.com/archives/kinoshitayoshihiko/
[+] [-] ksk|10 years ago|reply
[+] [-] taphangum|10 years ago|reply
[+] [-] DodgyEggplant|10 years ago|reply
http://www.huffingtonpost.com/2014/09/27/martins-beach-vinod...
[+] [-] jkyle|10 years ago|reply
> Khosla bought the 53-acre property for $32.5 million in 2008 and kept the beach open to the public for two years despite the fact that he was paying $500,000 to $600,000 a year in maintenance costs and liability insurance.
> In 2010, after receiving county court orders -- which he believed were unfair -- to keep the beach access open 24/7 and charge visitors $2 for parking, Khosla ordered his property manager to close the gate permanently.
Seems like it's not so clear cut. I mean, he was eating 500-600k a year without complaint maintaining the property for the public. That's pretty generous. Seems it was a dispute over parking and fees...and considering how trivial $2 is compared to the 500k+ he was already paying it just feels like there's a bit more to this story than "Koshla is an evil 1%'r".
edit
So, it was exceptionally hard finding anything from Khosla himself on the issue. But I did find a few more details on why the beach was closed.
So, when he got the property he allowed the same access as the previous owners. Which was generally accessible during the day, but typically closed at night, during bad whether (often during winter), and when "inconvenient" which I assume is when property managers were on vacation or whatever. This level of access has been confirmed by the previous owners, the Deeney's, in their court testimony.
So, for some unknown reason, the county issued an order to the property manager for them to a) reduce parking fees to $2 (which is what they were in the 1970's) and b) to keep the gate open 24/7.
Khosla's managers/attorney's/whatever thought this was a significant historical change in access policy and so fought it, closing the property until the dispute was resolved.
I got all this from the following article: http://www.mercurynews.com/san-mateo-county-times/ci_2616631...
[+] [-] quizotic|10 years ago|reply
[+] [-] mpdehaan2|10 years ago|reply
It also seems he was trying to restrict access to the road, not the beach.
Maybe he didn't own the road, but it seems you should be able to restrict access to a road you own, but that no one owns a beach, and it didn't actually say he restricted the beach.
Maybe that was the intent, but maybe it was due to problems with the cars parking along the road after leaving it open for two years.
I do believe most VCs can reduce the potential of the company when the founders have a cohesive vision for it already and know how to run it, and they do have an interest in saying they are better than the others :) So it is a lot about finding those that give good advice, but don't force it, and that's incredibly hard to judge in initial conversations with any of them.
I'd recommend talking to companies they are invested in and their fellow board members (i.e. the founders who created the tech) that work for companies they have invested in.
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] sqeaky|10 years ago|reply
Build something along side the road. Build a strip mall and rent bays to surf shops and restaurants. For the amount of money the article claimed he spent he could have afforded to build a hotel or resort.
[+] [-] api|10 years ago|reply
[+] [-] puppetmaster3|10 years ago|reply