Cause Or Effect?

In the wake of Erin Griffith’s piece in the NY Times suggesting that venture capital is toxic for some entrepreneurs, there has been a fair bit of debate about the causes of that situation.

Dan Primack tweeted this yesterday:

One thing that I think gets lost in the VC vs. non-VC discussion is that VCs don’t need a company to become a “unicorn.” At least not the early-stage VCs. They might want it, but unicorns weren’t really a thing until a few years back, and VCs “settled” for much shorter home runs

— Dan Primack (@danprimack) January 11, 2019

I pushed back on that notion in a series of tweets yesterday morning:

I think the truth is somewhere in between. Ownership levels have been coming down in VC over the last thirty years. When I got into VC in the mid 80s it was very typical for a VC to want 25% of the company. Then it became 20%. Then 15%. Now we ask ourselves if we can get to 10%

— Fred Wilson (@fredwilson) January 12, 2019

It is tempting to look at what is going on in the startup/tech landscape and say that the growing amount of capital under management is the problem.

But the capital market for startups is a complex system and I don’t think it is as simple as that.

It may well be that as entrepreneurs have had more negotiating leverage over the last twenty+ years, they have pushed valuations up significantly and the capital markets (ie VCs) have reacted to that by accumulating more capital so that they can try to buy the same amount of ownership at the higher prices.

That hasn’t really worked and the VC industry typically owns a lot less of a company at exit and the founders and team own a lot more versus 25 years ago. We have seen that clearly in our own portfolios over the last fifteen years and I would assume that is true across the industry.

So while it is tempting to suggest that big bad VCs are the reason for all the problems in the startup sector, I would caution everyone from coming to that conclusion. Like all relationships, it takes two to tango, and both sides have had something to do with where we are right now.