The ethics of VC — Thin- or thick-skinned? VCs respond to critics (#14)
In September, The Information ran an ‘Exclusive’ on Garry Tan’s rebuttals desperately fighting of his critics. The Y-Combinator CEO who cut staff and parts of the accelerator’s strategy (their growth fund), had to confront one critical piece after the other since he took the realm. Some journalists have been asking whether YC is still worth it for companies, a brutal critique given the decade-long dominance of the outfit in the accelerator space.
When I published my first piece in TechCrunch on VCs’ disinterest in anything impact and ‘good tech’ in 2020, I was confronted by a massive backlash from one VC’s PR firm. The TechCrunch team and I spent hours defending my specific claim and had to word-smith a single sentence that — in the PR’s team’s eyes — made the fund look bad. Unfortunately, we ended up caving and almost completely changed the meaning of the sentence. Not only did I learn something about journalism but also about how thin-skinned and concerned with critiques VCs are.
I saw VCs become similar defensive on Twitter when the New Yorker published a story on VC’s involvement with some of startupland’s biggest failures, from Theranos to WeWork; obviously, the FTX debacle has seen similar backs and forths. Sequoia, among others, vehemently defended their practices (‘we just took a big risk’) and disregarded some obvious negligence issues (you all remember their public (!) memos on FTX…). And current Uber-VC and king-of-Twitter-blocking Marc Andreessen of a16z is involved in trench fighting over his ‘frenzied’ techno-utopianist manifesto.
The bottom line of the defense is always similar: VCs only do what they’re supposed to do; they give money to high-risk-high-return startups with the goal of outsized returns. And in the process they are creating our techno-futurist dream. They pick ‘geniuses’ who — as a group — have had a track record of building crazy ideas into outlier businesses. And sometimes it works — judging from the list of the most highly valued companies: 7 out of the top 10 are formerly VC-backed.
But over my years in the industry, I have thought countless times why VCs appear to be so thin-skinned, sensitively defensive toward even constructive critique and ultimately quite unwilling to change their ways. And VC’s inner workings have changed very little in the last ten years despite tons of obvious — and in some cases: widely accepted — issues.
Some critique sticks — but thick skin prevails, for now
At least three pieces of critique have been accepted almost universally now:
- Most VCs don’t make money for their investors (or themselves); VC funds don’t make sense as a financial investment for their limited partners given the risk / return profile and variabilty (Evidence here, here and here). In the last decade of low interest rates (i.e. few alternatives to invest capital into), VC was a hopeful option but times are changing again now (see below).
- Diversity pays. It is both a missed financial opportunity and unjust that most VCs and the company founders they back are (white) men with Stanford and Harvard degrees. The lack of diversity across the ecosystem has been widely documented and accepted as problematic across VCs and LPs. The business case is clear while change has only happened very slowly. (This, by the way is also true for Marc A’s arch-enemy, ESG)
- Not all tech is good. VCs have invested for the last ten years in ‘blitzscalable unicorns’ without much consideration for the unintended consequences these produce. The damages attributed to Facebook/Twitter (misinformation), Amazon (workers rights), Uber (gig work) or Airbnb (gentrification) are partly now regulated or fought about in court.
Despite these critiques being launched again and again, the core principles the VC industry is based on and how decisions are made — what I call their ethics — haven’t fundamentally changed since the 1940s.
[More on that in my forthcoming book, join the wait list here if you want to be kept up to date]
What we must not forget in all this is context of the macro-environment; as Bill Janeway has pointed out repeatedly, the exuberance of the last ten years — and frankly: some VCs’ cocky arrogance — was only possible because money was essentially free. Near-zero interest rates flooded the alternative asset markets, including venture capital, with LP capital. The big ones, especially in the US, could choose who to take cash from. That made them both untouchable and perhaps also un-innovative.
A16Z, Sequoia and others have surely thought about new approaches — but mostly OUTSIDE of traditional VC. Dabbling in upstream private equity or crypto assets hasn’t meant changing the fundamental VC model. And why should they? The system has worked very well for them and flooded countless billions into their AUM, naturally producing countless millions (or even billions) of annual management fees for years to come. As a result the financial skin of these mega-funds right now is in fact quite thick.
Perhaps more than being thin-skinned, the VC funds everyone is watching and copying deflect critics and are reluctant to change because they can afford it.
From thick to thin in a matter of months?
The funds are thick-skinned, enamelled in a war chest of dry powder money. As an institution, as an ecosystem, as a big name VC fund right now, you can still afford to push away your critics. For this funding cycle, you might be financially independent, at least as a fund manager.
But the personalities heading these funds and behind the mask of the ‘fund manager’ might still grapple with what I perceive as their thin-skinned egos. At the end of the day, they are often big nerds who turned tremendously wealthy building early tech products. They’ve only ever been lauded (and in some cases build up a cult-like following) over the last two decades of techno-utopian embrace. Critique is a recent phenomenon of the tech-lash years they haven’t (yet?) trained well how to handle.
Fortunately, I would argue for the sake of innovation in the space, the macro-wind has changed and is beginning to blow harder into VCs’ faces. Higher interest rates means much less money in alternative assets means much more power in the hands of asset owners. Due diligence is back, and more transparency and information rights (institutionalised qua the recent SEC rules). And the first LPs, such as KfW Capital are starting to push hard both on ESG and diversity (e.g. with their new diversity-focused facility). VCs’ choices are becoming much much more limited by the day.
With my limited (non profit and journalistic) means, I’ll do my best to encourage everyone to take this opportunity seriously; LPs are finally in a position to push VCs into a direction where they’re aligned with best LP interests (to integrate DEI and ESG). And VCs can start to focus on building well-run, sustainable businesses that solve real problems, forgetting both their thin- and thick-skinned resistance.
