So, first the disclaimer…
This does not mean VC is bad or doesn’t work – of course it does. But there are a bunch of realities founders wish they knew before they took money.
This is what I wished knew when I started out
1 / Getting Index and Accel in your seed round is generally a bad idea. They are amazing funds but it means you lose optionality from the get-go. It’s called ‘signalling risk’ and I have seen many companies die because of it. Sorry, but it’s true and what all VCs say in private.
2. You will be amazed at the number of ‘daisy-chain’ rounds that happen. This is when companies are kept alive by their internal investors. Generally to keep a good ‘story’ going with their LPs as they raise their next fund.
3. Ditto to the number of companies that are ‘recapped.’ This is when companies raised at too high a valuation previously and needs to ‘sort out the cap table’, typically washing out the earlier investors.
4. VCs will make you think there is a degree of alchemy in what they do. This is overstated. They make multiple bets and some come off.
5. Venture capitalists generally have ‘smartitis’. An intelligence that leads to an overconfidence they can predict the future. The world is way more random than that.
6. The power law is real. In a portfolio of 20 only 2–3 matter and make all the returns. If your VC stops caring about you this is why. They are not nasty. It’s simply a function of the model.
7. Probabilistically you shouldn’t take venture capital. 98 % of companies shouldn’t. It’s not because of you (well, let’s be honest, sometimes it is) but is a function of the economic model.
8. I spent five years building my network. If I had the time again Id have done it much faster. Done whatever I could to become mates with the top funds so we could hunt in packs. This is becoming more and more the case.
9. VCs are scared just like you. It’s not as hard as building a company. No way. But they are humans too and have different pressures.
10. Honestly….VC’s really are not gods. It’s easy to think they are WOW because of the money. But remember ‘no one knows anything’ and your instincts remain the best thing you’ve got.
Hope that’s helpful – let me know if there’s anything I’ve missed.