Individuality in the Oasis of Venture Capital
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VCs, their limited partners (i.e. fund investors), and startup founders are privileged in that they can actually treat each other as people. It would be nice if everyone treated everyone else as a person all the time, but that’s rarely the case. Most of the time, we’re all cogs in a machine and treat each other accordingly.
While those involved in venture capital can and should see each other as complex individuals with rich personalities, that can mean different things to each group. So I’d like to explain what it means to treat people as people, why it’s so rare, and how it works differently in the world of venture capital from the perspectives of founders, LPs, and VCs themselves.
This is Water…
We no longer live in the “Monkeysphere,” the tight groups of 150 individuals that keep most primate communities cohesive. Modern life exceeds the maximum number of particular personalities, traits, and nodes in a web of social relations we naked apes can process. Our peers are no longer rich conglomerations of fears, hopes, and tics, but just interchangeable pieces of furniture in a complex social world, especially in business, which prizes efficiency and effectiveness.
This is problematic for two reasons. First, everyone knows we should treat people as individuals. That idea makes up two thirds of Kant’s categorical imperative. It’s how David Foster Wallace suggested that people can achieve “true freedom” in This is Water. The inability to really see people is a symptom of several personality disorders. We should treat others as we want to be treated. All the rest is commentary.
Second, mistakes are often the source of learning, but they tend to be punished in business with reprimands, dismissals, and sell-offs. Everyone knows that practice makes perfect, but practice implies imperfection, and originality — an important value in tech and business generally — logically precedes practice. We seek people willing to do what’s never been done, and we expect them to get it exactly right on the first try.
…the Market is a Desert…
Recognizing each person’s unique reality and self is practically impossible. The average American knows 600 people — four times Dunbar’s limit.
Think of a typical day. Seeing each other person’s full complexity — from the other drivers in traffic to whoever wrote those insane reporting requirements — and taking it seriously is physically and emotionally impossible. Nobody has the time or energy to deal with all that pain, joy, confusion, anxiety, and hope from so many directions and still pay the bills.
Most market interactions require us to treat others as interchangeable actors performing roles. As long as the accountants, lawyers, web designers, and cashiers perform their functions, that’s good enough. Arguably, abstracting away from individuals can even be a benefit in some contexts. The whole idea behind the efficient-market hypothesis is that other people are just inputs into the price mechanism, and that’s all they need to be.
…but Venture Capital is an Oasis.
VC is different because it’s such a small community and the activities are so targeted. It’s more like a university campus than an industry. Not everyone knows everyone, but everyone knows of everyone, and we see each other at parties, conferences, road shows, and such. And we make targeted moves with other people we’ve met personally. A VC decides on an investment based on a pitch meeting and maybe a couple of lunches (due diligence is a given), not just on a chart of aggregate data.
Since COVID and social distancing, nobody in the business doubts the value of personal contact and personalities anymore.
But that personal interaction means different things to the different groups involved. LPs are faced with the principal-agent problem: how to ensure their agents (the VCs) are acting in the LPs’ interests. Carry helps. It makes the VCs’ return on their time a function of the return they generate on the LPs’ money. But carry is not enough.
A happy LP is one who can enjoy their life without worrying whether their fund manager is taking their fiduciary duty seriously. And a happy VC is one who can take meetings, make decisions, and commit funds without having to reassure LPs at every turn. For both to be happy, there is no substitute for trust, and trust requires them to see each other as individuals. For a good partnership, LPs and VCs need to know each other, respect each other, and trust each other.
Founders need to be recognized as individuals in another sense. Their job is to go out there and disrupt! To do what’s never been done and to reach heights no one has yet dared. Founders must be brave, but the brave are favored by fortune and misfortune alike. Geniuses fail a lot. So founders need VCs to have faith in them as creative individuals with the potential to change the world, and to keep that faith even when inevitable failures occur.
Again, if a VC sees a founder as merely a cash cow on a linear upward trajectory, and the founder sees the VC merely as a means to sponge LPs investment capital, it’s not going to work. Money is a great lubricant, but it’s a terrible adhesive.
VCs are in between. We need to see both sides as individuals. LPs entrust us with their savings (or savings of millions of other people in case of institutional LPs like pension funds, for example), the fruits of their labor, and we need to honor that trust. And since we’re expecting founders to achieve the impossible, we need to accept that they don’t know how to do it. Yet. They’re learning, and learning comes from making mistakes. We VCs need to see our founders as complex individuals whose complexity is exactly what led us to them in the first place.
Being able to see the complex individuals before us, each of whom contains multitudes, is a special privilege. It’s also really hard. Automatons performing roles are so much more convenient, but so much less worthwhile. Only by accepting our individual failings can we succeed together.
