Power, Perspective, and the Interdependence of Founders and VCs
Sometimes a process can continue for a long time and become very elaborate without answering or even considering the basic question of its own existence. Take the universe, or reality itself. It’s been going on for what seems like forever now, but who knows why or even bothers to ask? It’s enough to give you vertigo.
A similar wooziness can arise when considering why VCs and startup executives bother with each other. When you think about it, the whole Silicon Valley growth model lacks a solid reason for its own existence.
The obvious, reflexive explanation for its existence is that startups need money to grow their companies, and VCs need startups to multiply their money. But is that really true?
For a startup with a good idea, competent people, and decent growth prospects, money is not hard to come by. Try crowdfunding. Startups can now raise up to $5 million through microlending. Go for it.
Crowdfunding has the added bonus of avoiding VC intervention. Someone with $100 worth of equity that they bought on wefunder has no say in a company’s daily operations. It’s money with fewer strings attached.
If money were the only motive, VCs could also do without startups. It’s not like private equity is the only way to achieve 10x returns, especially over the ten-year lifetime of a typical VC fund. Bitcoin has achieved around 500x in just the past eight years. Foreign-exchange carry trading “provides better risk-adjusted returns than static asset class premia in equities or fixed income.” Even 100 places from the top, an ETF can provide annual returns of around 30%.
And frankly, running a VC fund can be a headache. Some portfolio companies require lots of attention and direction, and some limited partners require lots of cajoling and mollification. I could just sit by the pool with my phone and a sangria, checking twitter occasionally, and trading on “the Elon Musk effect.” Same money, fewer hassles.
The Silicon Valley system of VCs chasing money, hunting for the best tech investments, cutting deals, and wrangling with founders to keep them focused, while the founders chase money on their own, hunt for the best VCs, cut deals, and try to remain independent of overbearing VCs is an elaborate edifice without a foundation. A reality without a cause.
Except that we need each other.
The Asymmetry of Efficacy and Perspective
Oddly, perspective and efficacy rarely coincide. Think of the Delphic Oracle. The idea was that she could see everything, but she never actually did anything. Ditto Nostradamus.
At the other end of the spectrum are cases like the itinerant courts of the Middle Ages. Medieval kings were efficacious — they were supposedly extensions of God’s will — but they had to keep travelling around to ensure that their vassals were actually following orders and kept paying tribute. For all the kings’ godly efficacy, they couldn’t see farther than a day’s ride away from where they sat.
For a more current example, think of a film set. On a film set, the director, not the actor, is paradoxically the efficacious role. The whole exercise is about realizing their vision. But a director typically only works on their own sets. They can see the results of other directors’ processes, but they rarely get a chance to see how their peers achieve those results. They have efficacy, but their vision extends little beyond their own set.
For actors, it’s the opposite. In film, actors are the director’s playthings. Actors might get to ad lib, and some are very good at it, but only if the director includes ad libbing in the process. However, someone like DiCaprio will get to work with Sam Raimi, Baz Luhrmann, James Cameron, Danny Boyle, Stephen Spielberg, Martin Scorcese (like, weekly), Christopher Nolan, Quentin Tarrantino, and Alejandro Iñárritu within a couple of decades. He’s seen everything a genius can do on a movie set. For all that perspective, though, Leo still has to stand where the director tells him to.
This divide has certain similarities to the relation between startup execs and VCs. The startup execs retain the power to decide. Efficacy lies with them. Even if a green CEO can’t overrule the board, any founder worth their equity will be able to nudge the board in the direction they want, to make the board want what the founder wants. The CEO simply has greater proximity to the operation, so they have more moves to make, which results in greater efficacy.
A good VC, however, has seen it all, or at least a lot. They’ll be able to tell you the 3587 ways to ruin your company and the 2 ways you might just barely be able to achieve 8x with a little luck. That wisdom is the result of having participated in dozens, hundreds of attempts to make it big. Despite having seen so much, though, VCs can’t look over the founders’ shoulders and ensure that they’re not wasting the first three hours of every day motivating their team of 15. VCs have powerful eyes, but weak hands. With respect to a company’s operations, VCs are all perspective and no efficacy (though what happens in their own funds and with their LPs is a different matter).
Even though efficacy and perspective rarely coincide, they are complementary. Perspective amplifies efficacy, and efficacy gives potency to the lessons acquired by perspective.
Founders have one; VCs have the other. They cooperate because they need each other. The capability of each gives meaning to the capability of the other. More than money, the Silicon Valley model exists and persists because it unifies the founders’ efficacy with VCs’ superior perspective.
