June 13th, 2003
may be right,
may be crazy,
it just may be a lunatic you're looking for.
out the light,
try to save me,
may be wrong for all I know,
you may be right” – Billy Joel, You May Be Right
is a very busy guy out there taking some time every few
weeks to write on subjects for software entrepreneurs,
managers and employees. He
has been doing it for a few years and provides a full
archive of his work. He is witty and writes fairly well.
Before the Internet, he wouldn’t likely have
been published, but he has a small following and some
Most times he is right on the mark with his
theses and suggestions, but on other topics he clearly
hasn’t done his homework.
But you forgive him because overall he’s pretty
His name is Joel Spolsky and his column is called
Joel on Software (a friend of mine, Alan Chiu, put me on
to his work). Last week Joel decided to take a hard look
at the current state of venture capital and I feel it is
my duty to respond.
might get tedious and I apologize in advance… but you
have to read his column before coming back here to read
the rest of this column.
This saves time because I don’t have to
paraphrase everything he said.
So go here (http://www.joelonsoftware.com/articles/VC.html)
and then return.
I’ll be here drumming my fingers on the
keyboard until you get back.
Interesting perspective, eh?
thing that we need to get on the table here is that he
is talking about software application development.
This is a large sub segment of the technology
investment universe that a VC has to choose from,
depending on the focus of the fund.
But it is not the only type of company out there.
He makes some arguments that are relevant only to
software application development which are not in the
least bit like, say, a drug discovery biotech start-up.
liked the first part, where he compares the risk profile
of a VC to an entrepreneur. It is an accurate
description of the divergent risk profiles, but the
conclusion that VCs want their companies to do
incredibly risky things is the first of a few non
sequiturs in his article.
Joel has confused the holistic end view of a
portfolio approach to investment with the individual,
specific day-to-day interactions of VC and entrepreneur.
What a VC wants to end up with in his fund at the
end of 10 years is a guide for decision making along the
way, but the decisions made today for the benefit of a
portfolio company are actually made in the best interest
of a company growing on a stepwise, milestone based
Hmmm, stepwise, milestone based path… sounds
like software development.
If the VC simply waved his/her hand and blessed
rampant money spending to get to the end faster, then
the companies would burn up much as he described in his
In fact this is exactly what happened in the late
It is not happening as much now, if at all.
VCs are not the wanton risk takers that he describes.
If you want proof of that, just ask any CEO in
Vancouver with VCs on their board.
Present the thesis that the VCs are constantly
asking them to spend money and take bigger risks in
their business plan.
After the laughter subsides, ask them what is
really happening in their board rooms.
I think a majority of the entrepreneurs feel
somewhat shackled by the VCs and that the advice is more
“stay the course and get to the next milestone on the least amount of money possible”.
there are big Silicon Valley VCs that play the game
closer to what Joel has described, but they represent a
vast minority of VC.
Most of us (and virtually all of us in Canada)
have a very different risk profile that is more in line
with the entrepreneur than Joel understands.
Most of us want all of our investments to succeed
(success is anywhere from 2x your invested capital all
the way to The Next Netscape) and make original
investment decisions based on that theory.
It’s just that we know ahead of time from
experience that some of them won’t work out.
latter part of the article about VCs learning to say
“No” and that they wouldn’t know a good
opportunity if it bit them in the hiney… well it’s
the classic view from the other side of the fence.
It was very entertaining to read, but the VC
process is actually pretty good at weeding out
opportunities that will never be funded very quickly.
The second major non sequitur is the conclusion
that we are too busy saying No to go and get to know a
company that is a worthwhile opportunity.
Has Joel seen how long it takes to get a term
sheet these days?
It’s not because we are playing golf.
It’s because the number one new commandment of
the VC learned in the 1999-2000 bubble is “Thou shalt
never be rushed through the diligence process again”.
VCs will say “No” to great opportunities
today if it is too tight a timeline for their resources.
There is no rush to get in a deal anymore.
We are doing the dance… and it’s a slow
started on a very worthwhile point about the deal terms
getting too harsh, but then used a poor example with his
rant on the “no shop” clause.
The “no shop” clause is usually not a big
deal term because the company is exhausted when it gets
to a term sheet after vigorous shopping among many VCs.
They don’t care about it because they want to
get back to building a company after assembling a
Anyway, he should have gone into better terms
like “participation preferences” and other preferred
rights that would have backed his argument about
entrepreneurs needing to really evaluate what they are
giving up for venture money.
That would have been interesting.
see, overall, I think Joel was on the right track, but
had some weaker arguments along the way. His good advice
hidden among some entertaining tangents I think was
venture capital is going through a reckoning right now
along with the rest of the industry, you, as an
entrepreneur, should be looking at the cost/benefit of
going down that path towards creating value for you and
your first shareholders.
The cheapest form of capital to expand or grow
your business, by far, is from your customer.
That should be your primary focus.
The second cheapest form of capital is government
sponsored incentives and grants.
The third cheapest form of capital is your own,
followed closely by your friends and family (although we
are getting into the realm of risk capital here and they
may end up not being your friends or your family if you
fail to get them their money back).
Then comes angel money, bank debt, public equity
and finally, as the most expensive form of capital,
private equity from institutions (i.e. VCs).
What I think Joel is trying to say is, why would
you run there first?
You need to get something to sell before you have
a customer and to build it requires someone to take a
big risk and dole out the capital.
If it is software and you can build version 1.0
and actually sell it to a few unsuspecting folks, you
don’t need a lot of money.
If it is the next cure for breast cancer,
obviously you need a little help.
VC is not about betting the farm on a software
company, ramming $10M down their throats and cutting
everyone loose with nothing to show for the effort after
it fails to meet expectation, as Joel portrays it.
VC is about entrepreneurs wanting scale and scope
and needing to build something that could be large.
I have said here many times before, you can grow a
business to a decent size and sell it owning 80%.
It will take you a while (10-15 years on average)
and a lot of hard work, but you have a nice nut to
retire on at the end of the run.
Occasionally, you can make it much bigger, like
say Alpha Industries in Vancouver, without ever taking
risk capital, but the chances are remote.
Most of the big technology companies of today and
the next 100 years will have raised capital along the
way and the original founders will own <5% of the
company after 6-8 years.
But your chances of getting really big are
enhanced and it might not be as long until you get
final response to Joel is that he portrays VCs as
omnipotent meddlers and the entrepreneur as the
subservient victim in a VC funded company. While it is a
popular myth, it simply is not true for the majority of
VC funded deals.
I have never met a CEO/founder that is no longer
with his/her original company that thinks that they are
It’s always the damn VCs.
Uh-huh. I am definitely aware of VCs that should
have been cast in Dumb and Dumberer, but the
entrepreneur can and should find out about their VCs
before partnering with them.
And they should be aware that sharing the voting
shares in their company makes it a democracy.
the whole, I liked Joel’s article and he raises some
very good points.
Just remember that there is always another point
of view to the story.
What Do You Think? Talk
Back To Brent Holliday
Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
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