Bros Funding Bros: What’s Wrong with Venture Capital

There is a laggard in our backyard that is slowing down progress. Fortunately, Silicon Valley trades on entrepreneurs disrupting this old guard.

The venture capital industry is stuck in yesteryear—the same people, living the same lives and having the same experiences making largely the same decisions. This sameness may have been a strength, but now it is creating blindspots. For every idea we fund, how many great ideas don’t even get a sounding board because we can’t relate to the problem or the entrepreneur? How much better off would we be if we had a larger lens from which to examine a broader class of entrepreneurs and ideas? My suspicion is greatly.

The bottom line is that the VC community is an increasingly predictable and lookalike bunch that just seems to follow each other around from one trivial idea to another. That was confirmed by an analysis we published today with The Information. My conclusion is that we need to improve decision-making or change the decision makers within our industry.  

At the core of this problem are the people stewarding the capital that is supposed to be the arbiter of good ideas. When we back one business over another, we are voting our desire for that idea to exist. To be clear, this also means we are saying that the “change” we fund is more important than the change we don’t.  Success is not zero sum, but time and focus definitely are.

And this is the biggest problem with venture capital right now. We have replaced “venture” capital with “product-market fit” capital.

The original practitioners of venture capital were the eccentric, quirky outcasts of traditional society who themselves were entrepreneurs. We’ve replaced this diverse bunch with a conformist but pedigreed group who are largely risk averse and driven more by FOMO than by passion or vision.

These new practitioners have several characteristics:

  1. They have decided that ideas are too risky and leave this work to incubators or angels.
  2. They will only play when some amount of “traction” exists.
  3. They don’t deeply understand the traction or have a view on the business, but simply want “momentum.”

The problem with this approach is that the big ideas of our day aren’t getting the ecosystem of support they need in order for them to have a chance. Big ideas are hard. They take a long time. They require huge amounts of capital. They have lots of risk, but also have massive upside in success. This should all be reasons we get excited.  But, increasingly, these are the reasons to say no. So how do we fix this?

Instructively, when you look at groups who have taken major strides to improve the world over the past several decades, one thing is increasingly common to them all.  

From the foundations and NGOs that are eradicating poverty and taking care of the world’s worst off, to companies like Facebook, Google and Apple that are inventing the future while looking after our best off, they have all explicitly decided to become less consensus driven and less homogeneous. They have found this increases creativity and drives business results. In turn, they are doing the ambitious, groundbreaking work that we used to do. And even though they have more work to do, when you compare the complexion of these leaders to the leaders within our industry, we look like total laggards.

I’m not going to regurgitate the litany of research showing the value of equality and diversity or how woefully pathetic our industry is even in comparison to the companies we fund; the data is stark and embarrassing. But the data is now in the open and available to all of us so we can act. 

As a result of this expose, we will start to see many opinions voiced.  Some will be along the lines of, “I’m glad we’re starting the conversation.” Don’t fall for this platitude.  Or, more insidiously and in backrooms, “It’s not clear that a diverse or balanced venture firm will result in returns.” To which I would say, it’s not like the counterfactual is actually impressive enough to justify not changing. The average returns in venture are sad—you are largely better off investing in public ETFs—less risk, same reward and totally liquid.

The point of this subterfuge is to take the focus away from what really matters.

What really matters is that we are in the midst of a technological renaissance that will be much farther reaching than any of us can predict if we invest correctly. Our generation has an opportunity, in our lifetime, to put a massive dent in human suffering and make trillions of dollars in return. Among the potential benefits:

  1. A broad educated humanity
  2. Eradication of cancer and preventable disease
  3. A sustainable environment
  4. Diverse capital bases that actually pursue the best ideas
  5. Safety, security, and less violence so each of us can achieve our potential

We need a wake up call on Sand Hill Road. We need to recapture our potential and open the doors. Invite more people into the decision making: young people, Blacks, Latinos, females, LGBT and others who aren’t necessarily part of the obvious majority.  Surround ourselves with a more diverse set of experiences and maybe we will prioritize a more diverse set of things. Maybe we will find more courage to do the hard things.

The VC world is cloistered and often afraid of change—the type of change that would serve the world better. An industry that wields the power to change lives is failing to do just that. Ultimately, fund investors will wake up to this bleak reality. We must change before this happens.

And if we don’t?

If we don’t, and we stay on our current path, the amount of human suffering in the world will continue to compound and will eventually spill into each of our backyards. When this happens, and it will, we will wonder who was supposed to have stopped it.

This last part is what frustrates me the most: It will have been us.

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The big ideas of our day aren’t getting the ecosystem of support they need in order for them to have a chance.