How Poor Venture Capitalist Firms Have Become Increasingly Fatigued
Executive Summary
- VCs have a reputation for investing in things they don’t understand.
- Now it turns out that VCs are also fatigued!
Introduction
VCs appear to work on the way to the public but work very differently when those who have experience dealing with VCs. In the article How Much of Vishal Sikka’s Explanations on Artificial Intelligence is Complete BS, we cover how people who have a track record of providing bad quality information to the public can raise many millions from VCs.
The Issues with Inexperienced VC Employees
VCs have developed a reputation for hiring family members into plum positions with a minimal background. And this comes across to people who have interacted with VCs, including the author of this article.
The following is a quotation on VCs from Reddit.
I run a self-funded SaaS startup that is getting decent traction, and just last month was contacted by one of the Silicon Valley big boys.
As I could see from the screenshots, this phone call was assigned by one of the managing partners to one of the young associates. I guess that is pretty common.
Anyway, we did have a nice conversation, but what struck me the most, this young Euro guy was completely clueless about my area of business, and since my startup also has some business specifics that only Americans & Canadians would understand, I was quite disappointed this big firm would assign a young kid with no understanding of this niche business to my account.
Anyway, my point is, if you are hiring these kids to do the work for you, they should have some understanding of the business.
The Reality of VCs in Overheated 2020
The following quotes are from a curious article in TechCrunch.
The reasons were similar if not perfectly overlapping. The biggest driver was the sheer flood of venture dollars targeting too few deals in the Valley these days. Consumer investing has become passé as exits disappear and the mobile wave crests (last year was the first year B2B investing overtook consumer investing in modern memory), forcing everyone to chase the same set of SaaS companies.
So VCs have too few deals they are chasing after? So there is more money chasing a limited number of SaaS companies it seems.
How Long to Close a Fundraising Deal?
VCs described to me how the top deals start and close their fundraises in 48-72 hours. Several VCs groused that dozens of firms now descend like hawks on the unwitting but fortunate target startup, angling for a term sheet and willing to give up valuation and preferences left and right for any chance at the cap table. Earlier investors are just as desperate to own that equity, and no longer play any sort of honest broker role that they might have in the past.
This is difficult to believe because it is difficult to see how one can adequately research an investment opportunity this quickly.
Unending Work Schedules for VCs?
Plus, the FOMO of the moment is more acute than ever — a VC at the end of the day might have already seen a dozen companies, but gets a late night intro to one last company — perhaps the company that could make or break their career. And so they will take that one last meeting, and then one more last meeting, hoping to find some meaningful edge against the competition.
This sounds “dynamic” however, fatigue affects all humans, and one has to wonder how many deals have been agreed to because of sleep deprivation.
No one can resist the effect of sleep deprivation on their judgment.
VCs Feeling Tired?
Firms are doing what they can. They are staffing up, trying to hire more raw talent in the hopes of finding that last undiscovered company. They scour their own portfolios and probe their founders, trying to find a tip to a deal that their competitor may have missed. They host dinner after dinner (sometimes multiple in one night — as I sometimes witness when I get an invitation to all of them, as if I can be in more than one place at the same time), again, hoping to find some bit of magic.
Ironically, the “tired” line was something I used to hear from seed investors, who constantly had to churn through dozens of under-hearted startups to find the gold. Now, I’ve heard this language more and more from later-stage VCs, where the Excel spreadsheet drives the valuation more than a relationship with a founder — and everyone can read the gridiron of SaaS metrics.
This lays out more explicitly the grind that venture capital has become.
The Outcome?
Less due diligence is happening before the term sheet is signed (again, to beat out the rabid competition), and there is now more buyer’s remorse from VCs (and very occasionally founders) that can lead to a botched round along the way.
Lack of bandwidth, hyper-velocity, a pittance of sleep — all of these are intensifying the sensitivity of VC returns. Email a VC an hour before or after and it may well change the result of a fundraise. VCs once had a reputation for plodding and slow deliberation. That old normal is definitely dead right now, and in its place is a new, modern VC who is going to determine millions of dollars in a few minutes on a jet fuel of caffeine and ambition.
Conclusion
It does not take much projection to realize that many of these deals signed in the late stage of the bubble of VCs are going to be low quality. We have observed companies that really should not be funded, getting money. This is a consequence of too much funding chasing the number of legitimate opportunities in the market, which invariably leads to standards being lowered.
[sp_easyaccordion id=”1709″]References
*https://www.reddit.com/r/venturecapital/comments/eri5jl/the_reason_vcs_are_just_tired/
*https://techcrunch.com/2020/01/16/vcs-are-just-tired/