Lots of entrepreneurs love painting VCs as villains. VCs have become the favourite whipping boys in the startup ecosystem because they have poured money into companies which have spectacularly blown up. These VC-funded businesses have ended up burning a lot of cash without creating any profit or value.
It’s very easy to be an armchair critic, and talk about how short-sighted these VCs are. Common complaints about VCs are that they are short-sighted; they prefer copycat models; they follow the herd mentality and refuse to take courageous contrarian bets; they don’t understand basic financial principles such as unit economics; and that they are obsessed with the single-minded pursuit of growth, no matter what the cost.
However, I think it’s actually all these entrepreneurs who criticise the VCs who are being short sighted.
Now, I can understand that founders are upset when VCs refuse to give them money – after all, most entrepreneurs think of themselves as being the next Steve Jobs, and are very frustrated when no one recognises their genius. This is one of the reasons they bad-mouth VCs.
Hindsight Is 20:20
We also need to remember that it’s very easy in hindsight to be able to say that a particular investment wasn’t sensible, whereas the reality is that at the time at which the investment was made, the company was a completely different animal. However, because it failed to evolve, it died, and it’s not fair to hold the VC responsible for its failure.
Obviously, we all need someone to blame and it’s easy to blame VCs. We think of them as being well-heeled money bags who are detached from the daily business grind. Comfortably ensconced in their fancy air-conditioned offices, we believe they are disconnected from harsh reality. All they do is play around with spreadsheets, think about the big picture, and spend other people’s money in order to drive growth. Also, since VCs often don’t participate in these public debates, we often don’t get a chance to hear their perspective.
Capitalism: Allocate Capital Intelligently
The key strength of capitalism is its ability to allocate capital intelligently, and VCs play a very important role in the ecosystem. They serve as a filter in deciding which companies should be backed, and which deserve to die a quiet death. Don’t forget that the number of startups they don’t fund far outweighs the ones they do. If they had funded a lot of the crazy business plans they are forced to listen to, they would have ended up losing a lot more money, and would have much less to invest in backing what they believe are the better startups.
Do they make mistakes? Yes, of course, they do, but they are smart enough to learn from these! Just because they don’t share their errors doesn’t mean they aren’t improving all the time. It’s always easy to criticise what someone else is doing. However, unless you walk in a VC’s shoes, it’s hard for an outsider to understand what kind of trade-offs they have to make. Just because they are soft targets doesn’t mean it’s fair to take pot shots at them. Many startups blow up, not because of the VC, but despite them. However, we only hear one version of the story – and since this is what the founder chooses to share, it’s often biased and inaccurate. This is because unhappy entrepreneurs are happy to go to town and complain publicly about how short sighted VCs are – about how Indian VCs don’t have any vision or guts, as compared to Silicon Valley VCs, who are willing to pump in money because they are entrepreneur-friendly.
VCs have a very challenging role to play because it’s not easy to multiply money in the startup world. Most startups will fail, no matter what the VC does. Often, even tonnes of money, superb mentoring, and high quality support they provide cannot save a floundering company.
Entrepreneurs and VCs need to learn to respect each other, rather than try to blame the person sitting on the other side of the table. Entrepreneurs need to learn not to take rejection personally – after all, this is only business. However, criticism and mud-slinging seem to be only things some Indians are world class at!
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]
