Venture capital has a self-dealing problem

Any investment group, upon hearing a pitch, will do one of three things; a) ignore it, b) figure out how to leverage the new information in existing pitches&#x2F;plans, c) fund it. To even get a pitch in front of an investment group takes a lot of networking to begin with, so the reality is by the time you pitch, you&#x27;re probably already an &quot;insider&quot; of sorts.<p>As an as-yet-successful entrepreneur, you should know that at any time your idea or portions of your idea may be stolen or &quot;adopted&quot; by anyone who hears you talk about it. And forget NDA&#x27;s. No one signs those anymore...certainly not an investor.<p>This is why, if you have an idea, you need to bootstrap it, get customers, and generate revenue. Then let the investors come to you.<p>I think the entire &quot;pitch&quot; process is rigged and pointless. If you&#x27;re going to build something, be passionate, find great partners and advisers, and bootstrap.<p>Let the VC&#x27;s play their game. You weren&#x27;t invited anyway.

I think the author&#x27;s Simon Cowell example actually disproves his point. If you wanted someone to win American Idol who would choose to do it? Someone who who you have to train to sing well and coach them on the judges preferences? Or would you choose the person who has worked with the judges for years, knows exactly what makes contestants win or lose, and helps to make the decision themselves. I would choose Simon Cowell, not because it would warm my heart to see him win, and make me believe in the Meritocracy of American Idol, but because he would be the best bet. Venture Capital is about making money, not about giving everyone a chance to make their start up happen.

Venture capital isn&#x27;t a game you can &quot;win.&quot; The goal is to get a return on investment, not to fairly distribute money. Starting a company isn&#x27;t a contest like american idol.

By this definition every bootstrapper is &#x27;self dealing&#x27;. VCs get to decide how, when and where they allocate their funds, if they decide to bankroll one of their own partners in a new venture then that&#x27;s totally ok as long as the partners and LPs are in agreement (it&#x27;s their money after all) and you can bet that they&#x27;ll have extra outsiders scrutinize the deal to avoid being accused of nepotism in case the company eventually goes south.<p>VCs with partners capable of executing on their own ideas are pretty rare, but when it does happen it is usually because someone had a side project (possibly even before joining the VC) that got legs (either unexpectedly or belatedly) and this person then uses his <i>excellent</i> VC contacts to secure a deal. And of course he&#x2F;she does not go to a competing VC, that would be a harder pitch and it would be strange not to offer your partners a shot at the deal first.<p>All in all I can&#x27;t see much wrong with this and if you think that it is &#x27;unfair&#x27; you have to remember that VCs are not under any obligation to invest in outsiders at all (private funds exist).

Two differing thoughts:<p>I&#x27;m not sure I would think the LPs would be all that concerned with this. After all, a VC firm is going to live and die by its performance reputation, so if their funds fail to return gains, it will haunt their firm for a long time.<p>What I do buy though is Kevin&#x27;s other point in the conflict of interest of potential entrepreneurs walking into VC offices and pitching a great product (editing out the word &quot;idea&quot; for clarity) that gets rejected. At that point you&#x27;ve given up a lot of information with little recourse, and having a partner at a firm run with the idea themselves, with strong funding and a powerful network, would pretty much be a death sentence.<p>I have never seen this happen myself (although I do confess Seattle can be pretty far removed from the daily dealings in VC world), and I do choose to believe that most VCs operate with a moral compass, but it&#x27;s still a terrifying thought.

I can&#x27;t believe the folks who disagreed with you are hand-waving away a huge conflict of interest.

As long as the money is private, they should be able to do whatever they want. If they&#x27;re actually bad decisions (a worse startup getting money solely due to being inside), then they&#x27;ll suffer for it. If the decision however gives a return, then what&#x27;s the problem?<p>I don&#x27;t feel suspicious of family&#x27;s investing in their kid&#x27;s venture -- wow how unfair! so biased, they should have given the kid next door a fair listening to as well!<p>The problem only arrises if bad decisions are then publicly de-risked (as is the case in banks, etc -- don&#x27;t know specifically if this happens in an indirect way with VC&#x27;s). But in and of itself -- &quot;people you know&quot; is one of many possibly good or bad metrics you can use to invest your own money (or the money interested to you by funders that know how you operate).

I totally agree, poor moral standard is at the root of a lot of shady investors.<p>I run a VC backed bitcoin startup myself and more then one of the investors we pitched to as early back as two years ago have gone on to create their own bitcoin-related companies in suspiciously similar product verticals to ours.

I&#x27;m really struggling to understand the issue. I understand the issue of conflict of interest when it comes to things like government contracts and public corporations. Here conflict of interest occurs because the person makes decisions on how to spend money that isn&#x27;t their money. It is either the taxpayer&#x27;s money or the stockholder&#x27;s money.<p>In a private company, like Andreessen Horowitz, they are effectively spending their own money. If they choose to invest in a company founded by one of their partners, I do not see the conflict of interest. From the outside we may question whether or not the startup is really worthy of being funded, but it really isn&#x27;t our call to make.<p>But what if it was our call to make? Did they make a bad decision by funding one of their own? Looking at his track record he already has experience as a co-founder and a CTO. On top of having prior experience, he has worked as a partner at Andreessen Horowitz for over a year. The people making the decision whether or not to fund his startup have experience working with him. They probably have a good idea of whether this person can or cannot deliver.<p>I think most people object to this, because they imagine a situation where a better startup is not funded because the partners decided to fund their buddy instead. Let us say that is true. For the sake of argument, assume this guy is incompetent and should not be given funding. Imagine this guy worked at Andreessen Horowitz for over a year and everyone knew he was incompetent, but decided to fund him anyways just because they were BFFs.<p>I guess it is possible something like this happened, but I doubt it. I recently finished reading Horowitz’s book The Hard Thing about Hard Things and he doesn’t seem like the type of person who keeps incompetent people around just because likes them.<p>The only valid objection I see is if they are using information provided to them under a non-disclosure agreement to gain unfair advantage. But is this a valid concern? As others have pointed out, most ideas are cheap. Even if that information provides some short-term advantage, it won’t help in the long-term as the market changes.

Imagine if you gave money to Warren Buffett to invest and he turned around and invested it in a company started by one of his own cronies?!

Interestingly, venture capital LAW definitely has a self-dealing problem. Many (if not most) major law firms in the valley have both company-side and investor-side clients. And even if they don&#x27;t, law firms often see a fair amount of company-side clients based on investor referrals. As a result, company-side counsel can often be reluctant to push too hard against investors lest they risk jeopardizing future business.<p>My first company actually had a situation where the same firm represented both us and the investor during our seed round AT THE SAME TIME. To be fair, this was the investor&#x27;s idea, not the law firm (and the law firm made sign all sorts of waivers), and we ultimately saved a small amount in transaction fees and I can&#x27;t say we would&#x27;ve gotten much better terms with independent counsel. But the entire affair makes me cringe a little every time I look back on it.<p>In case you&#x27;re wondering, yes, there are rules against all of this. But you can waive a lot of the rules by providing written consent (and many clients don&#x27;t think twice about this).

The public company version of this is like a buyer at one company starting a service provider as a side company and then using his authority as a buyer to award himself a contract.<p>It&#x27;s a conflict of interest and any publicly traded companies will fire you for it because it&#x27;s stealing from the (other)　shareholders.

Oh, maybe the sky is not falling. Maybe it is not true that &quot;We&#x27;ve got trouble, right here in River City. Trouble starts with a <i>T</i> and that rhymes with a <i>V</i> and a <i>C</i> and they stand for <i>venture capital</i>&quot;!<p>Why? Well in <i>information technology</i> (IT) venture capital, in recent years a strong <i>theme</i> has developed: The VCs want the founders to be <i>technical</i>, e.g., design and write software. As I recall, the firm A16Z is an especially strong supporter of this theme.<p>Well, then: For my startup, I&#x27;ve read a <i>lot</i> of VC bios: My conclusion is that only a tiny fraction of VCs are in any very significant sense <i>technical</i> in anything in or very close to IT. E.g., when was the last time they designed and wrote 10,000 lines of code? Invented a new algorithm? Did some technical work prior to the software, e.g., the applied math of <i>machine learning</i> or <i>data science</i>, e.g., some applied math for ad targeting? How about some applied math for computer and network security via anomaly detection? How many VCs are qualified to direct a major IT development project with planning, hiring, training, software project management, server farm planning and implementation including performance, reliability, security, growth potential? Gee, let&#x27;s keep it simple: How many VCs could step into to a slot as database administrator of, say, a major site of SQL Server, Oracle, DB&#x2F;2?<p>So, in an IT startup at the seed or Series A <i>level</i>, why would a founder want to hire a VC, and why would a VC want to invest in a VC as a founder or a founder who would hire a VC? How &#x27;bout they wouldn&#x27;t?<p>Sure, at the Series B, C, ..., maybe some VCs could do <i>business development</i>, marketing, setting up the sales <i>channels</i>, running the sales organization.<p>Net, <i>bottom line-wise</i>, the goal of the VCs and their limited partners (LPs) is to make money, and a VC firm that doesn&#x27;t make money will have a tough time raising more. And, LPs may look with <i>surprise</i> and even <i>concern</i> at losing bets on VCs within the firm. Or, such a VC darned better make money!

Hrm, didn&#x27;t think this particular &quot;Twitter fight&quot; would end up as an article. I see Kevin&#x27;s point, but maybe I&#x27;ve been in the water too long. It doesn&#x27;t bother me much. There&#x27;s plenty of networking and such already. Serial entrepreneurs have nearly as many connections as any VC would anyways. And the VC partner that is &quot;self-dealing&quot; isn&#x27;t going to be able to deal himself single-handedly. There are other partners at the firm.<p>There&#x27;s lots of other unfair things in the Valley when it comes to privilege like this.

It&#x27;s interesting how once practices become the norm in a group or industry, the practitioners become blind to conflicts of interest that are obvious to outsiders. &quot;This is the way it works.&quot; is useful information, but not a convincing justification.

If the entrepreneurs, venture partners and investors are fine with it then who are we to argue?

This actually happened to someone recently... VC invested millions in itself and created a clone (and not a very good one). Needless to say, that company is self-funding now but got stuck on that for months. (upside: now growing at &gt; 6% per week.)

It&#x27;s not corruption, just &#x27;more of the same&#x27; nepotism. If you&#x27;re shocked by this, you haven&#x27;t really been paying attention.

Start-up success can be much easier if...<p>A. You went to the same ivy league schools as VCs<p>B. You have a certain look<p>C. They give you the opportunity to work with them &amp; you take advantage&#x2F;work the opportunity to get funded.<p>Case in point, while I was participating in an incubator, there was a 20 year old mentor. He was mentoring a 40 something first time female founder. He had millions in funding and he went to sell his company for millions.<p>How did that happen when he had no previous experience. Well for one he graduated from the same top school as his VC (one of the biggest), who in which gave him a job working at the firm, who then funded his company and steered it to a huge sale using his huge&#x2F;immense network.<p>Start-ups can be very unfair if you don&#x27;t look the part, gone to the same ivy league school, given an opportunity to work with X huge VC &amp; make the most of it and or struck gold&#x2F;got lucky by publishing the next big thing you had no idea would take off.<p>VC is definitely a boys club filled with all the popular people from your high school who left you out &amp; talked trash about everyone who didn&#x27;t fit their part.