For companies that are at the point of raising venture capital, this might be what is actually needed. But it certainly seems like it filters out a lot of the more idiosyncratic, brilliant types that aren't concerned with (from their perspective, irrelevant) details, like the date on a pitch deck. It seems like a good way to get institutional operators, not rare but not-quite-conformist innovators. I can't imagine someone like Steve Jobs or Nikola Tesla passing these VC/Ivy League kinds of tests.

My "favorite" "test" is the one more for soft studies (think law or public policy) rather than STEM: for example UN internships typically have no compensation and they often require you to relocate to extremely expensive CoL areas, meaning there is an automatic filter built in where only children of very well-off parents can do these kinds of internships and segue into the jobs connected to them.

Imo the easiest way to get a VC Analyst internship is to do EECS@Cal/MIT or CS@Stanford with a Business (or in Cal+Stanford's case Econ or MS&E) minor, do a SWE internship in Frosh summer, and be prominent in your university's entrepreneurship or hackathon scene.

That said, my question would be WHY would you want to do that as an undergrad? I'm firmly in the camp that you need to build domain experience in the industry you are investing in, and that takes a decade of SWE, PM, and Sales experience - and that is reflected by the career trajectory of most VCs I work with.

Edit: This is not a snipe at Top Programs and VC Analyst roles. They have value in incubating new founders (plenty of successful YC founders have been VC Analysts who leveraged their VC network to start a successful startup).

Most of the replies below are just salty.

In a previous life I worked for a health insurance company that paid a million dollars to the Boston Consultancy Group on if we should use agile or not for development. The best part was seeing the half dozen or so people in our offices working so diligently to argue for something we were already doing, even better when speaking to these consultants they had zero experience programming or developing software.

I often wonder what it takes to win these contracts over McKinsey, Bain, BCG, Deloitte; because it sure feels like it's not aptitude that's the defining quality but more quasi-legal corruption.

The amount of money the government spends on useless contractors… shudders

And, no offense, but there is a massive difference in calibre between a Stanford/Cal/MIT/T10 CS program (they tend to have 2-4% acceptance rates to either the college or the CS department) and other programs. This doesn't mean that there aren't high calibre candidates at non-T10 programs (I've known plenty of successful SJSU, CUNY, UMinn, etc founders, EMs, SWEs, PMs, and yes even a couple angels and VCs), but it seems that you have a chip on your back.

> Like what do these kids with literally no experience running or starting anything know about companies

A lot HAVE tried starting something or are in the process of starting a company. Most VC Analysts are hired explicitly so when those Analysts hit the 2 year mark, they can start their own startup.

Majority of the T10 CS programs have deprecated legacy admissions. Most are public universities.

> These schools can be filtering for a great many things

The de facto bare minimum you need to get into a BSCS at UIUC, UCB, or CMU is a high (3.8+ out for 4) GPA and a high SAT/ACT (1500+ or 34+).

In reality, these are minimums, and most applicants have taken college level CS courses in high school either at your local flagship or community college, taken 6 or more AP classes, and have a fairly robust roster and background in Extracurriculars like sports, non profits, and even a couple founders. One of my peers at my undergrad literally sold his bootstrapped company for $1m while he was in high school and he was from Cincinnati.

The point is, because admissions are so rigorous, you end up with very prepared students who already know the ins and outs of the major and industry they are targeting, and as such are able to hit the road running (getting internships in their freshman summer, participating in research from freshman year, graduating early or accelerating MS admissions).

If I need to take a financial bet on someone (which is what VC and hiring is), I can justify my choice based on the data provided above.

This does NOT mean that life ends at college. I know a lot of T10 grads who did dick (no internships, minimal research) and probably would have been better off going to another school or another program. I also know and am friends with plenty of people who went to non-T10 programs who had an AMAZING career trajectory because of how driven and hard working they were.

That said, your credentials are very important - having a successful academic and professional career will open plenty of doors.

This leads me to a broader question: What does their acceptance rate of high schoolers have to do with anything? We're always using that as some kind of proxy, but high schoolers (even the top ones) don't know much...

Nope. I meant departments. The T10 programs handle CS admissions at the College (Engineering) and Department level.

When you apply for a BS EECS at Cal or BSCS at CMU, it is the CS department (or School of Computer Science) that handles the entire application review process.

Only more traditional LACs (the kinds modeled after Harvard College or Dartmouth College) put all applicants in the same bucket.

But now I see that their reply could also mean that the people are highschoolers at the time they are applying. I understood it as acceptance to high school itself.

Stanford at least doesn't for undergrads. Admissions is handled at the university level and you're encouraged not to even declare a major (CS included) until after your freshman year when you've had a chance to explore options for a major.

Stanford is a more traditional LAC though, so falls under your last paragraph.

It was only after Steve Jobs exploited their preferential attachment & tendency of VC to succumb to herding effects that he was given investment.

"It was only after Steve Jobs exploited their preferential attachment & tendency of VC to succumb to herding effects that he was given investment."

It's really good. I think everyone into Startups must watch this. It's not second hand narration but the real VCs them selves telling the stories so I find it very reliable.

So in the documentary there is a section about VCs meeting Steve Jobs & Wozniak for the first time.

They passed on the investment saying that they were "not impressive".

One of the VCs (that refused to invest) was begged to show up at some computer conference to see how people were interacting with the Apple Computer.

The VC saw a very huge crowd of people around the Apple booth waiting for a turn to use the Apple computer.

The VC then completely changed his mind & decided to invest in Apple. When he did so, even the likes of Don Valentine now begged to enter the round.

My suspicion is that the crowd was artificial, Steve Jobs knew that if he could prove (or construct) some kind of hype around his Apple computer at the conference. It would conjure fear of missing out in the VCs or something akin to traction.

Note that everything else remained the same the product, the founders etc. He just added an ounce of hype.

[1]: https://youtu.be/7eV2L7CHCSQ?feature=shared

a) they had been raising for a while now

b) the recipient was not their first choice (ouch, you can hear the ego taking a glancing hit)

So ”the market” did not consider the startup investable, and they did not think about their sales pitch strategically enough … this VC would have liked to be sold to, not just a source of funds.

The implied peer signaling is the key thing here IMO.

It baffles me that a person successful enough to get put in charge of an investment fund can have such incredibly thin skin.

How would you even function in the real world if you were so easily offended?

From my own experience having met with VC's and investors is that most are inundated with pitches, and the old addage of 'Take every meeting you can' has been replaced with 'Say No by default.' There is no exact science, and so there are proxy signals they use in their heuristic.

It reminds me of the scene in money ball where the scouts are complaining about a baseball player who does not date an attractive women, so therefore they should not sign him because he doesn't have confidence. https://www.youtube.com/watch?v=6naO8n6HsqE

Not necessarily ROI successful, though certainly successful in making connections to get the job. It seems, however, from their website that some of their capital made it into big companies. It's not clear whether they disclose the previous funds performances.

Is this really a sensible factor to consider? Canva's was founder was rejected 100 times before someone took a chance.

Is there any hard evidence that founders who secure funding earlier are more likely to provide a VC with a successful exit?

There really isn't much hard evidence about any correlative patterns about early stage VCs. Which is why their model is essentially spray and pray. The successful ones (Sequoias, a1z, etc.) are just signaling rods whereby high growth startups gravitate towards well known VCs, which in turns means signaling to M&A markets.

If a company is having a hard time finding investors now, in the future when it needs more money it may fail for lack of takers, spiking current investments.

Sensible or cognitive bias that is in play regardless if it is sensible? I've seen a little research on jobs that discriminate against people not currently employed, with longer periods of unemployment leading to greater discrimination. I haven't seen anything about if this is actually justified or not.

I've also heard of this in other areas, like with date, but I haven't been able to find any research and the topic borders some controversial areas that research has struggle handling.

My guess is that it does happen as a bias, related to peer pressure and following a crowd, but like with other biases, even if it makes sense in some cases historically it will lead to illogical behavior in our current society.

They DON'T function in the real world. Rich people, especially the uber new rich in SV do not interact with the real world, but rather with a purchased world from companies selling "lifestyle". They have people bring them groceries that they never see the bill for, because everything is handled by their accountant. They are thin skinned, so they surround themselves with yesmen to continually tell them they are awesome. They write trite, useless blog posts about "working harder" and their army of loyal sycophants eat it up.

We can be as cynical about this part as we want, but I think what is meant here is that startups should try to raise investment from VC's or investors who are a good match. If I'm down to the 20th VC on my list - that list is sorted a way for a reason by the startup founders.

It's easy to assign this to ego but I think being a rational actor, it is also a signal like the pitch deck date.

A VC has to live of management fees for the fund, which are a tiny fraction, typically half a percent, and that needs to cover both the initial investment process and all management of the portfolio, and it's not a lot.

You can't afford to spend a lot of time scrutinizing every pitch deck, because you'll be inundated by them, so you look for quick filters. Many of which will be bad, because they're wild guesses. Yes, that means they'll miss amazing opportunities. But they're gambling what will be left will at least not be worse.

Upside is, VC's wildly disagree on which things make decent quick filters, so what will get you binned one place will often interest another, or at least not annoy them.

On the other hand, a $100mm fund could be a 'contender' fund that wants to raise a large fund, and is in a competitive industry -- it's trying to get on the cap tables that, say, Mayfair gets on to, and so it needs to staff recruiting support, tech help, marketing people. Perhaps it's multi-jurisdiction. In that world, $2mm is way, way too little, and the GPs may well be financing the fund personally through fund 1 and into fund 2, depending on the follow-on raise. They are aiming at running, eventually, $1bn+ per fund in three to four stacked funds, and taking home $1bn after 20 years (or less?) of good effort for each of the original GPs.

These are caricatures, and there's much more than this to the lifecycle of venture funds, but since we're at HN and VC is a big part of the conversation, I think it's good for hackers and founders to understand the counterparties they do business with, and particularly to be able to read the signals of the VCs they talk to, while the VCs are reading the signals of a desperate, out of date deck.

And most LP's will expect the GP's to have significant skin in the game. E.g. at my previous employer, every staff member was expected to have at a minimum the equivalent of 1x gross yearly salary committed within a few years.

VC salaries are not that great outside the top tier funds or unless you're one of the GP's.

It could be "retirement money" for a handful of the GP's at the top tier funds, but they're only in that position in the first place because they have a lengthy track record, and so their past earnings from carry etc. will still dwarf any operating fee from their current fund.

Most who run a fund like this do not think of it as low pressure or cushy, regardless of goals. Something I tell my portco CEOs a lot is that as much as they want to raise money, or need money for their company, in general, VCs they are talking to need to write checks even more. Just not bad checks.

Spending a billion dollars take a lot of effort (or so I assume; I've "only" spent millions). People will ask annoying questions like "where is the billion dollars coming from, I had no idea you were a billionaire", and ask about AML etc.

Conversely, driving down the value of a company that's already worth billions is "easy": Just publicly demonstrate your willingness to drive the company totally into the ground.

Or if you want speed, and have access to the funds, the super-fast way would be transferring a billion worth of crypto to a random address.

For my part, my biggest "losses" were paper values in startups that failed or didn't get the exits we'd hoped for. There it's also "easy".

E.g. I know of a decent number of funds that size or smaller with a staff in the range of 10, a few with well above that. Even at 2% it's suddenly not so much money then, even less so when you start to factor in costs.

EDIT: You may also sometimes "on paper" have fees like that, but quietly offer discounts etc. to convince investors. On top of that comes often quite substantial requirements to buy into the fund for at least senior staff that seriously reduce the de facto salary unless the fund also does well enough that it's the carry that matters.

This is a clearly beneficial requirement, but your point is fair about it leading to 'on-paper' comp looking high. But I'd even go so far as to say that the majority of comp for senior people should be contingent (not sure if that's typical).

Note that given salary levels this means that over the 10 year runtime of the fund, most of us would be giving up nearly ~20% of our 10 year aggregate gross salary, most of us within 4-5 years. My gross salary during that period was not much different from in my job before - it was a pretty steep sacrifice for a shot at that carry.

Fair. These sorts of things are usually pretty nuanced.

> it was a pretty steep sacrifice for a shot at that carry.

I totally get that, but it also seems like the ideal balance of interests. To many obvious failure modes if you don't have enough skin in the game. Of course that works the other way too, the upside in good-to-great cases have to make it make sense.

A lot of startups think it's still ok to pay under the odds once hiring staff that are getting tiny fractions of a percent, though, and at that point, the risk-adjusted value of those options is not worth taking a cut for relative to a bigger corporate with somewhat predictable share performance and liquidity.

If you do stuff like that 100 hours a week, it kind of becomes ingrained.

VCs manage risk differently than bankers, but they still need some form of assurance that their investment will bear fruit. They are not as rigid as bankers but they are still in the same position of having to rely on proxy signals to predict the future.

They can catch more non-conformist value builders† but not every single one.

†For a VC, innovation is a means to building value, not an end to itself. Often the 2 are used interchangeably but only the finances matter in the end.

For VCs a compelling product means great traction but to get great traction you need initial funding so it's always a catch 22.

Like in all fields, true competence comes with a deep skepticism of one’s own capabilities. Especially in a field absolutely chock full of luck, uncontrollable variables, motivated reasoning, and outright deception.

The most competent at this would sensibly not be relying very much on slides at all, and capable of clearly seeing beyond the factors like luck and uncontrollable elements.

It couldn't happen overnight, and especially not in a single slideshow, much less an email.

What happens when a founder is open to investment and only a super-genius capitalist would be appropriate?

The relevance of a slideshow might still mainly be in the "signaling" more than anything else.

Getting the critical capital to get there is big problem, and I recall some places explicitly snubbing VCs after having to get to "impressive" without them.

“Smart” and “brilliant” are all highly subjective.

Pride and ego lead to an amazing amount of bias when you start to think you know “smart” when you see it.

There are no “tests” for legacy admissions and for students whose parents have donated millions.

Tesla might have been more likely to focus on having the tech working at the expense of everything else.

If he did make it to an important investor meeting, he'd sit there massaging his naked dirty feet.

Like it or not - the business world requires some level of shallow ritual you have to buy into.

Otherwise you're optimizing for criteria other than "selecting whether to invest in Apple or Uber."

They arent single-mindedly optimizing to invest in the next apple or uber at all cost! They are balancing it against the need to screen out no-name bums that look and sound the same.

If you can win a coin flip 51% of the time instead of 50, you have a viable business model.

Perfection isnt the goal.

To build the company, Jobs adroitly tapped the network of support services that has made Silicon Valley such a fertile place for fledgling businesses. Says he: “We didn’t know what the hell we were doing, but we were very careful observers and learned quickly.” Jobs pestered Regis McKenna, the area’s premier public relations specialist, to take on Apple as a client. After refusing twice, McKenna finally agreed. For advice on how to raise money, Jobs consulted both McKenna and Nolan Bushnell, his former boss at Atari. They suggested that he call Don Valentine, an investor who frequently puts money into new firms. When Valentine came around to inspect the new computer, he found Jobs wearing cutoff jeans and sandals while sporting shoulder-length hair and a Ho Chi Minh beard. Valentine later asked McKenna: “Why did you send me this renegade from the human race?”

https://time.com/3462424/the-seeds-of-success/

Looks like he did exceed everyone's expectations.

OTOH people who prefer the conventional are not likely to recognize the most promising outliers for what they are, it can go right over their head as if there was no difference from those having below-average potential.

For sure, there's a wider question about how society can reward more than just the ability to return profit. That would help with a lot of today's issues, like climate change, but it's a much bigger issue than just one of where VCs put their money.

But yeah we shouldn't put onus on VC to make society better. Government should invest more in research which benefits society.

I probably shouldn't have used climate change since it's often a controversial issue, but to keep down that path- Public transport would really help climate change but VC likely to invest in that heavily because return wise it isn't comparable to things like selling electric cars.

Again, I'm not saying that as a criticism of VC specifically, but more making the point that the way our society rewards talent or ideas isn't an exact match with what benefits society the most.

How is it overinvested if no one (government, companies, you name it) come even close to "solving" climate change??

There's a very clear benchmark (CO2 increase) and we're failing spectacularly year-on-year!

The two arent related in any way. Overinvested means that most current investors will lose money. It says nothing about the progress toward climate change

He invented the brushless motor and types of transformers that were instrumental to building Westinghouse's empire. When Westinghouse was running low on money Tesla tore up the patents he'd sold to him to save the company.

Tesla was definitely not a "bad decision for investors", the ROI for his inventions is some significant fraction of the economic value of the global electrical system.

But yeah, a couple of his projects failed at some point. Surely a terrible investment!

Investors MUST accrue ROI to their own account and/or that of their own investors, the limited partners. If they do not, they're done. Going bankrupt personally while providing huge value to the world at large is a TERRIBLE outcome for any investor.

Tesla invented great things that provide huge positive ROI to the global electrical system, yes. Nonetheless, giving Tesla 150k was a rather poor investment for JP Morgan. If Morgan had made many more such bad investments, he'd be bankrupt, and unable to fund any further value for anyone.

JP Morgan understood that as well as anyone. Venture capital is a numbers game.

The world is full of examples of founders whose first few companies failed and they then went on to start companies that were successful. The very nature of the US's system that allows failure is why it has such a booming startup ecosystem...

I feel like this is soo close to getting it. Yes, for those investors it was a bad investment. Their goal isnt global economic value and the success of other projects isnt a consolation.

My second point was not every investment in a founder will yield a huge result - many will fail. It's a game of numbers, and just because some of Tesla's projects didn't work out didn't mean he was a "terrible investment".

Does that make more sense?

Tesla made the rounds in New York trying to find investors for his system of wireless transmission, wining and dining them at the Waldorf-Astoria's Palm Garden (the hotel where he was living at the time), The Players Club and Delmonico's. Tesla first went to his old friend George Westinghouse for help. Westinghouse seemed like a natural fit for the project given the large-scale AC equipment Westinghouse manufactured and Tesla's need for similar equipment.

Tesla asked Westinghouse to "…meet me on some fair terms in furnishing me the machinery, retaining the ownership of the same and interesting yourself to a certain extent". While Westinghouse declined to buy into the project, he did agree to lend Tesla $6,000. Westinghouse suggested Tesla pursue some of the rich venture capitalists. Tesla talked to John Jacob Astor, Thomas Fortune Ryan, and even sent a cabochon sapphire ring as a gift to Henry O. Havemeyer. No investment was forthcoming from Havemeyer and Ryan but Astor did buy 500 shares in Tesla's company. Tesla gained the attention of financier J. P. Morgan in November 1900.

Morgan, who was impressed by Guglielmo Marconi's feat of sending reports from the America's Cup yacht races off Long Island back to New York City via radio-based wireless the previous year, was dubious about the feasibility and patent priority of Tesla's system.

In several discussions Tesla assured Morgan his system was superior to, and based on patents that superseded, that of Marconi and of other wireless inventors, and that it would far outpace the performance of its main competitor, the transatlantic telegraph cable. Morgan signed a contract with Tesla in March 1901, agreeing to give the inventor $150,000 to develop and build a wireless station on Long Island, New York, capable of sending wireless messages to London as well as ships at sea. The deal also included Morgan having a 51% interest in the company as well as a 51% share in present and future wireless patents developed from the project.

I grew up in a fabulously wealthy suburb of NYC, a town often dubbed the "hedge fund capital of the world". I went to school with the kids of people who managed or worked at some of these funds, or worked on Wall Street. These kids were not and are not dumb, let alone incompetant by any stretch. I'm talking top scores on SAT & AP exams, Ivy League acceptance, Consulting/Banking internships, and top tier jobs out of college. Some extremely book smart people, and some with a degree of street smarts too. They all ended up working for the same types of businesses their peers and parents worked at. People would hire their golfing buddy's kids without blinking.

However, there's something these kids all lacked: practical real world knowledge and a complete inability to see outside their biases and inability to perceive outside of their bubble. It's not on them though, not at all - it's just how their experiences shaped them.

It takes an outsider to see the value in another outsider. Insiders are clouded by their own experiences that they can't understand disruption or change in an unknown way.

That same disruption or change is what oftentimes makes for startups whose early investors see insane returns.

I have no grievance with people who had slightly better starting conditions than others. My background wasn’t exactly fun but I didn’t grow up in the same postal code as Easy E, a lot of people have it a lot worse than being pushed around as a kid. My childhood was like: “you’re on your own”.

My ex-wife’s background was a horror film, an Ellis novel and she cleanly tests 185-ish on proctored Stanford-Binet. I’m at least somewhat aware of the difference.

What I have an issue with is the fungibility of one’s parent’s or lover’s or advocates wealth into further capture. That’s the thing I’ll be running for office to make not only a felony but one that gets enforced.

You sound like a cool person who is aware you supplied two of three ingredients around success: long hours and table stakes, but my quasi-informed read of your remarks is that you paid that rake.

It also sounds like you understand good cards tend to be the dominant term, and I find that even more noteworthy and admirable than the first two.

Good day Sir or Madame.

Re: starting off from different conditions - it's the world we live in, and it's inherent in people who have found success (for the most part) - if I have the means to give my kids the best chance for success, why wouldn't I do so? If that means making sure they go to a good school, or get a good job, or a loan to start a business, by all means, it's a no-brainer.

>What I have an issue with is the fungibility of one’s parent’s or lover’s or advocates wealth into further capture. That’s the thing I’ll be running for office to make not only a felony but one that gets enforced.

Agree 110%. You've got my vote (and donation, when you have a campaign and I have money to donate). Question is though, what are the mechanisms for catching this, much less enforcing it? It's one thing to be one of those multi-billionaires who send their kids to the best private schools, but at the same time take advantage of every tax loophole, lobby politicians to slash public education. It's another thing to be moderately successful and do right by society, yet also do one's best to make sure their offspring get every chance to succeed. Success does beget success (in most cases) so policing it is tough IMO but a worthwhile goal.

I'm paraphrasing the Prof G podcast here, but the system needs to really do 2 things. 1. Make sure the people that society would typically forget about (the bottom 90%) get a chance to enter the top 10%, and 2. for the top 10% to produce someone who enters the top .0001% who then makes enough money that taxing that person (or persons) helps #1.

>You sound like a cool person who is aware you supplied two of three ingredients around success: long hours and table stakes, but my quasi-informed read of your remarks is that you paid that rake.

Thank you. I was definitely supplied a lot by my parents, who raised a large family and my mom never had to work (for money - she still had to raise 4 kids, 2 adopted kids, a whole bunch of neighbors, and a dog). My dad worked his ass off and did well for himself, and for his community. Of course, he also had a great start in life (his father was a very successful surgeon) and was afforded top opportunities. The respect for him doesn't change though. I have put in my time, and dealt with a lot of BS, but hopefully one day I'll make it. That said, I also was born with crippling ADHD and am somewhere on the ASD spectrum, so it ain't all roses and sunshine - I barely passed through school and didn't get a good job. But I'm aware of where I came from, and how that influences my worldview. Some of my age-group peers who are doing much better than me financially and socially don't have that awareness, or are blind to the inherent biases that come from it. Odd, but I guess that's how it is.

>It also sounds like you understand good cards tend to be the dominant term, and I find that even more noteworthy and admirable than the first two.

It is what it is! I realize how lucky I was to be brought up when, where and how I did. Some don't, and those tend to be people that get suckered into crazy political beliefs or those that have no idea how society actually is versus how they think it is. Sad, but again, that's just how it is.

Good day to you as well; when you stop by my city to campaign, I will buy you coffee.

I try hard to leaven an attitude and articulation around this that depending on one’s taste starts at “passionate” and it’s not ridiculous to call it “strident” or maybe even “toxic” or something with acknowledging thoughtful, public-minded comments like yours at every opportunity.

I would like to acknowledge that you’re very articulate and clearly ethically-motivated remarks and attitude created an opportunity for me to be thoughtful and reasonable in spite of being very frustrated with the status quo, which is not an opportunity afforded on every thread for someone who is engaged in what amounts to some level of “civil disobedience”.

I think everything you’ve said is eminently reasonable, though even describing a position on these topics implies some different difficult dilemmas, many of which you pointed out.

I’d very much like to continue this conversation as it’s one of the most productive I’ve found on the Internet in recent memory, but arbitrarily nesting the thread without more expressed interest from the community is probably pushing it.

If you’d also like to kick the tires on some of these conundrums in a bit more detail, please email me at [email protected] and I will make an effort to reply promptly!

Either way, thank you for raising the bar on the conversation: you pulled my level of debate up, and I doubt I’m alone in that.

So let’s add criminal corruption.

Don’t take my word for it, Carmack publicly expressed regret at not fighting it harder.

And on hacker news? I don’t really care if someone disagrees with Engine John.

Secondly, I’m talking about VCs today. Do you think VCs today act the exact same way they did 50 years ago? The industry has grown dramatically since then.

1. Legacies: this is the single biggest group of admitted students (eg ~36% of Harvard's undergraduate class). This by itself destroys any merit argument;

2. Athletes: people forget or don't know that the Ivy League is an athletics conference, despite the academic prestige and social proof. Ivy League schools don't offer true atheltics scholarships like you might get for D1 football recruits at, say, UAlabama or USC, but it is an important part of the admissions process;

3. The nebulous idea of "diversity". I don't mean in the DEI sense because it's much broader than that, like you can have better odds of getting an acceptance from an Ivy League school by simply coming from a low-population (and thus low applicant) state like Wyoming or Montana rather than Texas, California or New York;

4. Extra-curriculars, many of which are a proxy for wealth and privilege. For example, not everyone can do an unpaid internship living in NYC or LA or take unpaid opportunities requiring international travel;

5. Other random factors like filling out an orchestra. There's an old cliche that you should study the viola instead of the violin if you want to get into Harvard because there are fewer viola players.

6. Whether admissions believe you will enhance the reputation they've so carefully cultivated. An Ivy League degree is a powerful form of social proof. Being a Harvard grad will help you get into any graduate program. The prestige of your medical school greatly affects your ability to get a residency in a competitive specialty. The point is that social proof diminishes if the perception of your graduates turns sour so admissions will absolutely look at how may reflect on them in future.

The only commonality with VC funding seems to be the power of social proof. That is, MIT and Stanford grads will have an easier time. VC firms will go and do presentations and recruiting at those schools.

That doesn't mean you can't get funded if you went to an unremarkable state school. It just means it's a more difficult road. Stanford or MIT will make it easier to get an internship and thus a returning offer at a prestigious Big Tech company. You'll potentially know more of the people in the VC and startup spaces because you went to school with them or someone they know. There's a real network effect here.

But the point is the similarity to Ivy League recruiting seems to be fairly superficial.

Not saying that most of the cases are not hard work from the startup team but saying that if I would have to raise funds I will put laser focus in the people I know instead of trying to reach VCs that are not in my network.

I will repeat this a little bit differently: I see many yes that are related to the team links, not their product or market.

Finally, when I talk about the team, I don't talk about their real capacity to execute but to sell to a VC like selling to an important customer.

This is the most common piece of advice all VCs and Founders give. Even YC has called it out on multiple occasions

The corollary are the following questions:

- What a founder without VC connections should do?

- How long will it take?

Even if they have a super product in mind (not a time machine) they will have an annoying experience pitching VCs who doesn't have any idea of what you are talking about.

> what a founder without VC connections should do

Network, network, network.

Finding a VC is the same process as finding your first customer. Sales is a grind, as is running a company. It acts as a filtering function to find seriousish players.

> How long will it take?

If you raise funding, at least 10-15 years to even get the chance to potentially list or get a high 9 figure low 10 figure acquisition.

They thought that the crazy hair and the video game stuff was an act meant to project an image to the world, and the real SBF was Stanford and Jane Street.

Its the same for the entire education system as Chomsky explains: It seeks to educate people smart enough to do what they are told, but dumb enough to not question it.

Maybe they made the deck two months ago and spent the last two months prosecuting pipeline and closing deals? Maybe they didn’t have a great investor network, so it took them a month or two to even be talking to the right investors (which more often than not is actually what’s important, and only superficially any given pitch or deck)? Maybe the VC in question was their first choice once they learned they existed and what their thesis is?

It’s absolutely true that VCs aren’t your friends. They’re middlemen for distributing other people’s money who pick winners at such a low success rate that one could be forgiven for wondering if random lottery might do just as well.

In terms of actual performance and criteria, they’re more like clergy. There are various performative religious traditions and ceremonies that have to be serviced and abided if one is to have any hope of them bestowing their blessings.

You're assuming that most businesses seeking VC money are fundraising full-time.

I read this and assumed that the founder was was working on building their business full-time and passively looking for VC. For example, they might not be ready to do active fundraising, but want to "dip their toe" into VC so they're much better prepared in 6-24 months when they are ready to actively raise money?

The attention that a business needs gives to fundraising really depends on what the business is, and how well organic growth helps them now.

They’re herd animals where survivorship bias has a reinforcing function until a point where being luckiest longest makes it possible to put a finger on the scale of outcomes to make raising subsequent funds easier, makes it possible to set the trend the herd follows, and makes it possible to somewhat curate outcomes (“soft landings” instead of insolvency) for your portfolio.

Every single unicorn and/or significantly exited startup has a pile of VC rejections that’s miles high. The trick as the founder is to just figure out how to find better aligned investors. Typically ones who aren’t high on the ego trip of being an accidental kingmaker. Take the “feedback” like that of the VC in the post for what it is… complete nonsense from someone who’s accidentally successful enough to get away with such a silly criteria because nobody wants to insult the cult clergy to their face in case you might need their blessings at some point yourself… and move on.

Successfully raising money is first an exercise in qualifying who the right investors/funds are for what you’re doing as a venture and second it’s an exercise in number of shots on goal you can make in as short a period as possible until you find one, “Yes”. Full stop.

I find the mindset “my pitch deck was 2 months old so I didn’t get funding” very out of touch of business realities. It is far more likely that that type of business doesn’t need VC funding. Your SaaS can probably be built with your daytime developer salary. No VC ever says “wow, what a great investment opportunity, one of the best, but the slides were old”. You don’t even need the slides, or the rehearsed elevator pitch. Just build a business that’s worth VC money (solid, profitable, and ready to scale up) if you absolutely insist on it.

Customers today expect polish and few bugs right out of the gate. I spent months on polish alone. If you don't, your product is going to be savaged like this:

"Former Yahoo CEO Marissa Mayer’s New Photo-Sharing App Has a Design From the Stone Age"

https://gizmodo.com/marissa-mayer-new-app-shine-photo-sharin...

The benefit of being bootstrapped, of course, is that it's designed with costs in mind, so I don't spend more on hosting than I do on my Netflix subscription.

That article follows a long standing tradition of women attacking other women in power based on appearance to try to elevate themselves. No insight on polishing trends can be learned here.

Sure. But from experience it takes 3x as long.

After a long day of coding it’s not fun to come home and do another 8 hours.

When you finally take 1 day a month off and look down from 10,000 feet up

The reality of how things are going is gloomy

It might also help if you can mentally spin things to be more boomy. Optimists in the house

Sure, but if the business is profitable that means it works. Now the investment can be spent on bending the curve up (e.g. hire more salespeople that could have been afforded from the company’s revenue alone) rather than the more risky approach of spending the money to see if the product will make it at all.

> A profitable business has either reached market potential, or isn't spending enough on growth.

This is a naïve view from the SaaS era propagated by SaaS and consumer app investors. Does not apply to most businesses and applied to none of the biggest companies today like Microsoft, Apple, NVIDIA, Google, et al.

Look at google: no, it wasn’t profitable (no revenue or even revenue model) but had huge uptake by the nerds without any effort to market it.

> Anecdotally I can think of many more examples of unprofitable businesses getting VC money.

Sure, several of my own companies were funded in this mode. But that capital was more expensive because it was used figuring out if the tech would work and if there were actually customers for the product.

Yes, but spending money on growth is probably the number one thing VCs like to invest in. If you happen to be profitable, but also can demonstrate a clear path to growth, then VCs will lean in.

Example:

- buy 1 million shares at $1.

- sell 1 million shares for $101.

- (101 - 1) * 1_000_000 = 100_000_000

- 100_000_000 * 0.2 = VC gain of 20_000_000

There is more than enough money sloshing around, it all boils down to designing contracts and suitable information exchanges between parties. So anybody thinking that the current system is sub-obtimal can try their hand at disrupting the VC system and making history :-)

An arrangement that better utilizes the majority of the entrepreneurial crowd's energy and time is likely to at least carve a niche, if not dominate. It may not even be that hard. The chasing of planet-scale returns (with the corresponding discounting of the rest 99.99%) is a recent phenomenon and may be just an aberration.

It may well be that far better arrangements exist, but how would a slumdog or a small time farmer or a stay at home parent ever get the ball rolling? Who would play ball with them?

It would pretty much require that an existing VC or an empowered member of their ecosystem have the idea and see a path to it enriching themselves in order for them to spend time on it.

This is a major issue with pure market maximalism like the above: not everyone has agency within and access to every market, and no agent within a market would just let it change unless they personally stand to gain. Many potential solutions pass through empowerment or enrichment of different groups than those currently holding the reins, and this may mean those solutions are impossible to explore.

The cost and effort and intellectual integrity burnt on linking that mass to bosonic super partners even after a six sigma result at CERN on scalar field excitation at 125 GeV was found exactly as everyone knew it would be without a squark in sight is very on brand for what passes as rigor around here these days.

My experience is that if the VC is someone who has background from finance, consulting, or law, then they are more likely to lose their minds over superficial stuff like logo placement, font consistency, alignment of images / tables / etc., and of course consistency in dates etc. - probably because that's all they did during their formative years in their respective industries.

Second point: There's a bunch of VCs out there with the only qualification of

A) Having founded / led a successful startup

B) Having invested in startups during the ZIRP-era

So while you have some tremendously good VCs that have stood the test of time, and have "seen it all", there are also VCs that will be washed away the next few years. So don't take it personally if / when some VC will decline you and and be all preachy about it.

Last point: Some of these stories are just made-up BS to generate content and thoughts. Half of the stuff VCs write on LinkedIn or Twitter seems to be fiction, for the sake of getting a point through to their listeners. Also keep that in mind.

Seems like the typical teacher or manager to me.

I guess "VC was wrong and nobody really gave a shit" doesn't have the same ring to it.

This is a good point. When something looks like Jason Lemkin posting something ridiculous on social media, it is actually an opportunity for us to learn of both his fame and the normalcy of his opinions, as well as to be reminded of the high portion of VCs that are good human beings.

The only difference is that the VC pays you your salary (and all your other expenses) in advance. And let's you keep some of the upside. By contrast an employer pays you a salary, and your (work) expenses as you go.

The VC "implies" by their funding how long your contract is. The employee goes "forever".

So all the things that apply to job-hunting apply to VC funding (Amplified). And make no mistake, the VC becomes your boss.

Once you understand it in these terms you can best evaluate if VC funding is for you.

In this case, I suspect Jason assumes that every business should be 110% focused on fundraising. Well, businesses are trying to run their business! The goal is to run the business, the pitch is a tool, not the goal.

The same thing applies to finding a (software engineering) job: Candidates have life obligations and can't dedicate 110% of their time to pleasing a single interviewer. The goal is to demonstrate that you can do a job, the interview isn't the job itself.

I had a short experience with the music industry and the whole enterprise + VC sounds the same dynamic between artists and record labels back in the day, where was not enough to play in local bars and have a steady presence there, but everyone wanna to be Metallica or Anthrax.

That's not to diss local artists, though. Some are incredibly talented, and I loved the scene I was in it. Just, if we're talking about investing, making music looked like 9 times out of 10 a money sink you do for the love of it, not an investment opportunity.

That’s not quite true. It’s an extreme example, but Taylor Swift’s personal earnings from her current tour is expected to end up in the billions.

Back in the day, touring was something of a marketing tool to sell records, today the records are marketing for the tours (and they build hype, which yields sponsorships and so on). Merch is an important revenue stream, but a large chunk of that is sold on tour.

Many classic rock bands with members in their 40/50/60s perform live, have a local following and make good money without selling CDs.

Cover bands are often local and make good coin without album sales.

Then you have musicians performing children who get paid.

You are never going to be a pop star or a VC rocketship company but few are. But you can make a solid living just performing locally.

It's either: only allow companies that are already big to do new things, which they often aren't geared for in various ways, or have a mechanism to allow capital into new businesses from outside, that comes with certain expectations. You're free to decline both the capital and the expectations, of course, because this is a free agreement made between two parties.

There is maybe some people who raise money "because it is cool", but I would think it is in the minority. If you have a business that is profitable, you are happy with the growth, etc, there is little sense in going to the investors begging for money. The couple bootstrapped businesses I have seen didn't have much interest in raisin.

I discovered a promising new medical treatment- a small molecule drug with impressive experimental results. My name is on the patent and my co-inventors decided to form a startup and gave me co-ownership/stock, although I did some work to help get the company started I didn't want to leave my current job to be involved in full time running the startup at the level they were.

They got big VC funding and the VCs reformed the startup as a new company. During the pandemic lockdown, trying to work at home while parenting a toddler with no childcare, I was sent a form to sign by a new VC firm funding the company, and I was so stressed with the pandemic situation that I just trusted them and signed it without reading it.

The VCs cut me out entirely... just deleted my shares and ownership of a company based on tech I invented and patented. I can't revoke the patent rights either, because they already had a contract licensing it from my employer.

Ironically this I heard this from somebody who ultimately became one. Perhaps it's Zombie Carnivorous Sheep.

""We want to be the first check in." "We add value" 'We are responsible investors". "We're in for the long run". "We back outliers" and the oh-so-famous "Let me know how I can be helpful".

then what they should look for is a skilled operational partner with a high-ish IQ and a stable personality, almost certainly with access to money that can be used for bootstrapping the business. You know, a virtually nonexistent unicorn in the circles that most people operate. Someone who is as rare as the right spouse. That combination is worth a hefty percentage.

VC money isn't optimal for the initial startup phase. Everyone will be happier, detail nitpicking will be nonexistent, and the VC involvement will be more natural at the point in which customer acquisition rate and the cost of that volume is outpacing revenue, which should be the exponential growth curve often in years 5-10. Sometimes an acquisition comes soon after.

If a founder cares about their business, then asking VC to essentially be their startup partner is asking for trouble in a lot of instances.

Most of the stories about "how VC works" are 10, 15 years out of date. The cultural "sense of things" lags behind the reality. We found this out the hard way.

In fact, contrary to all expectations and myths, VCs (outside perhaps of the top 50 or 100 firms?) read their emails and take cold meetings.

They have to.

Every region in the world has some clone of Silicon Valley - technical universities and accelerators and incubators and funds - and most of them have very little deal flow or exposure to outside opportunities and ideas. The guy from a second tier French city part-funded by an Economic Development Agency has as much luck getting into a deal with Union Square as you do. But he still has money to invest.

So most of the VCs outside of a small, narrow set do answer emails, are glad to be approached, and are basically glad to see you if you've got anything at all which is interesting to say. It doesn't cost much to try, either. It's the price of an email.

Yes, warm intros to top tier VCs are really handy.

But that's also why the top tier VCs are so massively subject to group think and wind up collectively dropping five billion dollars on electric scooters and stuff like that.

Everybody is human.

Everybody is here to do the deal.

At the top of the chrome towers are men and women in shoes and socks trying to look good to their management. Nothing behind the curtain, no wizard of oz. Do what you can. Don't break yourself for the myths. Do intelligently bet the odds!

Tech is going to be the dominant story in human history for the rest of our lives in almost all scenarios. It's not a bad industry to be in. It's just the financial side of that industry is really heavy on the mythology and maybe that's holding us back now.

Will be raising on an idea that makes me look at least a little bit like a lunatic in four weeks’ time, so keen to see how this is born out!

They’d take 40% of the upside and live on ramen noodles.

VCs make money by raising money from LPs.

They spend this money on investments which don’t look too bad if they fail, because nearly all of them fail. Looking good while losing all of your investors money on companies which go broke is the key VC skill.

Once in a while you get a huge hit. That’s a lottery win, there is no formula for finding that hit. Broad bets helps but that’s about it. The “VC thesis” is a fundraising tool, a pitch instrument, it makes no measurable difference to success. It’s a shtick.

Sympathy, however, for the VC: car dealership sized transactions paired with the diligence burdens of real finance. It’s a terrible job.

Once you understand that VC is one of the worst jobs in finance and they don’t believe most of their own story — it’s fundraising flimflam for their LPs - it’s a lot easier to negotiate.

1) we are a sound bet not to get you in trouble if we fail (good schools and track records)

2) we will work hard on things which your LPs and their lawyers understand, leaving evidence of a good effort on failure

3) we know how the game works and will play by the unwritten rules: keep up appearances

The kind of lunatics who actually stand to make money with a higher probability than average - the “Think Different” category - usually violate all of these rules.

1) they have no track record

2) they work on esoteric nonsense

3) they look weird in public

And they’re structurally uninvestable.

Once you get this it’s all a lot easier: the job of a VC is not to invest in winners, that’s a bonus.

The job of a VC is to look respectable while losing other people’s money at the roulette wheel, and taking a margin for doing so.

I hope that helps.

This makes no sense. Companies have fees, junior associates have student loans, buldings require rent to be paid.

This is a foolish sentiment, unless you would apply it to all employees everywhere. If startup employees truly believe in their company they would also take no salary at all and just live on ramen noodles.

But if you think this through you realize that employees also have costs in their lives that they need money for.

> Once you get this it’s all a lot easier: the job of a VC is not to invest in winners, that’s a bonus.

> The job of a VC is to look respectable while losing other people’s money at the roulette wheel, and taking a margin for doing so.

This really makes me question which VC firm you work at as you don't seem to understand how they work. If VC firms had no alpha then they wouldn't be able to raise a second fund at all. And you'd never see VC funds stick around.

They fact that Y combinator exists for all these years and A16Z, sequoia, etc are all around for so long indicates that they are good at their job and their job is to make returns for the LPs.

I work at a firm, i'd be happy to help you understand how these firms work as you seem to have a very outsiders view on it, i can help clear up alot of your blind spots if you want to talk!!

Within that loss, some companies do better than others.

Whether that is skill, luck or finding some way to tilt the board in your favour (political influence for example) depends on who you ask.

I have read that the statistics the distribution of success in the VC field was compatible with a random distribution with a very small skill bias.

I do not know if that analysis was accurate and it will be 10 years out of date now.

But that there are winners and losers does not mean that it is not a game of chance.

If you're actually open to changing your mind, provide the source for this claim.

I think you'll find you're wrong by most reasonable definitions of "losing money".

Which tend to happen at least once a decade?

People often have a point to make, and will often ignore such data to make it. To add to this, outside of honest intent prejudiced with personal bias, there are parties lookong to undermine any aspect of success the West has, by invalidating those successful models.

Not if you have no capital -- You still have to eat and be housed and that costs a lot if you don't have family wealth or other income streams, even with a good salary.

People also naturally have different levels of risk aversion. Not everyone can/should be putting it all on red every day.

> This really makes me question which VC firm you work at as you don't seem to understand how they work. If VC firms had no alpha then they wouldn't be able to raise a second fund at all. And you'd never see VC funds stick around.

You're looking at it at the 'fund' level not the individual businesses that make up the fund. To use the roulette example, if I bet specific numbers or splits, I will expect any one of those to certainly lose, but I just need one to hit to cover the rest. Since the individual bets here are human beings and companies and not chips on a table, there's definitely an element of what the top commenter said IMO.

That's exactly their point; this exact same logic can be applied to VCs, too.

For the employees, the sentiment that you should bet on the sales pitch "I won't get you fired" over "I will make you wealthy beyond measure" still holds.

One of these groups clearly has more money at the start of this arrangement and you seem to be ignoring the change in npower dynamic that creates.

Of course, from a startup perspective, both really just look like VCs. But in reality, the people working at VCs but who are not LPs are not usually rich.

By your own logic, you better pay yourself a $0 salary, $0 on secondaries, and invested all your personal savings into the project, because otherwise clearly you don't believe in your own company. Right? And I hope that is also true about every one of your employees?

CEOs of tech companies fall for the anti-capitalist propaganda as much as anyone, in fact maybe more. There’s always been a far-left political lean to tech. Which hey, whatever floats your boat.

It's not a very ordinary company. Too many lawyers.

I worked in hedge funds, even there the management fee (2%) covers the fixed costs (legal, trading operations, treasury, IT operations, etc.) whereas the performance fee (20%) incentivises the alpha.

In VC it's even worse, because at least hedge funds are liquid. VC investments don't realize their value for 5-10 years! Are they supposed to work for free for 10 years? Even the support staff?

Therefore, the more money you are managing, the higher your trading costs. (i.e those costs are "fixed" but its a "fixed percentage" rather than a static number.)

Calculating your trading costs (and usually more importantly slippage) is absolutely table stakes for a fund that trades.

For most funds that’s relatively easy as the trading component is a cost center that you can outsource for predictable prices.

For funds that aren’t treating trades as cost centers, well it’s presumably part of what you are selling so you better be good at it.

> "The two most important things to understand about startup investing, as a business, are (1) that effectively all the returns are concentrated in a few big winners, and (2) that the best ideas look initially like bad ideas."

_initially look like bad ideas_ meaning "we can't pick them out of the crowd of other bad ideas"

> "there is probably at most one company in each YC batch that will have a significant effect on our returns, and the rest are just a cost of doing business"

> "For that reason one of my most valuable memories is how lame Facebook sounded to me when I first heard about it."

> "We'll probably never be able to bring ourselves to take risks proportionate to the returns in this business."

So it's not like this model is alien to Our Kind Hosts at YC. They understand that this is a crap shoot with a slightly tilted table, but they're optimising for staying out of the zones where everybody else is betting and not that much more.

To be remembered: if you're having a hard time getting funded, the VCs are also having a hard time funding you, because the huge returns go to things that look odd, lame, and weird.

For the most part.

Do you think this still applies, given recent waves of following the crowd in the last few years like crypto, and now AI? It seems that YC is actually in exactly the same hype zones as everyone else these days.

I think there's a pretty good chance that as their original team is further and further from the operation that they're "reverting to the mean" but I have no evidence.

So if you believed in something, you need to get rid of the concept of hedging and financial responsibility?

This kind of "believing" is what a religious zealot does. No wonder people say SV is a cult.

Not all VCs from the Bay Area are good, but the good ones are far more common there than anywhere else. One reason "move to SF" is such common advice.

VCs have a whole staff of people needed to do business and a ton of costs. There's a legal team, marketing/events, human resources, finance, some executive assistants. Screening, meeting founders, traveling to meet founders, takes up a TON of time and obviously most of the time, no investments are made! Also don't forget, VCs have an office, usually not in a cheap place, so lease costs, cleaning costs etc.

If VCs had to work for free, where would you be meeting them? Ok it's all virtual now, let's say. But the truth is, meeting people face to face when you're going to write them a cheque for 10-20M is generally a good idea. So VCs and founders will almost always need to travel. You're also always going to need lawyers and finance people, since you're dealing with term sheets and large amounts of money.

As others have said, VC investments are not liquid at all and the timeline is 10 years for any returns. So a VC investor in your world has to travel around the US, Europe or India meeting founders, has to work with lawyers, financial folks for free, gets zero benefits in terms of healthcare, etc. All for the chance at 40% of something in 10+ years, that might not work out anyway?

If run this way, the industry would simply not exist and the founders would not get any investment. And the truth is this, there are many founders out there who want and actively seek VC investment and "shock" actually are happy with the relationship with their investors because they understand a good relationship benefits both parties in the deal.

I will also add, most employees in VC firms get no percentage of the profits of the fund (i.e. the carry). Most VC employees just get a regular salary (which is often far less than tech company salaries). So if there were no fee associated, these people would never get paid, since even when the fund finishes, they wouldn't get any of the 20% carry.

Warren Buffett has described PE as a horrible investment class populated entirely by grifters who lock up your money for 10 years and fuck around with it, producing awful returns. The way he describes it, VC sounds very similar from a LP's perspective.

So why does anyone invest? Buffett's theory is that LPs are mutual fund and pension fund managers who like the fact that there's a 10 year lockup in a private, illiquid investment because it means that the value can't be marked to market. They won't still be managing the fund at the end of the lockup and in the mean time they can mark to expectation and let the next guy deal with the fallout.

But in the process there's no control and no sense of skill or judgement or expertise. I'm just a gambler.

If on-the-other-hand I gave that money to a GP in a fund to invest on my behalf, they could come back with a game-changing amount of money in some circumstances, and there's a plausible claim of skill and expertise in my selection of the GP, and the GP's selection of investments.

Same potential for asymmetric returns as gambling, but in a format that reinforces the illusions of skill and control and just maybe really is a question of skill at some level.

I want to say that losing money by being bad at things is always possible, but making money by being good at things is far more a matter of intangibles than anybody want to admit, and proving that any success was deterministic rather than little turtles racing down the beach to the sea and on-average half make it is nearly impossible.

We all love the illusion of control. But the statistics just don't bear it out as a fact in business.

It's interesting you are pointing exactly at the OP point without realizing it. If you are assuming that the VCs will be doing this for "free", it means they simply don't believe they'll have any ROI, let alone one that beats the market.

VC is a job like any other, it takes time and work/effort etc to produce output, it's also a job where you can improve with skill and experience. Just like writing code takes effort and skill, why would you spend 10 years writing code full-time for "free"?

Just like no one would edit books full-time for free, or write code full-time for free, or teach kids full-time for free, VC's wouldn't screen companies, interview founders, carry out significant due diligence processes for free either. Because they need to eat, need health-care, need money for rent/mortgages etc, just like every other professional.

It's just another job, and most people in VC are not rich, they are just earning a salary and get no carry/% of profits of the fund.

Raise money for the fund's operations with a separate investment product, and take no 2% management fee. Instead take 40% of the upside: this is _efficient_ if you think the upside will be huge.

In fact if you were certain of the huge upside, people would borrow the operating costs for the VC rather than selling equity in the fund. Most VCs in practice live off the 2% quite nicely, and pray for a big hit, but _the big hit is a bonus not the point of the fund_

The point of the fund is the 2%. The once-in-a-blue moon hit is just that.

And let me point out. The YC "big hit rate" is about 1 per 200 investments. Ballpark; you'd need to ask them the current stat.

So a fund that makes 100 investments, on those numbers, has a 50/50 chance of a big hit. 50 investments, a 25% chance.

To reliably get a big hit you either need to massively alter the odds of success for your portfolio companies, or kiss an awful lot of frogs hoping to hit the occasional prince.

VC is _extremely hard_ because it bakes in tech risk and projections about future society into a financial product called startup equity. The big hits are staggering - the best investments ever made by human beings at any point in history I would guess - but reliable prediction of those big hits is impossible.

Nearly every unicorn has a stack of 70 rejection emails. The special factor is intangible and invisible.

If it even exists.

I think Paul Graham explained all of this quite clearly in Black Swan Farming. It's slightly "between the lines" but he knows exactly what business he is in: spread betting and tipping the table as far as possible in his favour!

A good VC approach.

No, it's not; or at least not supposed to. That's what communism is (regular plebs of the working class deciding how to allocate resources with no skin in the game).

It's funny that I heard a VC the other day claiming the US is turning into the Soviet Union...

I mean you've gotta define terms here...

The problem, in my opinion, is the lack of skin in the game in many of these funds. If the alpha is the 2% of funds managed, then the investments are a side show and as a result VC are just a plunder of these funds and a misallocation of resources in the economy. (Hence my comparison with communism).