19 Shocking Insider Secrets About Venture Capital
9 min read

19 Shocking Insider Secrets About Venture Capital

Insiders reveal 19 secrets on how venture capital really works so you can understand the industry and navigate it with inside knowledge.
19 Shocking Insider Secrets About Venture Capital

For this post, I interviewed dozens of venture capital insiders and surveyed hundreds more to collect their views on venture capital. The result is a collection of thoughtful and intelligent takes on the world of venture capitalists. Because my research was anonymous, many of the takes are funny and witty, and they are definitely brutally honest.

It's like having a connected friend in venture capital telling you all the secrets of how venture capitalists really work. I hope you find the post illuminating and useful for navigating your interactions with venture capital, or your career as a VC. Please feel free to contribute if you have anything to add to the discussion.

Top 5 Takeaways

If you only have a few minutes to spare, here are the top 5 takeaways:

  • The unfortunate truth is that most VCs care about their management fees and their next fund, because that is how they get paid. So they will act accordingly. Founders need to know this, so they can act accordingly too.
  • The venture capital space is overcrowded. There are too many venture capitalists, too many firms and too much money. While opportunity is almost unlimited and the world is pregnant with opportunities, the market can only take so much change at a time. Supply in venture capital has far outgrown supply. There will be an ongoing shaking out of below average people and firms.
  • Most VCs are in it for themselves. In corporate speak, they are mercenaries not missionaries. With the money flowing in over the last decade, the industry has attracted the type of smooth talking people who are looking for a quick buck with the least possible effort.
  • Sure, the value-add offered by VCs is hit and miss. But VCs put far too much pressure on themselves when they do the initial sell and it sets expectations far too high. Most good founders don’t expect much from their VCs except the wire to hit the bank account, some wise advice once in a while and responsible governance.
  • Venture capital funded Google, Facebook, Uber, Lyft and SpaceX. That’s just five. Without venture capital the funding options for founders with ideas this ambitious are hugely limited to non-existent. While there are hits and misses, wins and loses, even heroes and frauds, venture capital helps to bring big ideas into the world.

These are just 5 interesting snippets from the interviews and surveys with venture capital insiders, and the full responses are below. So please read on for more insights on venture capital (points #8, #16 and #19 are my favorites). If you’re leaving now, do you want to know how to 10x your impact in your chosen field? You should sign up for free and I’ll show you how.

19 Insider Secrets on How Venture Capital Really Works

The Brutal Truth About Venture Capital

1. As a generalization: if a venture capitalist tweets a lot, don’t take their money. Run for the hills. These blatant self-marketers might promise their social reach to you, but when it comes time to deliver their excuses will pile up high. Heavy tweeting is for retired or semi-retired VCs and the pretenders. You want serious money and serious advice.

2. Venture capital firms have customers, and they are not the founders and startups. A venture capital firm's customer is its Limited Partners, the people and funds who provide the venture capitalists with the money to invest. For example, when a VC is making an investment in a seed stage startup that money is coming from university endowments, pension funds and family offices (rich people). Because the customer is the Limited Partner it means that most venture capital firms focus more on keeping them happy than founders. The unfortunate truth is that most VCs care about their management fees and their next fund, because that is how they get paid. So they will act accordingly. Founders need to know this, so they can act accordingly too.

3. The venture capital space is way too overcrowded at the moment (writing in 2022). There are too many venture capitalists, too many firms and too much money. While opportunity is almost unlimited and the world is pregnant with opportunities, the market can only take so much change at a time. Basically, supply in venture capital has far outgrown supply. There will be an ongoing shaking out of below average people and firms, and if the conditions occur, there might be a mass exodus from the market.

4. It’s shocking how little due diligence venture capitalists do on new investments. It’s not uncommon to invest millions of dollars to a company after a meeting and what can only be described as surface level due diligence. VCs justify this as unavoidable if they are to deploy funds at the pace they need to, and to remain competitive on rounds.

5. The value-add offered by VCs is hit and miss (founder speaking here). To be honest, I’m being generous, it’s mostly miss. The top tier partners can really offer value, but it might come in 3-5 individual acts. One of these acts can make a company, a good customer introduction or referring a good hire. But the value-add is hardly ongoing. This is also fine. VCs put far too much pressure on themselves when they do the initial sell and it sets expectations far too high. Most good founders don’t expect much from their VCs except the wire to hit the bank account, some wise advice once in a while and responsible governance.

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6. Something founders need to know. If a VC has a portfolio with 12 companies and they are still making new investments, how can they possibly spend enough time with you? Forgetting every other commitment they have, if they spend 50% of their time looking for new investments and 50% with portfolio companies that leaves half a month of time for each company. A month has 21 working days, so that’s 10.5 days a year they can possibly commit to you and your company. This simple math shows what you need to expect, and hopefully can make you more aware of the time pressures placed on individual venture capitalists.

7. Venture capital can attract individuals with the wrong intentions. Most VCs are in it for themselves. In corporate speak, they are mercenaries not missionaries. With the money flowing in over the last decade, the industry has attracted the type of smooth talking people who are looking for a quick buck with the least possible effort. These people exist mostly in the long tail of VC as the top tier firms quickly weed them out. If you’re a founder, be on the lookout and do your due diligence on your investors.

8. Hot take: the traditional 2% and 20% revenue model in venture capital won’t last. That means the VC takes 2% of the money they raise (usually for the life of the fund or the first 7-years) and 20% of the profits from the fund. For example, a $200 million fund that returns 3x cash-on-cash to turn the fund into $600 million, will make $4 million every year in management fees and $80 million in performance fees. That’s over $100 million total. This is far too much based on the overheads and the risks of running a VC fund. Like other areas of asset management that have matured, there will be downward pressure on venture capital fees for the next several decades.

9. Beware ex-FAANG venture capital partners. VC firms often hire these people because their resumes look good to their Limited Partners and it is good for fund raising. That doesn’t help founders. If a VC has spent too long in a non-technical role in big tech, they are unlikely to be able to offer much value. The capabilities and relationships they have to offer just don’t align to what early stage founders need. They have spent most of their recent time dealing with bureaucracy and tedious project management.

10. Founders should have a clear funding roadmap in mind before they set out with even their first fundraising. Will this roadmap be 100% accurate? No way. Impossible. But that’s not the point. The point is to think backwards from the result you want (e.g. 20% founders equity at liquidity event) and determine based on the capital needs of your chosen industry, what your funding journey might look like. Map it out based on relevant milestones (product, customer or revenue targets) and funding requirements (e.g. $5M seed for 20% of equity, $20M Series A for 15%, and so on). This will tell you what you have to work with. You can also go and sense check these assumptions with someone friendly who has been there before. This exercise will set you up well for the road ahead.

11. Watch the share price, not the valuation. Most people overlook the fact that startups are like public companies in that the valuation is based on a share price and the number of shares issued. If you are a founder or investor, watching the share price versus your entry price is the most informative indicator of your returns from an individual investment.

12. Term sheets are about economics and control. People get lost fighting and “negotiating” over all sorts of random terms, but the only ones that really matter are the ones that impact economics and control. Economics refers to the company’s ownership (who owns what share) under all possible scenarios. Control relates to the ability to change management and governance, under different scenarios. That’s all. All the other text is superfluous and boilerplate.

13. What better way to turn a win into a loss than liquidation preferences. Play your cards wrong and founders can be left with nothing, even if they achieve a multi-hundred million dollar exit. A friend of mine worked on their company for 8-years, sold it for $50 million, and got nothing.

14. Winning in venture capital is about winning the best deals. The best deals generate the best returns, and it is possible to tell on average what the best deals will be. There will be outliers but largely there are enough signals on the big winners. That means the top tier firms will continue to win in venture capital for a long time to come, because they have the best brands and can attract the best deal flow. The rest of the industry will keep fighting over the scraps, hoping they luck on to one of the outliers. It’s rare that you find an industry with such a stable industry structure.

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15. VC is about marketing and brand building. Both at the firm and venture capitalist level these are what drive success in the industry. Some say that there are firms that have become media companies that monetize with venture capital funds. It’s a super interesting take, but just a way to industrialize the marketing and attract more marketers. At the end of the day, generating big returns in VC is about building a better and better brand.

From my interview: Finally, An Honest Take on How Venture Capital Really Works

16. The balance of venture capitalists try to maximize their returns while minimizing their career risk. So venture capital actually has tens of thousands of funds that raise billions of dollars and allocate the money to derivative ideas that will slightly improve the existing outcome for society. Because of the echo chamber they exist in, funds chase similar ideas that are slight variations on existing solutions. They rarely send resources to genuinely new ideas.

17. We care much less about founders than we say we do. Of course we have to tell founders that we are founder friendly and will prioritize their needs, in some situations we genuinely become friends with founders. But we don’t care about them any more than we do any other human being, friend or family member. Each venture capitalist knows 50+ founders, how can we possibly deeply care about each one? There is not enough time in the day.

Balancing the Scales on Venture Capital

18. Venture capital funded Google, Facebook, Uber, Lyft and SpaceX. I just chose five. Without venture capital the funding options for founders with ideas this ambitious are hugely limited to non-existent. While there are hits and misses, wins and loses, even heroes and frauds, venture capital helps to bring big ideas into the world.

19. I have worked with and observed venture capital partners who are so dedicated to their craft and helping their companies that they spend evenings and weekends in offices with the founders of their companies. They are so bought into the purpose and the mission of the company and deeply care about the individuals involved. It’s so great to see and a shining example for all current and future VCs to follow.

Final Thoughts

I hope these insights from current and former venture capital insiders have informed you about the true nature of venture capital and provided useful information on how to navigate your interactions with the venture capital ecosystem, or career in venture.

Venture capital is a cut throat business. To make it in venture capital you need to be on top of your game. You need all your actions to be as impactful as possible. If you want to find ways to 10x your impact, you should sign up for free and I’ll show you how.

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