Venture Capitalists are MUCH LESS ambitious than their private equity siblings

By auren

There’s a common narrative that venture capital doesn’t scale. That narrative is so well accepted as truth that venture capitalists themselves don’t bother taking the advice that they generally dole out.

Here are some common truisms that are often passed down by VCs but aren’t applied in their own business:

Establish dominant market share and become the very best. VCs advise companies to find a niche and exploit it — and do not enter a super competitive space. But the venture capital industry is crazy competitive — often competing with 100 firms (that are usually staffed with super-smart people).

Have one CEO. VCs advise companies to have one core decision-maker. In the rare case, maybe there is a co-CEO. But many VC firms are run as a partnership with 3–8 equal partners (though some partners may be more equal than others). They’d never invest in a company run by committee.

Founders should demonstrate deep commitment to future value creation by taking low salaries. But VCs do not usually trade some of their short-term salaries for long-term upside. Most VCs pay themselves salaries out of their typical 2% management fees. If VCs took their own advice, they would be using most of that 2% fee to build systems and invest in the future. Or they would trade the bulk of the management fee for greater carry.

Companies should invest in growth and market dominance over profitability. But VCs themselves are extremely profitable. They do not hire aggressively, invest in technology, spend time on automation, or make any of the other investments in themselves that they would expect their portfolio companies to make.

Leverage existing advantages to expand into adjacent markets. VCs want companies to hire great people and continually level-up the management team. Yet the VCs grow their own businesses very slowly and do not take risks. VCs rarely move into adjacent markets, expand their brand, etc.

Keep expenses low — spend less on rent, fly economy, and generally be frugal. Yet most VCs do the opposite with their own expenses — often spending lavishly on rent, travel & entertainment, and more.

Companies should be long-term focused and should be doing things that outlast the founders. But many VCs set up their firms in a short-term oriented way. VCs often have much bigger key-man risks than the companies they invest in. And VCs, even successful VCs, rarely outlast their founders.

Governance structure in portfolio companies is a high priority. VCs think it is wise to have investors and independents on a company’s board. But VCs themselves often have much less oversight. Many thrive on potential conflicts of interest.

Companies should go public and being a public company is very good for the long-term. But venture capital firms themselves rarely go public.

Acquisitions can be accretive and strategic. The growth of a synergistic merger often can outweigh the dilution that comes from growing the firm. VCs rarely acquire other firms.