Are VCs Accountable?

One of my readers named Giordano sent me an email over the weekend that i've been thinking about on vacation. He asked "Are VCs accountable"?

Well, yes they are surely accountable to their investors, called LPs in the industry vernacular. VCs need to generate returns that are significantly better than what the LPs could get in the public markets in order to compensate the LPs for the risk they are taking by investing in venture funds. And individual VC firms need to compete with each other for the LP's capital and so each VC firm is looking to outperform its competition.

But i think Giordano was asking another potentially more interesting question. Which is, "are VCs accountable to their portfolio companies?". Giordano's writes about the VCs he's seen in action:

From those experiences, I’ve got the impression that the attitude of most of them is one of carelessness: they know that, should they put money in your company or not, they will always have a job, and will find another gig without problems. Since most of them are not career VCs, but come from successful managerial and financial careers, they feel they don’t have nothing to prove.

Sure, they must prove that their investments are profitable and well-chosen to continue managing the money they’re in charge of now, but it doesn’t seems that they have to motivate the businesses they choose.

That's a pretty big indictment of the venture business. And i believe that there may be a lot of truth to what he says. Because i think many VCs forget that their most important consitituency is the comapnies they invest in.

I have a friend and mentor who has been in the investment business for 40 years. He started a hedge fund of funds long before anyone even knew what a hedge fund was. And he was quoted in a recent article as saying that he had always focused more on his relationships with his hedge fund managers than his investors because, "my father was in the manufacturing business and he taught me that his relationship with his suppliers was always more important than his relationships with his customers". I found that to be an incredibly revealing concept.

I will assert that the suppliers in the venture business are the entrepreneurs who create the companies we invest in. They are our most important relationship and we must be accountable to them and the companies they create. Those who fail to do this part of the business well will not suceed over the long term.

Comments

[Giordano Contestabile]

Thanks for the answer! I know that a sizeable number of VCs are different from the one I described, but your post pinpointed an attitude that I've encountered in a few VCs... they sit in their "turris eburnea", dispensing funds to a few chosen ones like Babilonian kings, and if the end result is a failure, the blame is all on the entrepreneur and the company. Well, of course most of it must be on them, but I've seen a few businesses collapse also because of the deteriorating of the relationships between VCs and entrepreneurs. Come to think of it, there are a lot of case histories for that.
Thanks!

[Simon Clark]

Fred, this could be the start of an an interesting debate between VCs and entrepreneurs. The old fashioned VC view from firms like Greylock was that the critical test of a VC was his ability to build relationships with entrepreneurs so that he would get the first call next time they started a company. Newer entrants into the industry either forgot or never learnt this, and tried to get deals in competitive processes instead, and may have contributed to the jaundiced view that you quoted.
Simon
PS: We have just backed on entrepreneur on his third company (of course it helps that the first two were great successes).

[Dick Costolo]

It seems to me that the interesting challenge for the VC here is that your desired accountability flows in the opposite direction of the initial money. That is, LPs fund you and you fund entrepreneurs. A natural reaction is then for the entrepreneur to feel accountable to the VC and in turn, the VC to the LPs. To take the long view and understand that accountability to the fundee creates lasting success seems like a compelling insight, but one I haven't actually heard articulated until this post. Would be interesting to think about the entire value-chain of accountability, as I'm sure there's an interesting corollary for entrepreneurs here as well.