Stanley Bing on VC: It’s Akin to a Ponzi Scheme
I haven’t subscribed to Fortune for a few years, mostly because I can’t find the time to read it anymore. Still, I’ve long enjoyed the work of columnist and humor writer Stanley Bing (outed several years ago as CBS’s corporate communications head Gil Schwartz).
In fact, it’s because I’m a fan that I was surprised to read his blog post this morning, titled “Forget Ponzi Schemes: Try Venture Capital!”
The piece starts off with some straightforward storytelling, about a party Bing attended in the Bay Area last weekend, where “although you wouldn’t know it from all the good-natured laughter and noise, at least 25 percent of the room [was] now unemployed.” (Unfortunately, it’s a scene that we’ve all become accustomed to over the past year.)
Then Bing lurches into an unconvincing, and surprisingly unfunny, argument about why “venture capitalism may be the greatest scam going.” The model as he describes it, works as follows:
– I have money, which I give to you to pursue your little idea.
– You develop your idea to the point where it can be sold to somebody who has none.
– During that time, I can do whatever I want with you to grow your bulb into a tulip I can sell.
– I then sell your pretty flower, take all my money back and then some. The guys who grew the thing get a little taste, but are for the most part left holding the bag.
– The tiny, wafer-thin notion wilts inside the big hothouse that acquired it, generating the requirement for a massive write-down.
– I’m still rich even though nobody else involved in this is.
To illustrate his point, Bing brings up his entrepreneur friend Matt, who organized the Bay Area party, then spent the night drinking heavily, because Matt is unemployed and apparently didn’t make much off the sale of his startup to an acquirer — unlike his VCs, says Bing.
“I don’t have to tell you the only one who walked away with all the dough from that sad story. Whatever its current difficulties, let it never be said that capitalism is bad business for the guys holding the checkbook,” he writes.
I have the utmost respect for entrepreneurs and I fully agree with Jim Clark’s recent assessment that generally, “VCs take too much ownership for what they bring to [a] business.”
I’m mostly remarking on the post because Bing has historically offered fun and useful insights into the industries about which he writes, and I gathered today that he doesn’t have a great perspective on the venture industry or else he wouldn’t have likened it to a Ponzi scheme.
Plenty of VCs can be vainglorious, greedy, and worse; I don’t think anyone (other than those VCs) would argue with that. Still, there’s no shortage of other investors who add a lot to startups in the way of counsel and connections and other support, and either way, as much as I hate to say it, what happened to Bing’s pal Matt was probably Matt’s own fault. He didn’t have to take venture capital, and unless he gave away his company to his investors (which also wouldn’t be smart), he didn’t have to sell it to that software company, either.
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The Epicurean Dealmaker said on July 28, 2009
I imagine Bing is using “Ponzi scheme” like everyone else in the mainstream media nowadays, as shorthand for mystifying behavior you do not understand by people in the finance industry you do not like on principle that appears to be egregiously greedy and harmful to “regular Joes” like yourself. It is a sorry commentary on the intelligence, insight, and even humor one can find in the MSM today. Sigh.
Shava Nerad said on July 28, 2009
You say:
He didn’t have to take venture capital, and unless he gave away his company
to his investors (which also wouldn’t be smart), he didn’t have to sell it to that
software company, either.
Frankly, I am surprised to hear anyone on a PE site say this. Unless Matt is a serial entrepreneur with a tidy stake to invest at the inception of his idea company, he will have a terrible time keeping a majority stake in any venture which requires serious capitalization and no initial revenue. Doesn’t this describe most software development efforts?
For most of us with good ideas (and grey hairs) that need to be developed and brought to market, our decision to go for VC money is painful, because we have seen more companies ruined by the interference of VC influence over a company, and have seen lots of our peers left shafted. I hope it’s less true now than when VC was just any group of yahoos with spare money investing in some random dotcom idea with pretty powerpoints. But some of us bear scars.
Where an entrepreneur is crowded out, it’s often because he or she is an idea and early stage person, but lacking in the steady management skills required for growth stages of the company. In that case, I should hope their stake, their skin, and their contribution would be adequately recognized and compensated (ideally, by them not letting themselves be ripped off at the initial terms). But often not. And it wouldn’t surprise me if some of those entrepreneurs would rather say they were ripped off (true or not) than that their management skills were found lacking, and they were pushed.
But blaming an entrepreneur who comes to the game with only an idea for having a minority stake in his/her own company seems just a little naive. Most investors won’t give you what you need to deliver product for a 25% stake, when all you have is an idea and sweat. How often does that happen in software companies, much less something that involves serious manufacturing?
And if that structure exists, please elucidate. If I could get all the funding I need for maybe a 25% stake in my new company, I’d be ecstatic, and I could probably overcome my inherent distrust around VCs.
Kelvin Fields said on July 29, 2009
I, too, have enjoyed Bing over the years, but this piece is off-the-mark and counterproductive. Unfortunately, pieces like this just reinforce negative and destructive stereotypes that people in the venture industry have to step over. Are there “bad” VCs out there? Sure, but not nearly as many as there were. Do some entrepreneurs get taken for a ride? Probably, although most of the entrepreneurs who whine at cocktail parties about greedy VCs have only themselves to blame and there is usually another side of the story that they conveniently leave out.
This silly notion that VCs “steal” ideas and “fire founders at will” is so overplayed that it only serves to block cooperation between parties that, in almost all cases, have incentives that are aligned. Everyone wants the company to succeed. VCs are too busy with existing portfolio companies and the daily grind and pressures of managing a fund, quieting nervous LPs and partners, to steal ideas from founders. It’s bad for business and it wrecks reputations. Fanning the flames of this kind of “urban legend” only hurts everyone in the ecosystem.
Sixty Year Naive said on July 29, 2009
To expect altruism from any funding source is naive. From my experience funding 5 start-ups, I believe Bing’s comments are accurate for the majority of ventures but not for the majority of the money invested. The VC promise is to help the company grow, not to help the entrepreneur grow.
Mike Alfred said on July 29, 2009
I think it’s sad when people are so willing to laugh at jokes made at the expense of others but then become defensive and hurt when a joke is made about their life or their industry. Get over it, Connie. Crying and taking things personally is not a good habit for a serious journalist.
CK said on July 29, 2009
Kelvin, VC’s steal ideas, maybe 15% of the time. They fire founders at will, say, 40% of the time.
Sounds bad, but in the nearest comparable industry, Hollywood, they steal ideas 200% of the time. And when they fire you (100% of the time), they run you out of town or dump you on Skid Row.
This is why Silicon Valley is rightly considered a Happy Valley where dreams come true.
just.a.guy said on July 30, 2009
The more salient point about VC would be not about the relationship between VCs and entrepreneurs, but between VCs and LPs.
If you look at 10-year returns for VC, they’re finally no longer including the bubble years. But even that’s not the whole story because on a dollar-weighted basis, VC has been a pretty terrible investment for the average LP despite the high IRR in its early years. I did the math 2 or 3 years ago that something like 60 cents out of every committed/invested VC dollar had been returned to LPs at that point (several more dimes were on the come line in ongoing investments or reserves against same).
How so many VC firms can raise so much money and stay in business for so long with such poor results is truly baffling. I suppose it is, in the case of LPs, the triumph of hope over experience.
Mark Solon said on July 30, 2009
In 15 years as a VC, I can’t remember ever hearing a story of a firm holding a gun to an entrepreneur’s head to take their firm’s money. They had (and always will have) other options to finance their companies. Another sensationalistic journalist who has no idea what he’s talking about…
JH said on July 30, 2009
Mark,
You’ve never heard of an entrepreneur who had to take VC money because he could no longer bootstrap the growing business? Dude, you REALLY need to get out more..