Vinod Khosla: “70-80% of VCs add negative value to startups”
In an article on Techcrunch yesterday, Vinod Khosla (one of the co-founders of Sun Microsystems and of Khosla Ventures fame) spoke candidly about the value (or, specifically, the lack of value) that venture capitalists add to startups.
Khosla feels most VCs are not in a position to help their startups get through tough times. When asked to name specific VCs who have a poor history of advising their startups, he replied:
“I would be offending too many people. Maybe some percentage that’s substantially larger than 95 percent of VCs add zero value. I would bet that 70-80 percent add negative value to a startup in their advising.”
To hear a very respected member of the VC community speak so sharply about his profession is certainly jarring. But if you look at many of the comments at the end of the article, it seems a lot of TechCrunch’s readers agree with Khosla’s sentiments.
From an entrepreneur viewpoint, claims like this can certainly add to the perception that VCs aren’t true partners and can’t be trusted. Many may even wonder whether it might be worth it to find alternative sources of funding. After all, an entrepreneur sees his or her company as much more than solely a potential source of profit — it’s about taking a vision and working together to transform it into reality. The thing is, for the best VCs, that’s their mission, too.
3 Things to Look for in a VC
The truth is not all VCs are created equal. But if you look for these three things you’ll be well on your way towards finding a successful partnership:
1) Passion and Success Working with Companies Like Yours
Perhaps there are some VCs that meet Mr. Khosla’s characterization, but a few bad apples don’t ruin the bunch. Look for a VC who specializes in your field and has experience assisting companies that fit your profile. Even more importantly, find one who understands your core mission and is actively interested in having a strong relationship with you.
Here at OpenView, we have a sharp focus on the types of companies we are able to add value to — expansion-stage software and software-related companies that have solid growth, are achieving $2-$20 million in annual sales, and are interested in raising $5-$15 million in capital. Those are the types of companies we choose to partner with, because those are the types of companies who we are specifically geared towards helping most.
2) An Established Track Record
Take a look at the background of any VC and see what types of experiences he or she has had. Better yet, talk with founders and CEOs at companies who they have worked with.
Here at OpenView, our partners all have diverse experiences building companies, working in large enterprises, and are respected thought leaders.
3) The Willingness and Ability to Offer More than Just Capital
The best VCs bring more to the table than a check. In addition to funding they provide their time, connections, and experience, and — as is the case with our own unique approach with OpenView Labs — they can even offer important operational support, as well.
In the end, your decision to sign with a VC should come down to you feeling confident that it’s the best long term partnership for your business. If you’re not convinced that it will add value then you shouldn’t do it. There are other ways to get money.
For the entrepreneurs out there, do you agree with Khosla? What are some of your best experiences with a VC, and what are some of your worst? Feel free to post your thoughts below.