Like many of you, I have been experimenting with OpenAI’s Playground (ChatGPT, InstructGPT, etc.) recently. It’s amazing what the tech can do and I’m interested to see how it gets applied in the coming years. I don’t think it’s hyperbolic to say it could affect every area of our lives one day. It’s also just plain fun to play around with! With the recent market events on my mind, I thought it would be timely to ask AI why people dislike venture capitalists.
Given all the turmoil in the capital markets this year, both private and public, there’s a lot of finger-pointing going around. Some of those fingers are being pointed at venture capitalists, for things like encouraging companies to grow at all costs when capital was cheap and expecting the same companies to flip to profitability on a dime now that capital is expensive. Or, for not doing proper due diligence, leading to massive frauds like FTX. I believe some truth lies in every criticism, and no industry is perfect, but as a venture capitalist myself, I’m also a bit defensive.
So, I asked ChatGPT for the reasons venture capitalists are disliked and below you will find 5 arguments that AI gave.
We all know there are still limits to GPT, the main one being it often returns incorrect answers, so I also share my own thoughts and rebuttals below.
GPT: 1. Put Profits Before People: Venture capitalists are primarily motivated by profit and maximizing returns for their investors. This often means prioritizing short-term gains over long-term investments and ignoring potential consequences for the people involved.
GHF: It’s true that a venture capitalist’s job is to maximize profits for their investors; people often forget that VCs ultimately answer to their investors and not their portfolio companies. But, I disagree that most VCs are prioritizing short-term gains as a result. The most successful outcomes typically come from companies that play for the long-term vision, coupled with excellent execution in the short-term.
GHF: I also disagree that VCs ignore the consequences for the people involved. Venture capital is a people business. In the early stages, most investments come down to a bet on the founders and even in the late stages, investors always consider the team when deciding to make an investment. Usually, the success of a company and the success of the individuals are tied, which aligns incentives for VCs. There are some cases when a venture capitalist’s fiduciary duty to their investors will result in an unfavorable outcome for certain people, but the VCs I know do not take this lightly.
GPT: 2. Exploit Entrepreneurs: Entrepreneurs often feel the pressure to accept terms from venture capitalists that are not in their best interests. Venture capitalists may also be aggressive in negotiations, pressuring entrepreneurs to accept terms that are not in their favor.
GHF: I think this depends on the market cycle we are in. In bull markets, entrepreneurs might have more leverage on terms and VCs have little leverage to negotiate, especially in ‘hot deals.’ In bear markets, like the one we are in right now, VCs generally have more leverage on terms. This is a generalization, as the best companies will likely always have more negotiating power with VCs, regardless of the market cycle. At the end of the day, VCs and founders both need to feel like they’re getting a good deal for things to go well and the good VCs know this. Like I said above, a venture capitalist’s job is to make money for their investors, but this is more likely to happen when an entrepreneur is motivated and not when an entrepreneur feels taken advantage of.
GPT: 3. Lack of Transparency: Venture capitalists often make decisions and operate in a way that is not transparent. This can make it difficult for entrepreneurs to understand how decisions are made and what their rights are.
GHF: I very much agree with this one. Venture capitalists are notorious for giving vague answers and feedback. Many entrepreneurs don’t know where they stand with VCs and don’t have a full understanding of the investing process, which can be frustrating. I think one thing founders don’t typically understand is that VCs talk to hundreds, even thousands, of startups on a regular basis and only make a handful of investments. Sometimes the feedback is purposefully vague to keep the relationship open-ended. My advice to founders is to prepare for hundreds of no’s or no-reply’s, but don’t get discouraged; it’s a game of numbers and persistence.
GPT: 4. Risk Averse: Venture capitalists often take a risk-averse approach to investing, which can stifle innovation and creativity.
GHF: Overall, venture capital is a very risky business because most startups fail. Anyone who works in venture capital has to be somewhat comfortable with risk. It’s the age-old ‘high-risk, high-reward’ scenario. In that sense, I don’t think it’s fair to call VCs risk-averse. But I do think it’s fair to say most VCs try to hedge their risk however they can. This might look like coaching entrepreneurs, helping them hire good people, or introducing them to potential customers. Every incremental success a startup has decreases overall risk slightly.
GHF: To the point of stifling innovation and creativity, I think there is a nuance. Venture capitalists are typically looking to invest in innovative technology, so on the surface I disagree. However, venture capitalists also like to invest in technology that can sell, meaning the market has to be ready for that innovation. So in the case of innovative technology that the market is not ready for, VCs may not be interested. This can actually be a big deal because it means that sometimes, true innovation is not receiving adequate investment and then it becomes a self-fulfilling prophecy on market readiness.
GPT: 5. High Fees: Venture capitalists typically charge high fees and commissions on investments, which can reduce the returns for the entrepreneur.
GHF: It’s up for debate whether venture capital fees are ‘high’ or not, but asset management fees are very standardized these days. However, the AI is wrong in saying these fees reduce returns for entrepreneurs. In an exit event, entrepreneurs and investors each get their share of profit, and then VCs return their share of profit to their own investors (LPs) less a commission that the VCs keep. It’s a bit more complicated than that in real life, but the point remains: fees and commission only affect the VC and LP relationship.
Overall, I think there is some validity to VC criticism right now. It was a fun exercise to see what AI thinks the problem is, but in my biased opinion, I think AI is missing the nuance on some things!
The author generated this text in part with GPT-3, OpenAI’s large-scale language-generation model. Upon generating draft language, the author reviewed, edited, and revised the language to their own liking and takes ultimate responsibility for the content of this publication.