The commodification of venture capitalism

Over the past few years, I’ve noticed an alarming change in the venture capitalist / founder dynamic — the expectation of “founder-friendly” behaviour.

This isn’t a revelation I’ve solely discovered, either. It’s becoming systemic. According to the New Yorker,

“Startups increasingly want investors who won’t interfere or ask questions. Venture capitalists must be ‘founder-friendly.’”

And that,

“One of the bigger V.C. firms, the Founders Fund, which has more than six billion dollars under management, declares on its Web site that it ‘has never removed a single founder’ and that, when it finds entrepreneurs with ‘audacious vision,’ ‘a near-messianic attitude,’ and ‘wild-eyed passion,’ it essentially seeks to give them veto-proof authority over the board of directors, so that an entrepreneur need never worry about being reined in, let alone fired.”

This kind of pandering to entrepreneurs was, in many ways, inevitable — due to the rising valuation environment we’ve been in for nearly a decade.

Few entrepreneurs like being told how to run their business, and horror stories about venture capitalists are abound on the Internet. VCs, in many circles, are sadly being viewed as a necessary evil. Therefore, the capital they bring is all they’re good for, which can lead to resentment from the entrepreneur/founder when a VC attempts to do more or hold one to account.

What better way to hook a founder than to tell them you’ll give them millions of dollars with little to no oversight?

Suffice to say, the “hands off” approach is rarely in the best interest of the company and its shareholders. At best, it breeds incompetence — at worst, tyrants.

Although it’s not a VC’s place to micromanage or get in the way of a founder’s autonomy, they should be more than a source of capital. They should be willing to challenge a founder’s assumptions and provide them with support when needed, not shower them with fake praise or turn a blind eye when they’re struggling. In other words, they should be value add.

Unfortunately, the value-add investor is becoming increasingly rare in a world where everything is a race to the bottom…

The Downsides of Commodification

I believe the root of the founder friendly problem — like so many other problems in life — lies in commodification. According to the Angel Capital Association, there are approximately 300,000 active angel investors in the United States alone (this number balloons to a potential 4 million based on looser net worth thresholds). All of this is to say that there is no shortage of investment dollars to go around (for now).

Roger Ehrenberg, Managing Partner at IA Ventures (a seed stage venture firm managing $475 million across four funds), puts it best,

“With the flood of LP [Limited Partner] dollars into early-stage venture, and with the explosion of new venture firms, the notion of “founder friendly” has morphed into something that I believe does a grave disservice to both founders and LPs alike: abdication of responsibility to deliver honest, important, often difficult feedback that might be hard for founders to hear.”

Humans have a penchant to commodify things — oftentimes with negative consequences. We commodify relationships/interactions on dating apps, friendships with social media, and human labor with freelancing websites. Given the opportunity, there’s very few things we won’t try to commodify.

And while commodification has its perks, it can have significant downsides — especially when it involves the human element. In the case of venture capital, it trivializes collaboration, trust, risk, and the impact businesses have on employees and communities.

Venture Capitalists Need to Take an Active Role in Early-Stage Companies

Founders without value add investors are kings without curia regis — and that’s often a bad thing for the people (employees, shareholders, stakeholders) of the kingdom. The best thing angel investors can do for the companies they invest in is to offer support proactively, not sit back and hope for the best — akin to making a bet at the casino.

Aaron Hoddinott

Investor and marketer willing to take big swings at bold ideas.

Aaron Hoddinott

Investor and marketer willing to take big swings at bold ideas.