BUSINESS BLOGS
BUSINESS BLOGS
category: business
27 Aug 2008

VCs have a saying “we all make money or no one makes money”. All right, so that’s not the real saying… but the idea is: once the VCs make their dough back, then the entrepreneurs can get their money out, too.

There’s also a saying, to the tune of “everyone is equal but some are more equal than others”. That’s from Animal Farm, a story of the Communism Revolution depicting pigs. It’s funny that the animal of choice is the pig because when it comes to investing, we’re all greedy pigs, I presume.

Hearing the non-brouhaha over the fact that some VCs from Insight invested into Photobucket with their own money due to a lack of match between the company then and the firm’s target profile, I realized that sometimes perception is more important than facts. True, the fact is Insight does late stage deals and at the time the partners invested their own money, Photobucket had 3 employees, so it was obviously out of the VC firm’s investment profile. All right, is this a crime? Nope. The fund had no business to invest in a company like Photobucket. For the record, I once had a VC tell me that WatchMojo.com was out of his firm’s target profile but that he and his peers sometimes invested personally, prompting me to ask if he wanted to invest personally, to which he answered “double no” (I’m not making this up!).  So the point I want to stress is: in a way, good thing the VCs invested because that at least helped the company and entrepreneurs… however, does that make it right?

In other words, it does pose a couple of questions and raise some issues:

- Should VCs be allowed to invest “on the side” if they are asked to investon behalf of school endowments, retirement funds and what not? It’s one thing for a lawyer from a big firm to do something pro bono on the side… but if you are to invest $1M and get back $50M (or anything in this scope), I think you have a choice to make. There are exceptions, and those are for the very best VCs for whom the rules can be bent (yes, I said it: there are exceptions to every rule and everyone).

- Going back to my first point: we all make money or no one makes money, is the adage that VCs use. Maybe I’m wrong… but VCs track record at getting exits - let alone high ROIs - has been bad. So if I am Yale or whomever else invests in Insight’s funds, I would have a major issue with this, even if sure, technically, we’re talking about a mismatched investment. In other words: “hey buddy, maybe you should take a pass on those “on the side” deals and focus on getting my money back, plus a hefty return”.

- Moreover, I love the part where the VCs say they spent a maximum of 15 hours on Photobucket… this proves once and for all that beyond a check, VCs have little to offer. Nice to hear the admission from a VC.

- Last but not least, who cares. VCs are not the epicenter of the moral compass, they will push dying founders off a bridge to maximize their stake and fortune… which sort of explains why this is a non-issue.

I wonder who is the person who forwarded this to Valleywag and Paid Content… now that is a better story.

My conclusion: stay away from VCs, call your banker… frankly, there’s no real difference between the two, the banker probably is less dangerous and one less person you have to keep an eye out on (seriously, I’m not making this up).

Read more on VCs:

- Why do Entrepreneurs Accept Draconian VC Terms?
- Biggest Mistakes VCs Make.