Money Talks: Silicon Valley Venture Capitalists

Silicon ValleyHere in California, the rush for wealth long ago shifted from the foothills of the Sierra Nevada mountains where the 49ers panned for gold, to the Sand Hill Road offices of Silicon Valley venture capitalists (V.C.’s).

Legions of young hopefuls pitch their ideas to shrewd investors ready to back the next new thing to the tune of tens of millions of dollars. Yet the chances of hitting the big time and getting a V.C. to fund a new company are slim. Thousands of companies present their ideas, few succeed in attracting investors.

Just how slim those chances are, and what it takes to grab the attention of the men with the money, is described in Tad Friends’ compelling profile of the Andreesen Horowitz V.C. firm (known as “a16z”), in the May 18, 2015 edition of The New Yorker: Tomorrow’s Advance Man.

Slim Pickings

Each year, three thousand startups approach a16z with a “warm intro” from someone the firm knows. A16z invests in fifteen. Of those, at least ten will fold, three or four will prosper, and one might soar to be worth more than a billion dollars—a “unicorn,” in the local parlance. With great luck, once a decade that unicorn will become a Google or a Facebook and return the V.C.’s money a thousand times over: the storied 1,000x. There are eight hundred and three V.C. firms in the U.S., and last year they spent forty-eight billion dollars chasing that dream.

With the odds stacked against them, young entrepreneurs have a lot riding on their presentation. Armed with a make or break set of slides, they have just a few minutes in the a16z boardroom to make a good impression.

Hubris

So what does it take for a presentation to succeed? Forget everything the rhetoric books teach about ethos, pathos and logos. It takes balls.

The audience, especially a16z founder and Netscape Navigator inventor Mark Andreesen, are scary smart and don’t tolerate fools lightly.

Andreessen is tomorrow’s advance man, routinely laying out “what will happen in the next ten, twenty, thirty years,” as if he were glancing at his Google calendar. He views his acuity as a matter of careful observation and extrapolation, and often invokes William Gibson’s observation “The future is already here—it’s just not very evenly distributed…he asks questions that oblige his partners to envision a new world.

V.C.s are the “arms merchants” of Silicon Valley. They turn ideas into reality. Apple and Microsoft got started with venture money, as did Starbucks, the Home Depot, Whole Foods Market, and JetBlue. Facebook and Google are emblematic of the new age of the Valley, with Facebook literally occupying the abandoned offices of defunct Sun Microsystems.

In this environment, only the boldest presentation succeeds.

Pitch meetings are minefields. If a V.C. asks you, “When you get to a hundred engineers, are you worried about the company culture or excited?,” the correct answer is “A hundred? I want a thousand!” Reid Hoffman, a V.C. at Greylock Partners who co-founded LinkedIn, told me, “I look to see if someone has a marine strategy, for taking the beach; an army strategy, for taking the country; and a police strategy, for governing the country afterward.”

The key is thinking outside the box, way outside.

A16z wants to learn if the founder has a secret—a novel insight, drawn from personal experience, about how the world could be better arranged. If that new arrangement is 10x better, consumers might be won over. Balaji Srinivasan contributed the concept of the “idea maze”: you want the entrepreneur to have spent years thinking her idea into—and out of—every conceivable dead end.

Embracing failure

Despite all the hype and hoopla in the pitch sessions, V.C’s in Silicon Valley have a mixed record of accurately predicting the future.

Of the eighteen firms that V.C.s valued at more than a billion dollars in the heady days of 1999-2000, eleven have gone out of business or have been liquidated in fire sales, including @Home, eToys, and Webvan … The random, contingent way that the future comes to pass is a source of endless frustration in the Valley.

At the end of the day, it’s a numbers game.

It’s fine to have a lousy record of predicting the future, most of the time, as long as when you’re right you’re really right. Between 2004 and 2013, a mere 0.4 per cent of all venture investments returned at least 50x. The real mistakes aren’t the errors of commission, the companies that crash—all you can lose is your investment—but those of omission.

Given the need for aggressive proposals it’s little wonder that many outsiders, such as some Australian tech companies, are intimidated by the attitude adjustment needed to successfully pitch to V.C.’s.

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