The End of VC Worship

Several years ago, the venture capitalist moved from the wings of the great drama (or farce?) of American money creation to center stage. The applause was deafening: What a bunch of wonderful, risk-taking geniuses these guys were, and how lucky it is for the rest of us that they exist. This certainly was the state of things when Randall Stross was reporting his recently published book eBoys, which is about a Silicon Valley VC firm called Benchmark Capital.

In the last few months, however, it’s become possible to detect a re-evaluation of this point of view. Someone suggested to me earlier this year, when the Nasdaq started to crumble, that there would be a reckoning for VCs who had pushed questionable companies into the public markets. Shortly after that I heard a complaint about how the rules governing who can become a VC are stacked against the little guy. More recently there’s been a barrage of articles suggesting that a harsher market, particularly one that is far more skeptical of tech IPOs, is going to make life much harder for the VC crowd.

All of which makes eBoys an even more interesting read. Stross got what seems to be unprecedented access, spending about two years hanging out at the firm, and this is what makes the book. Stross doesn’t always render the dramatic moments with the kind of flair that could have made this book a classic, but it’s still the best journalist’s account I’ve yet seen of the VC life.

During the heroic phase of public thinking about venture capitalists, they were gutsy, lone-wolf visionaries, taking wild financial risks to back companies that couldn’t get off the ground any other way. In 1997, about 1,500 business plans were sent to Benchmark. Maybe 100 made it to the final stage of consideration, and only nine were funded. Grim odds, eh? Actually, Stross concludes that the 100 or so startups that get close to being funded by Benchmark are pretty much the same 100 firms every other VC comes close to funding. “For deals that, for whatever reasons, were regarded as hot, the chances of being funded were excellent,” he writes. “And for everyone else, they were essentially nil.” In other words, there’s a lot more herd behavior on Sand Hill Road than you might think.

As for wild financial risks, most VCs personally invest an amount of money that, if lost completely, would be trivial to their net worth. Instead they raise funds from big institutional investors. And because they’re investing in a portfolio of companies, the risk is diversified, and thus minuscule compared to that shouldered by an individual entrepreneur. As Geoff Yang, another VC, put in a comment to Fortune’s Melanie Warner last year that perhaps by now he regrets: “If the company doesn’t work out, we’ll sell it for $150 million. If the company kind of works out, we’ll sell it for $500 million, and if it really works out, it’ll be worth between $2 billion and $10 billion. Tell me how that’s risk.”

Then there’s a startup like eBay, which approached Benchmark when it was already profitable and did not need any venture capital at all. Pierre Omidyar simply wanted to be able to leverage Benchmark’s expertise and connections–most critically in attracting a big-time CEO. This is an interesting point, and I wish that Stross had followed up on it later–for example, did eBay actually need the capital raised by its IPO? Or was offering it to the public markets something done exclusively to create a “liquidity event” that would allow prior backers (like Benchmark) a clear way to cash out their investment?

EBoys certainly makes the case that venture capitalists really do work hard, lose sleep, provide good advice, and make critical connections for companies. It’s clear that Stross likes the Benchmark crew, or at least that he’s chosen to render them in a very likable way. In particular, it’s hard not to root for Dave Beirne, co-founder of an executive-recruiting firm who is the only Benchmark partner new to the venture capital game, who is exactly what you’d expect: a driven guy who wants his companies to perform aggressively and gets emotional when they founder.

Venture capitalists are fond of saying that “it’s not about the money,” and that gets said more than once in eBoys. This, of course, is absurd. I’m sure these guys all love their work, but if it didn’t involve payoffs in the seven figures and up (way up), then every single one of them would do something else with his life. And there’s nothing wrong with that, per se. What’s a little questionable is how well the pious stance of VCs will hold up. Stross does not say as much, but it seems to me that the venture capital crowd successfully leveraged their mystique into getting returns that far outweigh their actual contributions–to the companies they back or to society in general.

This is not to say that I don’t believe that venture capitalists work hard, because I do. I believe they are smart. I am even prepared to believe that these venture capitalists are better at their jobs than I am at mine. But I am not prepared to believe, after having read eBoys, that these guys did anything that was worth $200 million apiece, which is the amount added to the personal net worth of each Benchmark partner by the success of eBay alone. Of course, if there’s anyone in the capital-creation class reading this, I’m sure that by now they must be muttering: Well if you’re so smart, how come you’re not worth millions and millions of dollars. To which I could only say: But … I thought it wasn’t just about the money.