Six Myths About Venture Capitalists

Photography: Courtesy of the artist and Gow Langsford Gallery Artwork: Sara Hughes, Millions of Colours 3 (detail), 2003, acrylic paint on linen Steve Jobs, Mark Zuckerberg, Sergey Brin: We celebrate these entrepreneurs for their successes, and often equally extol the venture capitalists who backed their start-ups and share in their glory. Well-known VC firms such […]

by

Diane Mulcahy

by

Diane Mulcahy

From the Magazine (May 2013)

Summary.

Reprint: R1305E

As the director of private equity for the Kauffman Foundation and a former venture capitalist, Mulcahy has observed the industry closely. In 2012 she and two Kauffman colleagues published a report titled “We Have Met the Enemy…and He Is Us,” based on a comprehensive analysis of the foundation’s more than 20 years of experience investing in nearly 100 VC funds. Her research and experience led her to advise aspiring entrepreneurs against falling victim to these common myths about venture capital:

1. It’s the primary source of start-up funding. (Actually, angel investors fund 16 times as many companies, and in 2012 more than 18,000 entrepreneurs raised nearly $320 million through a single crowdfunding site.)

2. VCs take big risks with start-ups. (Often they’re insulated against risk by hefty annual fee streams.)

3. Most VCs offer great advice and mentoring. (To avoid disappointment on this front, ask the CEOs of other portfolio companies how they’d rate the firm.)

4. VC generates spectacular returns. (Since 1997 less cash has been returned to VC investors than they have invested.)

5. Bigger is better. (Research shows that fund performance declines as fund size increases above $250 million.)

6. VCs are innovators. (Apparently not. The innovation is coming from online platforms such as AngelList and SecondMarket.)

Steve Jobs, Mark Zuckerberg, Sergey Brin: We celebrate these entrepreneurs for their successes, and often equally extol the venture capitalists who backed their start-ups and share in their glory. Well-known VC firms such as Kleiner Perkins and Sequoia have cultivated a branded mystique around their ability to find and finance the most successful young companies. Forbes identifies the top individual VCs on its Midas List, implicitly crediting them with a mythical magic touch for investing. The story of venture capital appears to be a compelling narrative of bold investments and excess returns.

A version of this article appeared in the May 2013 issue of Harvard Business Review.

DM

Diane Mulcahy is the author of The Gig Economy: The Complete Guide to Getting Better Work, Taking More Time Off, and Financing the Life you Want. She is an Adjunct Lecturer at Babson College, where she created and teaches an MBA course on the Gig Economy, and a Senior Fellow at the Ewing Marion Kauffman Foundation. Learn more about Diane’s work at www.dianemulcahy.com.

Six Myths About Venture Capitalists

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