Like many folks in the startup world, I’m often in conversations with frustrated founders who are driven to endless consternation — that’s right I said “consternation” — by the fact that they can’t seem to raise capital for their startup. No doubt, there are a variety of reasons for this, but more often than not, this frustration stems from a misunderstanding — or outright ignorance — of how the business of venture capital works. Now, I’ve got a great piece by Steve Blank that I can share with them.
The short answer is that the business model for most venture capital firms is not to build profitable companies, nor is it to build companies in the national interest. VCs’ business model and financial incentives are to invest in companies and markets that will make the most money for their investors. (If they happen to do the former that’s a byproduct, not the goal.) At times that has them investing in companies and sectors that won’t produce useful products or may cause harm but will generate awesome returns (e.g. Juul, and some can argue social media.)
Read “Why investors don’t care about your business.”
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