Are VCs Accountable?

One of my readers named Giordano sent me an email over the weekend that i’ve been thinking about on vacation. He asked “Are VCs accountable”?

Well, yes they are surely accountable to their investors, called LPs in the industry vernacular. VCs need to generate returns that are significantly better than what the LPs could get in the public markets in order to compensate the LPs for the risk they are taking by investing in venture funds. And individual VC firms need to compete with each other for the LP’s capital and so each VC firm is looking to outperform its competition.

But i think Giordano was asking another potentially more interesting question. Which is, “are VCs accountable to their portfolio companies?”. Giordano’s writes about the VCs he’s seen in action:

From those experiences, I’ve got the impression that the attitude of most of them is one of carelessness: they know that, should they put money in your company or not, they will always have a job, and will find another gig without problems. Since most of them are not career VCs, but come from successful managerial and financial careers, they feel they don’t have nothing to prove.

Sure, they must prove that their investments are profitable and well-chosen to continue managing the money they’re in charge of now, but it doesn’t seems that they have to motivate the businesses they choose.

That’s a pretty big indictment of the venture business. And i believe that there may be a lot of truth to what he says. Because i think many VCs forget that their most important consitituency is the comapnies they invest in.

I have a friend and mentor who has been in the investment business for 40 years. He started a hedge fund of funds long before anyone even knew what a hedge fund was. And he was quoted in a recent article as saying that he had always focused more on his relationships with his hedge fund managers than his investors because, “my father was in the manufacturing business and he taught me that his relationship with his suppliers was always more important than his relationships with his customers”. I found that to be an incredibly revealing concept.

I will assert that the suppliers in the venture business are the entrepreneurs who create the companies we invest in. They are our most important relationship and we must be accountable to them and the companies they create. Those who fail to do this part of the business well will not suceed over the long term.