Venture capital isn't a game you can "win." The goal is to get a return on investment, not to fairly distribute money. Starting a company isn't a contest like american idol.
I think the bigger objections than "fairness" are:
1. These might not be good funding decisions. Maybe investing in Keith Rabois's new startup is a bad decision, but it is only happening because he's a partner at Khosla. If you're an LP in a VC fund, this is something you could reasonably be concerned about.
2. If you're an entrepreneur pitching to a investors, you expect that the pitch is being taken in good faith. If the investor is just taking your pitch so that they can access your proprietary information and use it to inform their own startup (funded by the firm you're pitching), that's pretty wack.
I have literally no information about these examples, so it wouldn't be meaningful for me to hold an opinion on whether or not impropriety is occurring. I also think that Keith Rabois probably has enough of a track record that he could easily raise funding for pretty much whatever he wants to do. I also suspect that most entrepreneurs aren't particularly worried about point 2.
Nonetheless, this is clearly right at the nexus of the objections that people raise about SV: that it's an old boy's network masquerading as a "meritocracy". It just smells fishy. Sometimes things smell fishy and are OK... but there's always a cost to doing things that smell fishy: the appearance of impropriety is often just as harmful as impropriety itself.
VCs are under no obligation to invest in outsiders at all.
Yes, it's an old boys network, old boys networks are not illegal nor are they bad. In fact they give the younger boys a fantastic opportunity to side-step the whole thing and start their own network, that's exactly what YC has done.
Whenever you see something like this there is an opportunity.
Yeah, sure. I don't think that contradicts my post: I'm just saying that people might be concerned about those things, and an LP might question whether a given VC firm is best managing the assets under its control. The author didn't say that VC firms were obliged to invest in outsiders, just that these rules might give LPs more confidence that firms were behaving properly and in their investors best interests.
That's not a wishy-washy "fairness" thing: it's a concern about whether the firm is fulfilling its obligations to its backers. You don't have to agree with the concern... but it isn't an unreasonable thing to be worried about.
The author is not an LP with a VC. He feels he's in competition with the VC partners for their money, different situation entirely.
As an LP he might take issue with this, but for that you have to be an LP first and LPs typically do not take issue with this but actually feel that their money is well spent (whether that's correct or not is another matter).
1) If you're an LP and you think this type of thing is a really big deal, don't put your money in a fund that does it.
2) Even if they didn't invest in themselves, they could just as easily give your idea to a more competent entrepreneur and invest in her instead. If you're really worried about your proprietary idea being stolen, you shouldn't be in these meetings.
Sure. But I think the author's point was that he does find these concerning, and that other people (LPs and entrepreneurs) might also find them concerning if they were more aware of them, and that he thinks that VC firms should institute rules against them.
So yeah, you can totally have the perspective that those two points don't matter. I'm not saying that you should think that they matter. But some people do think they matter, and I don't think it is wholly unreasonable to feel that way.
My goal with my earlier comment wasn't to make you agree with the author. It was just to point out that the author's points aren't just about "fairness": they're also about whether VC firms are best delivering value to LPs.
On a nitpick point: I never said "idea". The idea that people are worried only about "ideas" is silly. There are other things to worry about: if you're raising a series B and are providing data about your business, that data potentially has concrete value beyond merely an "idea". I don't personally think it's at all unreasonable to be concerned about people misusing that data.
This is a simplistic, overly idealistic understanding of venture capital that is unfortunately constantly repeated but rarely rebutted.
The goal in venture capital is to be able to continue to raise funds. On a $500 million fund, a venture firm locks in $100 million in management fees over the life of the fund (assuming the standard 2% annual management fee and 10 year fund life) regardless of performance. Not a bad deal.
But it gets better. Because of the nature of venture investments, it's all but impossible to declare a fund a winner or a loser a few years into a fund. But a firm won't wait 10 years to raise its next fund. It's going to raise its next fund not more than a few years in, and in a hot market like this one, that fund is likely to be bigger, so the firm gets to lock in another 10 years of management fees on an even bigger pile of money.
Carried interest (your "return on investment") is icing on the cake for venture capitalists. Because most LPs are muppets who will continue buying the same inferior product, the real imperative for a venture firm is to make sure its funds are not total dogs. Given historical venture capital returns, that basically equates to not blowing up your fund.
The "winning" is in creating a successful company, and VC tries to pick those winners. Getting VC funding isn't "winning" at all, and the author seems to conflate those two together.
As a LP, I would actually think that my GPs have a fiduciary duty to fund companies started by their partners if they thought it is a great investment opportunity (and ultimately VC partners are only beholden to their LPs and their own performance. Goodwill and good faith are valuable for achieving that end, not in itself)
Also,
>Now, in the most competitive start-up environment in history, these founders no longer just have to worry about being beaten by other start-ups in their space. They have to worry about potential investors picking off their ideas and using them for personal gain.
You've always had to vet your investors like this. Nothing has really changed.
Not sure american idol the best example. Don't the "winners" usually get signed on the judges labels? Simon Cowell does this, it's really pretty brilliant. get paid to make them popular via the TV show, get paid producing the albums after you make them a star. If you squint your eyes right, all those contestants are getting angel funding, the top 12 get VC funding and the winner gets an IPO. The producers lose a little money at the angel level, break even to decent money at the mid tier, and rake in some serious dough once the album comes out.
I get your point, but you should pick a contest that isn't hit driven like VC money is. Starting a company isn't like the Olympics, for sure.
1. These might not be good funding decisions. Maybe investing in Keith Rabois's new startup is a bad decision, but it is only happening because he's a partner at Khosla. If you're an LP in a VC fund, this is something you could reasonably be concerned about.
2. If you're an entrepreneur pitching to a investors, you expect that the pitch is being taken in good faith. If the investor is just taking your pitch so that they can access your proprietary information and use it to inform their own startup (funded by the firm you're pitching), that's pretty wack.
I have literally no information about these examples, so it wouldn't be meaningful for me to hold an opinion on whether or not impropriety is occurring. I also think that Keith Rabois probably has enough of a track record that he could easily raise funding for pretty much whatever he wants to do. I also suspect that most entrepreneurs aren't particularly worried about point 2.
Nonetheless, this is clearly right at the nexus of the objections that people raise about SV: that it's an old boy's network masquerading as a "meritocracy". It just smells fishy. Sometimes things smell fishy and are OK... but there's always a cost to doing things that smell fishy: the appearance of impropriety is often just as harmful as impropriety itself.