[jacquesm]

By this definition every bootstrapper is 'self dealing'. VCs get to decide how, when and where they allocate their funds, if they decide to bankroll one of their own partners in a new venture then that's totally ok as long as the partners and LPs are in agreement (it's their money after all) and you can bet that they'll have extra outsiders scrutinize the deal to avoid being accused of nepotism in case the company eventually goes south.

VCs with partners capable of executing on their own ideas are pretty rare, but when it does happen it is usually because someone had a side project (possibly even before joining the VC) that got legs (either unexpectedly or belatedly) and this person then uses his excellent VC contacts to secure a deal. And of course he/she does not go to a competing VC, that would be a harder pitch and it would be strange not to offer your partners a shot at the deal first.

All in all I can't see much wrong with this and if you think that it is 'unfair' you have to remember that VCs are not under any obligation to invest in outsiders at all (private funds exist).

[thesteamboat]

Bootstrapping is not a conflict of interest. When people are operating as both VCs and executives there are conflict of interest considerations.

Situations involving conflicts of interests are not inherently unethical, but greater care is needed.

[jacquesm]

How can it be a conflict of interest if it is in the end their own money? They get to spend it any way they want it and of course they will spend it on those that they know better more readily than elsewhere.

It's not as if VCs are distributing public funds and those VCs that have taken public funds (or pension funds) would likely never engage in a deal like this.

If you think you're 'in competition' with the VCs partners for capital you have it backwards, they have the capital and they can dispense it at their discretion, or even not at all.

[greghendershott]

Is it their own money? I thought the general partners are using money from limited partners. As the article put it: "I would love to ask the investment officers at a firefighter’s pension fund in Wyoming what they think of venture capital GPs using their money to fund their colleagues’ personal projects."

[jacquesm]

It could be it does not have to be. VCs have fiduciary responsibilities to their capital suppliers and in case there are potential conflicts of interest you can be fairly sure all the i's will be dotted and the t's will be crossed to avoid future trouble. If a VC has accepted public funds or other funds administered by parties who are not the eventual beneficiaries then those things will likely be double checked and expressly allowed.

[thesteamboat]

It sounds like you're defending a particular scenario that I'm not understanding.

Do you agree that there exist hypothetical situations in which a company and a VC firm investing in said company might have differing interests? Doesn't it follow that someone with responsibilities to both parties has a conflict of interest situation?

[tptacek]

This conflict is nothing new and is inherent to the model of organized private investors picking companies to invest in. The exact same problem emerges when an investor decides to invest in a portfolio competitor, or invests in a company that pivots to that role. It's why startups are antsy about who they allow to hold board seats.

[thesteamboat]

> This conflict is nothing new and is inherent to the model of organized private investors picking companies to invest in.

We're in agreement here.

Because this comes up in practice there are a slew of reasonable ways to deal with these sorts of scenarios. I think the original article's "what do we do about it" section falls nicely into this discussion.

I think the extent of my position here is that VC firms are at a heightened risk of dealing with this type of conflict of interest problem, and would be well served by having clear policies on how they resolve them.

edit:grammar

[jacquesm]

Every VC firm has different interests from the firms that it invests in. That's the major pitfall of accepting investor money, their goals and your goals will never be perfectly aligned and sometimes are very much not aligned.

Beware of who you accept money from, especially if that money comes with strings attached (board seats, various preferences and so on).

[thesteamboat]

If I understand correctly you agree that there are potential conflict of interest considerations. (This may be tempered by a belief that in practice these potential conflicts are not a problem for various reasons.)

This is the distinction my initial comment sought to clarify -- in bootstrapping (as I understand it) a company is funding itself so there is only one party and hence no conflict of interest. When a VC firm funds one of the partners, there might be. Given the particular circumstances this may or may not be problematic.

Would you agree further that it might be wise for VC firms to have clear conflict of interest policies in the same ways it is wise for VC firms and companies in general to have clear HR policies?

[jacquesm]

What makes you think VCs do not have clear conflict of interest policies? That you're not aware of any implies that you're not a partner or capital supplier to some fund because in that case you'd be in a position to either demand such clarification if they want you to supply your money or you could pass in case they don't. This concerns the capital suppliers and the partners, it definitely does not concern the seekers of investment.

[soneca]

Two issues with that:

i) bootstrapping is different from self-funding. All of them might start with self-funding, but bootstrapping is getting revenue to fund the startup. Not the founder's money to fund it.

ii) VC's money are not their own money in totality. They raise funds with outside investors and they decide where to invest other people's money too.

[jacquesm]

Bootstrapping is usually defined as 'pulling yourself up by your shoelaces' so using the revenues to fund the growth, but the prototype and initial capital is almost always provided from another source (savings, loans).

Not all VCs take outside investors, but plenty do.