3 signs early stage venture capital is losing its way


The genesis of the modern venture capital industry can most often be traced to a man named Georges Doriot, widely recognized as the “Father of Venture Capital”.

By creating the American Research and Development Corporation (ARDC) in 1946 with three partners, Doriot pioneered a new type of financing that provided equity investments to early-stage companies, many of which were founded by soldiers returning from World War II.

In addition to the new funding approach ARDC took with its investments, it also began to democratize the universe of sponsors beyond wealthy families and college graduates who went on to found several top companies, including Greylock Partners. Much of this success is due to Doriot’s principled approach to investing, which has lessons relevant today.

Doriot believed in many things, but deep down he viewed investing as creating a deeply personal relationship with the founders. This meant getting to know each founder’s family, sharing the highs and lows of the entrepreneurial journey, and becoming emotionally invested in each company’s mission. On a practical level, Doriot and his team would work hard to support ARDC’s investments with their expertise and access to their network, and ultimately see themselves as business builders.

Today, the abundance of capital in the market has seen principles dear to Doriot – and most other early practitioners – watered down or abandoned in favor of business models that more closely resemble those applied in the public markets.


A decade ago, when companies were described as taking a “spray and pray” approach, that was generally not seen as a compliment. It was a strategy of investing in many companies – maybe as many as 50 or 100 a year – and seeing which ones survived.

Once the check is written, the investor would not support the founder because the business model does not allow it, even if the company’s marketing said otherwise. Investors spent all their time raising money, finding and executing investments, leaving no time for anything else. Today, this approach is more kindly called trying to “index” the market (in other words, trying to build a fund that tracks the overall performance of the early tech market).

However, a new name does not hide how far this approach strayed from Doriot’s original vision for the venture capital industry, where investors were expected to help and support the companies they invested in, build relationships strong personal relationships with the founders and being emotionally invested in the journey. Seeing founders as an asset class and not as a group of unique humans may seem like a nuance to some, but it’s a fundamental philosophical difference between Doriot and these index funds.

A high-volume indexing approach can be challenging for founders. They will necessarily get less time from their investor at all stages of the investment process and especially after the investment. This can give the impression that the relationship is transactional, with the only value being provided in the form of money.

Founders who follow the oft-repeated advice to optimize their shareholder base – or capitalization table – so that each investor adds value in one way or another, should be wary of investors who admit – or are known – to be entirely passive.

Misalignment on added value

A report released last year by Forward Partners and Landscape.vc – More Than Money – found that 59% of founders report a negative experience with adding value to what they were promised.

In all other service industries, this would see founders voting with their feet and firing their advisers, but the long-term nature of the investment relationship means this is not a viable option in the venture capital space. .

For Doriot, who saw his role as doing everything he could to make his founders successful, these discoveries would make reading miserable.

In the most charitable interpretation, the funds promise to help their founders, but find themselves unable to do so due to competing priorities. In the worst examples, funds cynically make promises to founders that they know they can’t keep. In other service industries, this would be loosely considered a form of misrepresentation and would have serious professional and reputational consequences.

Some investors say their job is to fund a company and then let the founders build it. This can work if the founders are experienced entrepreneurs, but it’s a missed opportunity for the vast majority who would benefit from well-placed support and guidance.

In a competitive funding environment, behaviors are unlikely to return to the ideals envisioned by Doriot when he created the ARDC. Funds will often say what they need to win a deal and then disappoint founders after the investment. The emphasis therefore falls on the founders to do their due diligence before accepting the investment.

Determining the trading volume of each fund, who within the fund will be involved in your business post-investment, how they will add value, and conducting in-depth benchmarks with portfolio companies and the ecosystem are all essential steps to make an optimal decision. .

Longer term, founders making the most informed decisions possible are also healthy for the ecosystem, as funds that don’t deliver what they claim won’t be able to win the highest quality deals.


The two and twenty fee arrangement common to most venture capital funds requires investors (limited partners) to pay all operating expenses of a fund. The result is that when a fund invests in a company, 100% of the amount committed is received by that company without any deductions – a £1m investment means £1m. This is a desirable outcome since start-ups are cash-intensive.

Increasingly, this approach is challenged by funds that introduce costs to be borne by the company. This is a zero-sum game and the effect of these fees is to reduce the amount of capital available to invest in the growth of the business. They have no place in early stage venture capital where investors should focus on making their investments successful rather than waiving fees to increase their overall management fee commission on each trade. Doriot would be incredulous if he learned that investors give money with one hand and immediately take away a percentage with the other.

Typically, fees are defended on the basis that they are relatively small amounts – for example, five percent of the commitment amount – but imagine the impact if all of these amounts were aggregated and redirected to help companies to develop. In some cases, it could mean the difference between success and failure.

As an industry, we need to do better. Honesty and transparency on what each fund will do for its founders after the investment and the abolition of any type of company to pay fees in the early stages would be a good start.


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