To determine if VCs are overrated, we must first clarify the criteria by which we’re rating VCs.
I do think venture capitalists (VCs) get too much press attention for the function of their job which is essentially funneling capital from Limited Partner pools to companies they select (they are gatekeepers). Some VCs may provide value-added, while others may provide value-diminished services to the entrepreneurs they back. And not all VC firms or funds generate positive returns for their LPs.
Personally, I think the VC profession is formulaic but on occasion, I still get surprised. I recently had a VC firm tell me they couldn’t determine if our product was a social product, a privacy solution, a Web3 monetization tool, or an AI-generated content ecosystem and service. We offer all of the above! Perhaps “offers uni-dimensional product” is on the VC diligence checklist these days -- but I’d challenge my VC friends to pick companies that can walk and chew gum at the same time. a...@...mv...@...m I wonder what @ChatGPT BOT and @Ray Garcia might think of this?
The measure is performance of the fund itself and often that can't be determined until the fund end of life has happened, which could take many years. The main issue is that game of odds, or randomness of the returns depending on which economic theory one believes. Without the performance, i.e. exits the evaluation can't be determined and remains speculative at best or just random at worse. So the measure that is defaulted to is the ability of the fund to raise the capital and convince LP's that they know something, in effect, they are also selling, and that is one big sale if a GP is convincing anyone to give them millions for something that is so speculative or random. Even with a portfolio with a few exits, that isn't much to tout as actually knowing something, since the percentages are so low that it doesn't indicate much. If a corporation works on those odds for investments in innovation it would get a huge penalty on the stock price. So it remains that it can only be a confidence game. As for added value to any entrepreneur, in some rare cases, maybe, but otherwise it can't actually be of much value, other how to pump on the business in ways that allow the VC to pass on the risk to the next round, if they are in it for the early exit, for that purpose some of them know how to do this well enough to have repeated it multiple times, but this isn't created real value, it is only creating speculative value and then passing on the risk. The challenge here is not in understanding the VC firm but understand why any LP would ever give someone else money to play the roulette table, if one understand this then they are getting to the root of the venture economy dynamics.