My buddy Paul Kedrosky (disclosure: an advisor to my company) has an interesting piece on why he loves venture capitalists. I love them too, but mostly for a singular reason.

Paul’s posts starts with some excellent arguments, but alas, in the third paragraph he starts to lose me

To pick on a few things:

“the idea that anyone at all would build a business around funding startups is the remarkable thing”. Indeed. So is the fact that there exist professional gamblers. The odds are against them, most lose money, but a few end up with very good returns.

“Failure rates among venture-backed firms are lower in the first few years, but higher later on”. What we’re saying here is that companies who start out with more money take a longer amount of time to run out of money. Hmm. I don’t know if that says anything about the nature of VCs, other than they carry money.

“But that doesn’t mean VCs are quacks. Or that what they do isn’t hard. Or that it’s unimportant. Because it is important, and the good ones are smart, and what they do is very, very hard.” - I can almost make the same case for degenerate gamblers: what they do is hard, and the good ones are smart. Most are quacks though.

The difference is what they use their money for.

The saving grace of venture capitalists, god bless them all, is that they put their money to use in building business and innovation.

It’s not about loving venture capitalists. It’s about loving their money. And how they use their money.

Now think about it: hand somebody a big pile of money, pay them a handsome income, and have people begging them for money all day every day. What type of personality do think will emerge in them? Is it all possible they’ll start to think a little too highly of themselves?

So here’s to venture capital. I think it was Steve Martin who said something like: France is a  lovely country, except for all those damned French who live there. Well, venture capital is a lovely country too.

I kid, I kid. Particularly the VCs I’m talking to next week, plus all my VC friends, plus everyone I’m likely to raise money from in the future, I really don’t mean you guys. You guys bring a lot of value to the table besides money. You really do. I meant the other guys.

Seriously, I kid.

Let’s finish with a quote that made me laugh from an entrepreneur buddy of mine (who shall remain nameless): “I aspire to live a lifestyle where my hobbies are funded by other people’s money. Two ways I know to do that: get NSF funding or raise venture capital.”

Interesting data on impact of VC investment on startups with angel investment, based on a Kauffman Foundation study.

Couple of interesting nuggets:

• Angel investors are generating 27% Internal Rate of Return (2.6x investment in 3.5 years)
• However, average return is fairly meaningless; 52% of investments returned less than the investment amount, while 7% returned > 10x, accounting for 75% of the total investment returns.
• Startups that take VC money after taking angel money descrease their chances for a 1x to 5x exit by ~20%. They increase chances for a 5x to 10x exit by ~7%, however.