Oct 8, 2015 · 10 minutes

Earlier this week, The Information published the results of a three-month research project on diversity in venture capital.

The results were exactly as you’d expect: There isn’t any. Diversity in venture capital is far worse than the tech industry as a whole.

In an op-ed on the site, Social Capital’s Chamath Palihapitiya wrote something that was surprising: He aggressively called out the industry. Not off the record. Not in whispers with journalists. Not saying “some VCs.” He went full barrels on the industry writ-large.

From his post:

The original practitioners of venture capital were the eccentric, quirky outcasts of traditional society who themselves were entrepreneurs. We’ve replaced this diverse bunch with a conformist but pedigreed group who are largely risk averse and driven more by FOMO than by passion or vision.

It’s particularly interesting given Kleiner Perkins was rumored to be buying Social Capital at some point to revive its brand. Kleiner Perkins is the posterchild for so much of what Palihapitiya and The Information’s research shows.

Kleiner is a firm that used to be filled with “eccentric, quirky outcasts” and very much became the establishment. Many of their recent big name investments -- like Twitter and Facebook-- were made long after they had clear traction. It’s a firm where many of the investors were outside the “power alley” -- the age 35 to 46 bracket where VCs do their best work. And thanks to the Ellen Pao trial, it’s a firm that many people-- rightly or wrongly-- associate with gender discrimination.

But Kleiner is hardly the worst offender of what Palihapitiya describes. The clubbiness has gotten off the charts in recent years industry wide. Pals becoming partners. Failed entrepreneurs becoming partners. Hell, even failed middle-managers of startups becoming partners. Sometimes even successful executives at mega-companies becoming partners. Problem: They don’t know shit about startups.

VCs will say to this that partnerships are like marriages, and they should only be entered with people they know well. But, as Palihapitiya says, that’s bullshit if you look at the returns:

[I]’s not like the counterfactual is actually impressive enough to justify not changing. The average returns in venture are sad—you are largely better off investing in public ETFs—less risk, same reward and totally liquid. 

It’s also likely the largest reason there is nearly zero gender or race diversity. The hiring process is necessarily about who is already in your circle.

Certainly the lack of diversity, the hiring filter of “we met in a bar/ conference/ TED and just really hit it off”, and the utter lack of firing any senior white men who are no longer performing at a VC firm are all parts of the asset class’s stagnation.

But I think there’s another huge issue that’s causing conformism that doesn’t get talked about enough: VCs have become the spokespeople for the entire tech world.

For anyone new to the startup world this may not seem that remarkable. But this is one of the largest cultural changes I’ve witnessed in my near 15 year career covering venture capital. Before the dot com bubble, most of the public had no idea what a VC was. And while certainly some VCs became rock stars in the dot com age, most preferred for their portfolios to do the talking.

And even when things started to turn around for the better, many a VC would still repeat the old saw “We just want our entrepreneurs to be the focus.” This was basically cross-stitched and framed throughout Sequoia’s office. It was no small cultural change for the firm to try to brand its partners more.

Ironically, in my experience, the most quiet venture firm of all in the wake of the bust was Benchmark. The same Benchmark’s whose rainmaker ace Bill Gurley now appears in print and on TV seemingly daily talking up his portfolio and explaining why its rivals will certainly fail. It’s Gurley himself who’s said when a VC’s lips are moving he’s marketing. At least he admits it. Now that’s authenticity.

But give Gurley credit for at least being a great investor with a great existing portfolio that includes Snapchat and Uber and half a dozen more promising sleeper companies. The rise of social media has made even mediocre investors-- if you look at, yunno, returns-- into celebrity names with huge followings.

Over the last few years every VC-- even the biggest -- have grudgingly acknowledged that brand and voice matter greatly to this generation of entrepreneurs. They have all started to play the game. They have all hired “marketing partners.” They all Tweet and blog more. They all answer the phone when reporters call. They all sit on stage and go on TV.

What are some of the factors that got us here? And is this a bad thing? Arguably, VCs have a wide view of the industry and will be more honest than a founder who has 100% of his skin in one game, right?

Let’s answer the first of those questions first: How this happened. There seem a few factors to me.

  • The rise of social media and personal blogs. It gave VCs who weren’t at the top five Valley firms a voice and a way to speak directly to the market. Some of them were no-nonsense truth tellers like Fred Wilson. Some could make an impassioned point like Mark Suster. Some had larger than life combative personalities like Jason Calacanis. And some -- like Dave McClure-- just liked to swear a lot. They all had a talent for building a tribe.

  • The rise of professional blogs. Tech blogs have a lot of space to fill everyday. Blogs don’t require you go on the record. Blogs are always chasing down rumors of fundraisings, and VCs see most of those deals making the rounds. Many blogs will runs stories off a single source. The success of blogs has pushed many old media companies to accept these same bars for publication or be left in the dust. VCs became the go-to call for tech bloggers, willing to keep their identities secret. And in turn, blogs became the forum for VCs to secretly shape the narrative about how much a company was “crushing it” or how much their competition was getting “crushed.”

  • The rise of Andreessen Horowitz. One of the first hires A16Z made was the accomplished Margit Wennmachers. They didn’t hire her to do PR. They made her a partner. She had a lot to work with considering the Tweet-storming, outspoken personality of Marc Andreessen [Disclosure: A Pando investor] and the rap-quoting, equally outspoken ascendant brand of Ben Horowitz. But credit to them: They listened to the advice she gave, even if it conflicted with their own judgement. Within a year, A16Z was being touted as one of the top venture firms in the Valley. Soon after, VCs kept calling me asking if I knew “a Margit” they could hire. Nearly every firm tried to follow the playbook-- as much as they might bitch about it.
  • The sophistication of optics. As the importance of brand and voice grew, savvy VCs became adept at optics. They used to bully founders, insisting they hire grown up CEOs, taking over the boards with those loyal to them, pulling the plug on a company when things weren’t working, insisting founders return capital and try again. Not only does far less of that happen now, VCs won’t do it even if they believe it is the right course of action. Why? The Peter Thiel [Disclosure: Also a Pando investor, via Founders Fund] school of thought: Once a company is doing so poorly that you need to replace the CEO, it’s probably beyond fixing. Better to let the founding team grind it out. Beyond that logic, there’s the optics of being the VC who does any of those things. If a company is a loser, just let it die its own death, publicly continuing to signal your support. Anything else probably doesn’t help the company win, and it creates word of mouth that you are anti-founder. (Ie: The “Sean Parker problem” that Sequoia faced after his clashes with Mike Moritz over Plaxo.) It’s not that this is a bad strategy. But it shows how much VCs are playing to the crowd and sacrificing what may salvage one company for the good of a portfolio.

So why is any of this a bad thing? I mean, I too have spent the bulk of my career building VC sources, wining and dining them, trying to pry information out of them. Surely I wouldn’t do that if it weren’t some means of getting to the truth, right?

What makes me uneasy as a reporter is the shift from pull to push. It was one thing to pry information out of a VC. Now it’s all but screamed at you and any other reporter listening. The problem isn’t VCs speaking about what they see, it’s that VCs have become the voice of what’s happening in tech, and there’s precious little attention paid to the game they may be playing.

Here are just some of the problems with relying only on VCs to speak for tech and startups:

  • They may not actually know what’s happening -- even at their own portfolio companies. I’ve spoken to numerous founders who have complained that “off the record” information given to reporters about a funding deal or revenues was wildly out of date. But because reporters assume the founders won’t answer these questions, they don’t ask them. They ask the VCs. Sometimes the VCs are bullish out of loyalty. Sometimes they just talk out of their asses. Sometimes they may think they have the most accurate info and think they are helping. But it frustrates the shit out of founders.

  • If VCs give the wrong information about a startup company, people are willing to give them a pass on the accuracy. When we covered the story of Zirtual’s strange implosion, many people were willing to give Jason Calacanis a pass for talking up the company -- essentially openly encouraging other VCs to invest-- hours before its Web site disappeared, but no such pass was given to the founder. No ramifications for spinning a rosier outlook than is real is a dangerous situation for anyone making an investment or employment decision based on what these investors may say.

  • “Loyalty.” Most VCs will defend a portfolio company even in the wake of horrible behaviour or a dire financial situation. And why not? I wouldn’t want our investors just out trashing us. Private companies want to stay private so that their dirty laundry isn’t aired. Helping a company through a PR mess is a way to advertise “value add” for future entrepreneurs. But somehow the press treats commentary by a VC about its own investment as more impartial than talking points coming from the company itself. Beware the VC who says everyone in his portfolio is “Crushing it.”
  • And of course when it comes to issues like diversity, well, as The Information points out, VCs have a worse track record than tech companies writ large. They probably shouldn’t be speaking for anyone on topics like those.

Back to Palihapitiya’s point about group think and a lack of risk taking: VCs spending more time worrying about their personal brands more than their fiduciary duties is going to encourage conformity. The very fact that they’ve conflated brand with performance means they are playing to a crowd. And most people playing to a crowd don’t want to risk falling flat on their faces, delivering news no one wants to hear, or being the bad guy in any way.

Palihapitiya suggests more VCs should try to solve the world’s big problems like the eradication of cancer and a broadly educated planet or a sustainable environment. When John Doerr tried to do the last of those, he put his firm in peril and forever dented one of the most sterling personal brands in the venture world. No one who cares this much what the press and the Tweetosphere thinks of them is taking that gamble, no matter what gender they are.