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14) Anyway, how do you think about VCs? Well, why do they exist anyway? Let's start there. I've been on both sides of this now a few times, and have started to get a sense of it. As far as I can tell there are basically 6 reasons VCs exist.

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15) One reason--the stupidest--is that they can invest others' money and take a cut without any risk. That's a Bad VC. The Second, and maybe most common, is that they can buy low and sell high. Ideally, Very Low and then Very High, separated by Very Little Time.

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16) This is the easiest money a VC can make. It also provides basically no value to the project. Or rather it provides negative value. They're not floating capital for a while, they're not promoting it--they're just making money the project could have made instead.

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17) You don't want the Second VC either, really. You're just paying them money for no reason. And in fact maybe you even kind of know that, at some level. But it's what you do, you know? You do the VC thing where you sell cheap to them.

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18) Then there's the Third VC. The Third VC isn't trying to make money at all on this! The Third VC wants attention, and networks, and gossip. The Third VC might be strategic (if we invest here we'll meet their friends and maybe _that_ will give us great investments!).

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19) They might also just wish they had more eyes on them, so they want to do something, anything, to be Important. So far this doesn't look like a great advertisement for VCs. So far they either look like leaches, or really incompetent leaches.

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20) So let's move on to the Good VCs. The cleanest is the Fourth VC--the one who solves funding gaps. Often people will have a great company but that company won't make money for 2 years--instead it'll spend money. So it needs money to survive until it makes money.

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21) So a VC steps in, buys equity at 1/3 the eventual price, and makes a lot; and the company gives up 10% of their equity but increases their odds of survival from 20% to 60%--so somehow _both_ make 3x out of the investment. The only word of caution here--do you really need it?

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22) And now we get to the Fifth VC. The Fifth VC is kind of like the Fourth VC, but instead of providing bridge funding, they fight like hell for you. They tell all their friends about your project, and all their portfolio companies, and give you connections and networks.

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4:35 AM · Aug 6, 2020Twitter Web App

23) Sketchy versions of the Fifth VC are basicaly MLM. But Virtuous versions take projects they believe in, and teams they believe in. And when they go to their friends and companies and networks and promote the company, they're just telling their truth.

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24) "Use this", they say, "it will be great". And they stake their reputation on you, because they _do_ think you'll be great. The Fifth VC is nearly indistinguishable from 1-4, sometimes. Everyone _says_ they're #5. But there are things you can do to tell.

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25) For instance, give them a super long lockup--do they _really_ believe in you long term? Or grill them, and make them sell you on yourself. Or watch what they say publicly, and see what they push. Do they push random crap? Or do you agree with what they promote?

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26) The Fifth VC might seem lame. All VCs promise their network, but the Fourth also gives lots of money! If the Fifth VC really believes in you, though, they’ll give the _most_ money, because they think it’ll be worth it. And networks are great _if_ they’re really utilized.

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27) People have limited bandwidth, and don’t care about random crap they hear. But if someone you trust says that this is the one project to watch--you listen. We’ve gotten surprising amounts of value from team #5. It pops up where you least expect it.

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28) “Oh yeah, we onboarded because XX said you guys were cool.” “I spent 12 hours reading your ideas because YY vouched for them, and now I’m convinced.” A Fifth VC can get you a foot in the door. It’s up to you to maximize that.

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29) And to be clear, there’s a _huge_ difference between someone who says nice things about you, and someone who really goes to bat. Finally there’s the Sixth VC, a variant on the Fifth. They’re similar except instead of giving their influence they give their advice.

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30) The Sixth VC is great for newer entrepreneurs. There are a lot of fuckups everyone makes (I certainly did!). Pointing those out is huge. And so is noticing when you’re about to make a large error in strategic direction and telling you.

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31) On the other hand, the Third VC does this too, because Important Smart people have advice! Telling apart a Sixth VC from a Third VC can be hard, but it’s really important.

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32) Anyway, as a recap: ask not what a VC can do for you, or what you can do for a VC. Ask whether it really is very positive sum.

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33) And, in some sense, trust your gut. I’ve sometimes felt dread dealing with a VC. In retrospect, that was almost always a good sign to run away. And I’ve sometimes been really impressed, and felt great. Lean into that.

34) There are some Fifth VCs I’ve run into. Many of them are partners of SRM: projectserum.com. Some I wouldn’t have expected to be. But you can tell when someone really genuinely believes in you: their thoughts and arguments flow freely and powerfully.

35) There’s a parallel with community members. Those of you in the FTX community and chats can attest to how much impact Burg, and Dante, and Adebayo have had; way more impact than a random guy with 100k Twitter followers.

36) That’s the kind of partner you want: someone who sees what you see, and believes in you, and will fight for you. And yeah, it doesn’t hurt if they’ll also write you a big check.

37) Don’t fall for the classic VC pitch: we will grace you with our investment of $10, and you will give us 40% of your equity, because we are VCs, and you are a Company, and that is how we dance with each other. Find the partners you want.

38) And if you need funding, sure, raise from whoever! There’s nothing wrong with that, as long as you do actually need the funds, and are raising the amount you need.