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Comment by stephc_int13 | Hacker News Reader

Contrary to common belief, the main job of VCs is not to fuel innovation, it is to protect the money of their clients from the potential disruption.

Angels, on the other hand, are more likely to have a wider range of internal motivations and less constraints.

Some of them might be open to real innovation instead of hedging against it.

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VC = generate high returns for LPs. Not protection of money, but seeking high returns. Not necessarily protection from innovation unless their investment is threatened by it.

I see what you are trying to say but misworded it. Their goal is to generate high returns instead of innovation. If innovation will generate returns then they will invest. Their role is the riskier are the higher percentage earning investments in a portfolio for an endowment (historically).

That said angels can only do the front end very high risk of the investment curve. They can’t carry the company to fruition.

My reading is that VC's customers have portfolios that include successful companies. VCs are thus disincentivized from disrupting those companies, even if it makes a good return for the new company.

I haven't heard of VCs doing that. For that to happen I would imagine that the LPs have a considerable position to flex like that. I would also imagine that we be an edge case far from the rule.

This is simply not true. I don't know where you guys are reading this stuff.

> VCs are thus disincentivized from disrupting those companies, even if it makes a good return for the new company.

How do you think Uber, AirBnb, etc. were all funded?

> the main job of VCs is not to fuel innovation, it is to protect the money of their clients from the potential disruption.

Huh? VCs clients are pension funds, fund of funds, etc. Their main job is to return those LPs a return on investment. Nothing more. Very few of those LPs have deliberate plans to avoid disruption. Unless you're talking about CVC specifically.

Unless I'm mistaken about your use the word "client", this is just plain wrong.

I don't see how this is wrong.

Making a return is protecting money, and in this case this is done by hedging against innovation.

Yea but they tend to maximise profit. I was invited to join a swiss VC group and the way they do it is you don't get to have an idea. You do market analysis and form groups during 1 year of the scholarship and then build the product with a pyramid scheme return.

If you have your own idea it's believed that you love the idea a little too much unfortunately.

I'll try to reword it in the hope of being clearer.

The observation is that disruptive innovation is inevitable.

The role of VCs is to protect against this risk.

You can't protect money by letting it in the bank, investing and hedging is the only viable option.

This is a good way to describe it.

To use concrete examples, while I know there are always internal believers, perhaps decision makers at Visa invested in Stripe and at USAA invested in Coinbase to hedge downside of disruption, not because they want to encourage those technologies.

> perhaps decision makers at Visa invested in Stripe and at USAA invested in Coinbase to hedge downside of disruption,

PS - Those are examples of CVC. Which IMHO have very different goals than traditional VCs.

Ah yes, I was agreeing with your points about CVC. I probably should have responded to the parent thread but had to run so clicked submit.

> The observation is that disruptive innovation is inevitable.

Makes sense, agreed.

> The role of VCs is to protect against this risk.

Protect who though?

Are you just saying that a LP has to allocate funds to a VC asset class in order to hedge against worse returns in other asset classes? In other words, if I'm a pension fund, I don't put all of my capital into Marriott because I need to allocate some of it into AirBnb, since Marriott's market cap will likely go down as a result of ABNB's success? Hence - the hedge.

I am not talking about individual VCs, but in general, all of them, their collective role is to protect money (from their clients) from potential disruptive innovation.

The goal is not to create value or even to make money, but to not lose it.

> but to not lose it.

But for who? You keep saying "from their clients", but I don't think you understand how the VC model works or care to explain what you mean by "protect".

Here's an example:

The California State Teacher's Retirement System, or CalSTRS (called an LP) committed money into Shashta Ventures. Shasta ventures then invested in several Series A and Series B startups (presumably "disruptive innovation"). Sashta then profits from selling those companies and takes a part of that profit for themselves and gives another part to CalSTRS.

So. No, they're not "protecting it from their clients". VCs clients are their LPs and their goal is purely to profit from M&A/IPO activity and return that for themselves and their LPs.

There isn't any dirty little secret about the industry - its that simple.

This is not a secret but a common misunderstanding about alignment.

VCs (and their clients) are aligned against innovation, contrary to what we might read naïvely.

They are investing in "innovative" companies to protect their money against the innovation and also to control them.

Providing no evidence nor having experience in this area for why this is the case other than repeating the same thing over and over again isn't a very compelling argument.

For the record, I'm an angel investor and work with VCs. What you're saying makes no sense to me.

I rest my case.

To a financial manager, avoiding disruption and diversifying is the same thing.

My take is they sell a product to pension fund managers who need to invest in sophisticated asset classes to justify their jobs.

Yes, and also they manage to kill the companies who refuse to play the game.

VCs are not the friends of innovation.

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