It’s funny how an otherwise derivative and borderline depressing experience sometimes sends me down an existential and introspective path at the end of which I develop a decidedly contrarian opinion.  What follows is very much contrarian: any way you slice it, with an 80% failure rate VCs suck at their business.

I recently experienced such an episode at a regional investment day packed with VCs and a handful of hopeful founders. The founders presented some truly amazing businesses and tech, from a Netflix for enterprise process optimization, to a service platform for EV management. As the pitches ended, the VCs were asked which business was the most interesting. Overwhelmingly it was — and I’m not making this up — a startup that crafts protein bars. That’s right, not the business that could compete with McKinseys of the world and not the business that would make EV charging management more convenient for everyone. Protein bars. By far the most interesting startup in the eyes of the VCs at the event.

Mind you, I wish the protein bars startup all the best, and I hope the company can raise the capital. But the outcome made me think about why the VC level of sophistication is so much lower than the level of sophistication of startups. Why would they invest in protein bars and not enterprise process optimization? Are they capable of understanding products founders are pitching that are beyond candy confection? More broadly, why do VCs have such an abysmal failure rate? Why, since 1997, has less cash been returned to VC investors than they have invested? Why do average VCs consistently underperform compared to the stock market? In short, why do VCs suck so much at what they do? Why do 8 out of 10 startups they’ve hand-picked so carefully (allegedly) and with such (alleged) risk aversion still fail? Are they listening to the pitches and the founders? And ultimately, why don’t they start listening to founders and stop giving advice?

A venture capitalist seen here knowing everything while delivering negative ROI.

 The whole advice industrial complex that VCs have developed is enigmatic by itself. Why would a financial sector with an 80% failure rate be in a position to dole out advice? Yet, there are conferences, and seminars abound where VCs are doing the same old song-and-dance routine that hasn’t changed one bit since the invention of venture capital, telling people what they should do to win their attention. Any other industry with an 80% failure rate would be laughed at and out of business.

Imagine a baker who makes ten pastry items every morning — bagels, donuts, croissants, and the lot. Out of that 10, only two are good enough to sell; the rest, all 8 of them, are burned to a crisp and thrown out. The baker would be out of business before noon. But venture capitalists have managed to spin their failure into a dazzling display of bravado as they’ve baked in the loss into their business model. It’s like our hypothetical baker deciding to sell the two good pastries at 10x to make up for the eight that were tossed and then claiming that the $20 bagel is a stroke of baking genius. The baker is still a shitty baker.

But it gets better. The baker advises their clients day in and day out about their business, from how to run a dry cleaning business all the way to how to apply AI to contour tumors on CT scans. Nothing is beyond the knowledge of the baker, while their pastry is reduced to a handful of carbon atoms. How bizarre.

Of course, our baker would be in a pickle if they kept throwing out 80% of the goods. Unlike VCs, who charge 2% annual fee on committed capital over the life of the fund (usually 10+2 years) plus a percentage of the profits when firms successfully exit, the baker must live off of the return on investment — so the baker is better off shutting up and learning how to set the oven temperature. A VC, on the other hand, that raised a $100 million fund and charged a 2% fee would receive a fixed fee stream of $2 million a year to cover expenses and compensation. VC firms raise new funds about every three or four years, so let’s say that three years into the first fund, the firm raised a second $100 million fund. That would generate an additional $2 million in fees, for a total of $4 million annually. These cumulative and guaranteed management fees insulate VC partners from poor returns because much of their compensation comes from fees.

In most VC funds, the partners’ own money accounts for just 1% of the total. The industry’s revenue model, long investment cycle, little skin in the game, and lack of visible performance data make VCs less accountable for their performance than most other professional investors. If a VC firm invests in your start-up, it will be rooting for you to succeed. But it will probably do just fine financially even if you fail.

However, this may not be the main reason why VCs underperform so radically.

General partners celebrate an 80% failure rate after a hard day’s work.

There isn’t a day that my Linkedin feed would not contain a VC doling out unsolicited advice to the hapless audience. Many times the serving is accompanied by a dope animated gif meme about all-caps instructions on how founders should “PLEASE STOP [insert a completely rational thing] NOW!” Sometimes this is about not hiring fundraising agents, as VCs hate middlemen (although they are middlemen themselves — between people who have money and the people who need it), sometimes is about the same old format they’ve been preaching about for the last 50 years (problemsolutionwhynowmarketsizebullshit). But, as a rule, most bits of advice include the “PLEASE STOP TALKING ABOUT YOUR PRODUCT; TELL ME HOW YOU’RE GOING TO SELL IT!!!!” shtick in all caps as if they’re tired of thousands of founders who are too dense to finally get it. (n.b.: an industry that attracts so many clients and serves so few is dysfunctional by definition).

This could certainly be one of the key reasons why VCs suck at what they do: not listening or trying to understand what the product is.

Perhaps, if they’d listen to Elizabeth Holmes talking about the product and not only how she will sell it to every CVS, they’d be able to return some money to their investors. Perhaps, if they’d listen to Adam Neumann and his bovine manure, they’d realize WeWork is a janitorial cleaning business. Perhaps, if they would listen to Scam Bankman Fried, they’d understand he’s running a distributed Ponzi scheme. But no, it’s the selling that’s important. That’s why performer-entertainer-conartist-founders are the ones who get the investment, and consequently, the VC industry generates 80% fails.

So, it would be beneficial to VCs, their success rate, and their investors’ ROIs to start listening to people around them. If an industry consistently delivers an 80% failure rate, something fundamental needs to change, so they may as well start by listening to founders talking about their products.