Charlie Munger expressed strong reservations about the venture capital industry, likening many of its practices to gambling rather than genuine investing.
In a recent episode of the Acquired podcast, Munger remarked — Repeatedly achieving success in venture capital is an almost insurmountable task. With the rapid pace of decisions in such heated deals, it feels more like a game of chance.
Munger went on to draw parallels between venture capitalists and investment bankers, suggesting that neither group necessarily excels in their investment acumen. Instead, their focus often lies in pinpointing the next lucrative trend. "The real essence of investment is lost on many in the venture capital space," commented Munger.
The vice-chairman of Berkshire Hathaway also emphasized the problematic relationship between venture capitalists and the founders of early-stage companies. According to Munger, founders frequently feel underserved and undervalued. "There's often a palpable lack of genuine partnership. Instead, it feels like venture capitalists are primarily looking out for their own interests," he observed.
He also highlighted the discontent of backers, including esteemed institutions such as university endowments, with the venture capital industry. Munger believes that while venture capitalists might be prospering, their investors often don't see the returns they expect. "These backers feel shortchanged and misrepresented, leading to discomfort and dissatisfaction within their own circles," Munger stated.
Drawing a comparison, Munger noted the stark contrast in approach between the typical venture capital firm and Berkshire Hathaway. Under the guidance of Warren Buffett, Berkshire Hathaway leans towards long-term investments in companies, emphasizing trust in the capabilities of these companies' managers. Munger shared, "Founders appreciate our approach because they know we're not merely looking for an opportunity to sell their business to the highest bidder."
He continued to elucidate on Berkshire Hathaway's investment philosophy, "Unless a business is fundamentally flawed, we're committed to it. This consistent approach has built our reputation for reliability and trustworthiness."
Furthermore, Munger candidly shared that he tends to distance himself from venture capitalists, as well as bankers and consultants. He quipped about the independence that wealth offers, suggesting that it eliminates the need to appease others.
However, it's essential to recognize that Munger's stance on venture capital isn't entirely negative. He has previously expressed admiration for Sequoia Capital, a significant player in the industry and early supporter of giants like Apple, Google, and Airbnb. Praising their prowess, Munger acknowledged, "Sequoia Capital stands out in the American investment landscape, and they would undoubtedly outperform us in the realm of startups."
