I always enjoy reading Joel Spolsky’s writing, and his latest (Fixing Venture Capital) is no exception.
The fundamental reason is that VCs do not have goals that are aligned with the goals of the company founders. This creates a built-in source of stress in the relationship. Specifically, founders would prefer reasonable success with high probability, while VCs are looking for fantastic hit-it-out-of-the-ballpark success with low probability.
I think Joel is right on the money (in a manner of speaking). Another issue that Joel doesn’t go into is exactly what the VCs are expecting for an “exit”. He quotes Joi Ito as saying that the VCs want to cash out in 6 years. That means either an IPO or a sale. During the dotcom boom, many companies went for IPOs before the business was really ready for it. A public company has tremendous reporting requirements on it, and public shareholders sometimes seem to have a very near-term mindset (just watch how wildly many stocks will swing around earnings announcement time!)