Sep 6, 2024 · 1h 9m · news
Nicholas Chirls: Why Big VCs Ruin Startups, VC is a Ponzi Scheme Today & Most VCs are Bankers |E1198 · 20VC with Harry Stebbings
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In this insightful episode of the 20VC podcast, host Harry Stebbings interviews Nicholas Chirls of Asylum Ventures, who delivers a scathing critique of modern, fee-driven venture capital and shares his contrarian, trust-centered approach to early-stage investing.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 24.1% of the talking time here. How this is scored →
Harry as informed peer 5.6 Guest teaching 3.8 Guest disagreement 3.6 Harry pushing back 4.3
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 14:04 Nick vehemently rejects Harry's seed return thesis
Nick immediately cuts in with 'Totally disagree, totally disagree' to dismiss Harry's premise that elevated seed valuations inevitably crush fund returns.
Hardest push from Harry ▶ 27:35 Harry challenges Nick's willingness to give up preferred stock protectionsHarry refuses to accept Nick's idea of buying common stock, pressing him on how preferred protections save funds half a turn during market downturns.
Biggest teaching moment ▶ 21:54 Nick reframes LP incentives and compensation realitiesNick gently corrects Harry's assumption that LPs are incentivized by TVPI bonuses, pointing out that most institutional LPs are public employees whose primary motivation is job security.
Harry holds his own ▶ 38:59 Harry demonstrates track record expertise on 5 on 25 roundsHarry leverages his concrete data from over 170 investments across ten years to show why high-valuation seed rounds consistently underperform.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Harry's Welcome and the Launch of Asylum Ventures | 3 | 2 | 2 | 1 | Harry warmly welcomes Nick back to the podcast after 10 years and asks about his transition from Notation to Asylum. Nick sets a critical tone by comparing top VC firms to Lehman Brothers and Wall Street banks. | |
| Venture Capital as a Ponzi Scheme | 6 | 4 | 5 | 8 | Harry explicitly takes the opposing view to challenge Nick's claim that VC management fees function like a Ponzi scheme. Harry counters that no standard job forces employees to return salaries if targets aren't met, forcing Nick to defend his no-salary model at Asylum. | |
| Boutique Artisans vs. Commodities | 7 | 3 | 4 | 6 | Harry brings up Doug Leone's perspective on VC commoditization and pushes back on Nick's view by highlighting how multi-stage funds like Index have efficiently entered seed stages. Nick maintains that firm differentiation comes solely from standing for a distinct belief. | |
| Early-Stage Strategy and Non-Consensus Investing | 6 | 4 | 6 | 5 | Nick aggressively rejects Harry's view that high entry valuations destroy seed returns, arguing the real job of seed VCs is backing non-consensus ideas before anyone cares. Harry engages thoughtfully on Series A vs B pricing dynamics and momentum investing. | |
| LP Incentives and Book Markdowns | 6 | 5 | 3 | 4 | Harry brings up LP compensation structures and unacknowledged markdowns as hidden drivers of systemic VC risk. Nick corrects Harry's assumption regarding LP compensation, pointing out that most pension LPs are public employees motivated by job security rather than TVPI bonuses. | |
| The A24 Analogy for Venture Capital | 7 | 4 | 5 | 8 | Harry aggressively challenges Nick's idea of buying common shares and abandoning preferred rights, emphasizing fiduciary responsibility and down-market downside protection. Harry pushes back strongly against Nick's idealism regarding founder trust, noting legal provisions can represent a half-turn difference in fund returns. | |
| Real-Life Deals and VC on VC Crime | 4 | 3 | 4 | 3 | Harry prompts Nick to share personal experiences of getting bypassed in deals, leading to a discussion on predatory VC practices and short-term games. Nick shares a painful story where founders accepted acquihire retention packages while investors received nothing. | |
| Why Big VCs Promote Capital Inefficiency | 4 | 5 | 5 | 4 | Nick explains how large VC firms incentivize junior partners based on deployment velocity rather than net returns, promoting capital-hungry sectors like foundation models and defense tech. Harry asks whether poor performance will eventually halt their fund-raising ability. | |
| The Disastrous "5 on 25" Seed Round | 8 | 4 | 3 | 3 | Harry draws on his extensive portfolio experience of 170 investments to argue that overpriced 5 on 25 seed rounds produce the worst outcomes due to lost urgency. Nick agrees, illustrating with his hugely successful early bets on Bison Trails and Solana when nobody else cared. | |
| Investing in Founders When You Don't Understand the Space | 5 | 4 | 3 | 5 | Harry pushes Nick on whether he would invest in a top-tier founder operating in a domain he doesn't understand. Nick reframes the issue, asserting that exceptional founders must be able to explain complex ideas in simple terms to non-experts. | |
| The Myth of VC Value-Add | 8 | 4 | 4 | 6 | Harry challenges Nick's dismissal of VC value-add by citing Doug Leone advising Fred Luddy against selling ServiceNow, which grew into a $160B enterprise. Nick clarifies his critique is aimed at platform/recruiting services rather than high-trust strategic guidance. | |
| Founder-VC Misalignment and Capital Efficiency | 5 | 3 | 3 | 2 | Nick and Harry examine how large VC fund mechanics force founders to raise excess capital prematurely. Harry notes that media narratives have conditioned an entire generation of founders to equate fundraising with progress. | |
| The Brutal Reality of Being a Founder | 4 | 5 | 4 | 2 | Nick passionately debunks the popular Silicon Valley narrative that everyone should become a founder, calling the journey brutal and life-ruining unless driven by deep obsession. Harry concurs, linking back to their earlier discussion on obsession versus passion. | |
| Liquidity Timing and Aligning with Founders | 7 | 4 | 3 | 6 | Harry openly admits his failure to take liquidity in hyper-hyped startups like Hopin and Clubhouse, then questions Nick's policy of selling secondary stock alongside founders if he still believes in the business. Nick defends secondary sales as a way to secure LP returns while maintaining founder alignment. | |
| Reflecting on VC Investment Mistakes and Valuations | 5 | 4 | 2 | 4 | Nick reflects candidly on his investment mistakes, such as letting deal droughts induce FOMO and over-haggling over minor valuation differences at pre-seed. Harry asks for exact current metrics on Asylum's average valuation caps and check sizes. | |
| The Quick-Fire Round: Unorthodox Views and Lost Opportunities | 4 | 3 | 2 | 2 | Harry leads Nick through a rapid-fire series of questions covering his contrarian views, peer inspirations, and major missed deals like Hugging Face and Runway. Nick shares a personal origin story about how his mother's death and time at Lehman Brothers shaped his anti-banker ethos. |
Statements from this episode (37)
Chirls: Junior partners at big VCs are compensated on deployment speed
“Your junior partner at these big firms, sort of like a VP at Goldman, they are compensated and promoted based on money velocity, not money returns.”
Chirls: Foundation model startups align with mega-VC deployment goals
“Like the foundation models are like a big, big VC firm's dream. They literally require billions and billions of dollars to go buy effectively NVIDIA GPUs.”
Chirls: Asylum Ventures is a $55M fund writing $500K to $2M checks
“Fifty-five million dollar fund. We write 500 K to two million dollar checks.”
Chirls: Large VC firms operate like transactional Wall Street banks
“Basically all the same people from Lehman showed up. Highly transactional, all about the money. There was no real art or creativity to it. It was very private equity, like finding the company, dressing it up a little bit, handing it off to the next guy. And I …”
Chirls: Private equity allows managers to profit even if portfolio companies fail
“The private equity scam is like, we probably all know this is like, you can invest in a company. It doesn't actually matter how well that company does. You can take a lot of money out of that company, and if it goes bankrupt, it doesn't matter.”
Chirls: VC is a Ponzi scheme guaranteeing 20% fees regardless of performance
“The venture Ponzi is you raise a fund, you take two percent management fees for 10 years guaranteed, it does not matter how well that fund does, and you've taken 20% of that fund and put it in your pocket.”
Chirls takes zero salary at Asylum Ventures to reinvest fees into hiring
“I don't pay myself at a silo. I'm putting every single dollar into the, into hiring people and building the firm.”
Chirls: Wealthy venture capitalists rarely reinvest personal money into their own firms
“I would argue that over time, even wealthy folks that have made a lot of money in this business or venture don't put any money into their firms.”
Chirls: Stage, sector, and geo-focus are not sustainable VC advantages
“I think for the most part, stage, sector, geo-focuses these things get arbitraged away. They are not sustainable positions in venture, in my view. The only sustainable position is actually standing for something meaningful.”
Stebbings: Multi-stage entry prices will cut seed fund returns in half
“I actually think that they've come in with such efficiency that actually they've made it so much harder for the existing pure seed players. They've increased price. They've increased supply. I think you will see returns significantly denigrate. We all saw five…”
Chirls: Early-stage venture returns require investing in ignored sectors
“If I've learned, I don't know, one thing over the last 12 years or 13 years investing is that the only way that I personally have ever made money, and I think this is probably true for most of early stage investing, is to invest in something that no one cares …”
Stebbings: VC LPs face unrecognized permanent loss of capital
“I think it's a permanent loss of capital issue, actually, and that they actually have significantly impaired books that they just don't know yet.”
Chirls: Top-quartile 2015 vintage VC funds haven't returned capital
“The top quartile, the best 25% of venture firms from the twenty-fifteen vintage have not returned their investors all their money. We're nine years in. The top quartile has not given their investors their money back.”
Chirls: 75% of 2020-2021 vintage VC funds won't return principal
“If you think about the twenty-twenty-one vintage, I think a one X fund will be top quartile. I think returning your money is, I think returning your LP's money on almost any timeframe will be top quartile. So in that sense, probably 70, I would guess 75% of th…”
Chirls: Mega-VCs Create Market Opportunities for Boutique Seed Funds
“I'm actually grateful for the big banks in venture. I actually don't want them to go away because that they actually provide our opportunity. They provide us an opportunity to provide an alternative to founders to that system.”
Chirls: Common and preferred shares yield identical returns in outlier startup wins
“There's a few in every fund that really matter, at least matter from a financial performance perspective. And when they really matter, the common is, is exactly the same as the preferred, is exactly the same as the preferred two, the series A, they're all wort…”
Stebbings: Downside liquidation preferences can add half a turn to fund returns
“Those provisions exist for a reason, which is because in harder times, being able to get back one X, not 0.2 X actually across several companies, which is often the case makes a big difference. It can make a half turn on a fund.”
Chirls: Legal agreements cannot prevent VCs and founders from screwing each other
“My experience over the last 10 years, there's the legal agreements don't matter. There are always ways for an investor to quote unquote screw over a founder or for a founder to screw over an investor. It goes both ways. And the legal, the illegal agreements do…”
Chirls: Founders restructured an acquihire to cut out early investors entirely
“There's one that comes to mind around Aquihire that we that you kind of talked about many years ago where we actually introduced the portfolio company to the acquirer. It was understood that the cap table would sort of get Taken care of. Like not, again, not m…”
Chirls: Asylum Ventures Blacklists Untrustworthy VCs Permanently
“Now there's many folks that I will never work with again. And maybe that doesn't matter to them, but like I think it will. There will be a company, there will be an opportunity where someone wants to work with a company that we work with we'll never work with …”
Chirls: Defense tech is popular among mega VCs due to capital inefficiency
“I believe that the big venture firms, defense tech is great, right? Defense tech, those companies are going to be insanely capital inefficient. They're going to require insane amounts of money. My view is like American dynamism and defense tech as a theme. It'…”
Chirls: VCs can raise new funds by matching NASDAQ returns
“The returns need to just look like about the NASDAQ. It just needs to be, it just needs to be roughly in line with the NASDAQ for them to continue to raise. And by the way, that's true for all of venture. That's true for all of venture, which again is why, lik…”
Stebbings: $5M on $25M seed rounds are my worst investments
“The worst category of seed investments that I've made have been five on 25. They are slower. They lose urgency. They try and do too much too soon because they can do more than one thing at once. The founders lose proximity to customers. They're the worst.”
Chirls: Bison Trails hit $30M revenue 18 months post-investment
“18 months later, they were doing almost thirty million in revenue, and they were a monopoly on the market.”
Chirls: Notation Capital invested in Solana's Series A round
“We invested in the Solana Series A. So that's kind of similar. No one cared.”
Chirls: No VC firm has ever determined a startup's success or failure
“I have never found that any investment we've made ever, or really any, I've never seen any VC Be truly the difference between success and failure of a company. Period.”
Chirls: Coinbase would have succeeded without Andreessen Horowitz and USV
“Would Coinbase not have been successful? If they hadn't take money from Andreessen Horowitz and USV. No, I think they would have been just as successful.”
Chirls: VC platform services like BD and recruiting do not move the needle
“So like what I think I'm, what I said, what I don't think has, what I don't think moves the needle is services. I don't think that services, you know, a business development team, a recruiter, et cetera, are actually going to be the difference between success …”
Chirls: Only a small percentage of VCs actively destroy startup value
“In my experience, actually, it's a smaller percentage that actually destroy, like, when I think about lots of VCs in the community that we work with, like, there's not a long list of folks where I'm like, oh, this person is gonna be, like, dangerous to the com…”
Chirls: VCs push founders to raise money for markups and promotions
“VCs are obviously incentivized for founders to think that or to be scared of that. Some ways it's a threat and there's all sorts of weird incentives in the middle, right? It's I'm raising my fund. I need to show some markups or I'm a trying to get a promotion …”
Chirls: Building a startup will ruin your life whether it succeeds or fails
“Building a startup is truly awful. It's like a truly, truly bad experience. And it will ruin your life basically in various different ways. And by the way, that's if it goes well or if it doesn't go well.”
Stebbings: I should have sold secondary positions in Clubhouse, Hopin, and BeReal
“Truth be told, honestly, Nick, I've been in some rockets that then turned out to not be rockets. Your clubhouse to your hop in to your be real. And they are portfolios with assets in, whether you like it or not in terms of naming. And I should have been much m…”
Chirls: Asylum Ventures only sells secondary stock when founders are selling
“We will only do that when the founder is selling. At, but I will say when the founder is selling, we almost always do it.”
Chirls: Non-institutional VCs will win more founders over next decade
“I believe actually the less institutional and banker-like you can look to founders over the next decade, the more likely you are to win. So I think that the most of venture is deeply focused on becoming institutional. It feels more professional. I think the mo…”
Chirls: Andy Weissman and Bryce Roberts represent top independent VC alternatives
“This has changed over time, but right now probably Andy Weissman and Bryce Roberts. I think they represent many of the things that I just described about being the alternative to the big AUM firms. They think independently, and they have the guts to be themsel…”