Home Advice For The Young At Heart Venture Capital: A System Built On Trust

Venture Capital: A System Built On Trust


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by Elizabeth Zalman and Jerry Neumann, coauthors of Founder vs Investor: The Honest Truth About Venture Capital from Startup to IPO

Right at the beginning of books about venture capital is where the paean to startups and Silicon Valley usually goes. I believe in the Silicon Valley–style venture capital system — it’s behind the majority of the most innovative companies of the last fifty years — but if you want to read about that, pick up literally any other book on venture capital. I want to focus here on the one improbably important thing that makes it all possible: trust.

Every day, people I have never met, and usually never heard of, email me and ask me for money. I read all these emails, take them seriously, and sometimes, after a few weeks of work, decide to write them a check. On the face of it, this sounds insane and, in some ways, it is. I’ll lie awake at night, wondering what the hell I’m doing. Why should I believe I can give a complete stranger money, based primarily on a mostly unverifiable story they are telling me, and hope that I would ever see any of it again, much less make money doing it? The intricate sequence of events that has to happen between me writing a check and someday getting a bigger check back is unlikely, to say the least.

You probably also get emails (check your spam folder) promising you vast amounts of money if you just spend a little bit of money up front. You know these are scams; what makes the emails I get different?

The difference is the aforementioned Silicon Valley–style venture capital system. Liz likes to say it’s a construct. It’s a system people built over time to make giving money to strangers more appealing. It is based on an understanding shared between founders and investors about how market value is created, what constitutes progress along those value creation paths, how that progress is measured, and what it’s worth along the way. It depends on a community of investors who share information, trust each other’s opinions, and can roughly predict how the other will act. It depends on founders believing in making founding their profession (at least for a little while), finding other founders to mentor them, and being willing to take a big risk — not the risk of starting a company, that’s an ordinary risk, but the risk of partnering with someone who will give them money but demand shared control of their startup.

And last, it depends, and mainly so, on founders and investors believing that the other will follow these norms even when times are tough or there’s easy money to be made by ditching them. It depends on a certain kind of trust: not necessarily personal trust, but trust that founders and investors will each follow the rules, through good times and bad.

The system doesn’t always work. Every year some venture capital–backed company turns out to be a fraud. But, despite hindsight-looking bystanders exclaiming that giving money to strangers is doomed to fail, these frauds are rare enough or small enough that the system overall still makes sense. It’s the more run-of-the-mill failures, the ones that rarely hit the media and are ambiguously described when they do, that threaten the system. These failures happen when things are not going perfectly — and they only rarely do — and either the founder or investor decides to bend the rules in their favor.

The rules of the system constrain both founders and investors. Each of them agrees to these constraints for different reasons. For investors, it’s primarily about the money, but it’s more than that. The rules stop the VC from maximizing their returns at the expense of the founder and other VCs, for instance. This is not a legal constraint, it’s just how the system operates. A VC who ignores this rule will find they are not welcome in future deals. Other areas of investing don’t have these sorts of rules. VCs accept these constraints because they believe they are doing something more worthwhile than other investors: They are promoting human progress.

Founders, also, agree to the system for more than money. They need money, of course, but for them money is a means, not an end. Just like you don’t go to the hardware store to buy a tool, you go to get what you need to finish a project, founders don’t go to VCs for money, they go for help realizing their vision of building a company.

The system promises both founder and investor that they can be successful while getting what they want. It does this by making money the medium: Investors have money, founders need money. And it rationalizes their different goals — self-realization and pro- moting progress — by denominating success in money. This is fine when everything is going well. But when things aren’t going well, the symmetry breaks. When their goals and the path to riches start to diverge, founders may care more about their vision than making as much money as possible. Meanwhile, investors may decide that promoting progress is less important to them, in the end, than maximizing their returns. When this happens, when the founder and investor goals are no longer aligned because their definitions of success no longer agree, the system starts to break down.


*Excerpted from “Founder vs Investor: The Honest Truth About Venture Capital from Startup to IPO” by Elizabeth Zalman and Jerry Neumann. Copyright © 2023 by Gerard Neumann and Elizabeth Joy Zalman. Used by permission of HarperCollins Leadership.


Elizabeth Zalman is an infrastructure and information security expert and two-time founder/CEO of venture-backed companies, building her first startup to a successful exit and her second to a multi-hundred-million-dollar business. She has raised more than $100 million from the top VCs in the world. Liz has also never shied from a showdown with them, or anyone, really.

Jerry Neumann is a twenty-five-year veteran of venture capital. He was one of the first investors in some of the most successful venture-backed companies of the past three decades, including Datadog and The Trade Desk, and has worked alongside dozens of entrepreneurs as investor, board member, and advisor. He was named one of the most important VCs in New York and one of the 100 best early-stage investors by Business Insider. Jerry teaches entrepreneurship and innovation at Columbia.


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