Billionaire Charlie Munger, Warren Buffett’s right-hand man, isn’t shy about his dislike for venture capitalists. In 2014, the legendary investor told the Wall Street Journal that it would be better for venture capital funds to light their money “on fire with an acetylene torch” than to invest in internet startups. Now, at the age of 99, soon to turn 100 on Jan. 1, he has another message for venture capitalists: “To hell with them!”
Munger, vice chairman of the famed holding company Berkshire Hathaway and one of the world’s most successful investors, discussed his disdain of venture capitalists, as well as his obsession with Costco, the state of the global stock market, and the concept of investing versus gambling, on the podcast Acquired on Sunday.
“You don’t want to make money by screwing your investors, and that’s what a lot of venture capitalists do,” Munger said on Acquired.
“You really shouldn’t be in the business of charging extra unless you really are going to achieve very unusual results,” Munger added, referring to the higher fees venture capitalists charge compared to other kinds of investments and the promise of venture capital providing bigger returns. “Of course, it’s more easy to pretend that you can get good results than actually get them, and so it attracts the wrong people.”
The average annual return for venture capital investments over the past 20 years was 11.8%, versus 12% for the Nasdaq Composite, according to Cambridge Associates.
Venture capitalists’ business is based on a concept known as the power law. Most startups in a venture firm’s portfolio will fail or only see modest growth, so to offset those losses, any big returns must come from the rare, explosive startup successes like Facebook, Airbnb, and Zoom. For this reason, venture capitalists are often described as the epitomes of greed.
Venture capitalists also have a reputation for being like sheep—following the herd and putting their money in whatever everyone else is investing in. Just look at Sam Bankman-Fried’s cryptocurrency exchange FTX, which collapsed spectacularly in November 2022. FTX’s demise called into question the venture capital industry’s due diligence, with the Securities and Exchange Commission (SEC) probing FTX’s investors about it at the beginning of the year.
Venture funds experienced a boom in capital during the COVID-19 pandemic, leading them to pump record-breaking volumes of “cheap money” into startups in 2021 and thereby inflating those new company’s valuations. Now, after nearly two years of high inflation and the Federal Reserve’s interest rate hikes in an effort to dodge a recession, startup valuations have fallen, tech startups are stuck in an IPO winter, and investors are being stingier with the money they hand out. In the first half of 2022, venture capital investments reflected average losses of 13%.
To be sure, Munger’s scathing criticism doesn’t apply to all venture capitalists. He says it can be a “very legitimate business, if you do it right,” and if you put the “right people” in positions of power. But that’s currently not the case, he says.
“The people who make the most money at venture capital are a lot like investment bankers. They say which hot, new area they’re going to get in,” Munger said. However, “they’re not great investors—they’re not great at anything.”
