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Not such a long time ago in a Manhattan studio far, far away from Silicon Valley, technology legend Marc Andreessen in an interview on the Charlie Rose Show smiled as he acknowledged he’s “crossing over to the dark side.”

The three time entrepreneur and active angel investor, in partnership with longtime collaborator Ben Horowitz, has just closed a $300M first fund focused on technology companies in Silicon Valley under the shingle Andreessen Horowitz.

This is not the first time venture capital has been referred to as the ‘dark side,’ but the term has enjoyed a resurgence in technology media headlines of late as Mr. Andreessen has been doing the publicity rounds promoting the new fund.

Though the timing is fortunate for this author, the name Darth Capitalist is less a nod to Mr. Andreessen’s remarks but more an expression of a sentiment sometimes associated with an industry whose incentives and practices are often not well understood by entrepreneurs and the general public, alike.

Venture capital is not the dark side of entrepreneurship, it is an enabler of all that is right with capitalism and the pursuit of progress. As a successful entrepreneur several times over, Mr. Andreessen is intimately familiar with the challenges that can occur between investor and entrepreneur. The dark side is not venture capital as a whole, the dark side is the misalignment that can occur between an investment principal operating within a structure aimed at generating returns and an agent tasked with tactical execution.

As practitioners under such conditions, venture capitalists endure monikers ranging from the benign ‘vulture capitalist’ to the more worrisome inclusion in the “systematic risk” of the “shadow banking sector” by the SEC, Treasury and Federal Reserve. Of which the former is cute and perhaps occasionally justified, and the latter completely ridiculous.

The name Darth Capitalist is intended to be tongue-in-cheek–a little self effacing humor at a time when the venture industry as a whole is facing some tough realities apart from the challenges of day to day business. Near-illiquid markets for venture-backed exits and the closure of underperforming partnerships have all happened before–this is merely the ebb and flow that occurs in any industry.

The Rebel Alliance

In the summer of 2008, The Economist ran a cover story on the trouble with the LBO  industry complete with an illustration of a Magritte-esque anonymous business man in a suit marching off a precipice, BlackBerry in hand. The article spoke of big funds and even bigger egos leading to obscene valuations and oppressive debt loads. Certainly venture capital is guilty of the same crimes, less the debt and the suits.

Though such a picture isn’t flattering, it is unlikely that much will, or should, change at the macro level. The venture model is not broken, venture capital does not present a danger to the financial system, the industry is merely in a state of transition. Taking a step off the precipice into the unknown isn’t uncommon, but risk management is the name of the game.

In a letter to James Madison, Thomas Jefferson wrote, “a little rebellion now and then is a good thing.” Venture capitalists make their living by enabling such rebellions, be they technological (cloud computing) or social (Facebook). Shifts in market forces create opportunity for some while leaving others behind to circle the drain. Venture capitalists must learn to adapt to the realities of their marketplace, much as they would expect a company in their portfolio to do.

And as with any rebellion, opportunities for new entrants to make an impact are created. Mr. Andreessen, welcome to the eternal optimism of institutional venture capital, where managing the uncertainties of the rebellion and bringing light to the dark side is your new day to day responsibility. You have my permission to print “Marc Andreessen, Darth Capitalist” on your business card.

I love this news item. Bill Gates has filed a patent for a system to neutralize hurricanes. The science goes a little like this: Hurricanes are powered by water vapor evaporated from the water’s surface. The water condenses, warms the air and in the absence of wind shear, a low pressure system forms and wind begins to swirl. The theory is that if the water can be prevented from evaporating, the hurricane’s power plant shuts down.

In collaboration with Nathan Myhrvold, former Microsoft CTO, founder of Intellectual Ventures, and all-around smart guy, Mr. Gates proposes a system that will pump cold water from the ocean’s depths and use it to lower the temperature of the water’s surface. Apparently, reducing the surface temperature by 4.5 degrees at the eye of a hurricane would be enough to deactivate it.

The technical and logistic complexity would surely be high, but the economic and human savings of preventing another Katrina are compelling. But what I like almost as much as the potential to save human lives is the sheer ambitiousness of it all. I have often spoken to friends of my plans to amass a great fortune and then invest it in the development of lightsaber technology, but apparently I’ve been thinking small.

Mr. Gates has certainly proven to be an conscientious steward of his personal wealth. Rather than eating California Condor egg omelets and using the works of Carl Fabergé for target practice, he has been thoughtfully attacking some of the world’s largest problems. That being said, in the future I hope to see his name attached to patent applications for (in order of importance):

• Lightsabers
• A Time Machine
• Warp Technology
• A way to prevent any more Terminator movies from being made

But for the time being I’ll have to be satisfied that when a butterfly flaps its wings in the Amazon, Mr. Gates may have something to say about what happens next.

Guy Kawasaki is an interesting fellow. When I was finishing up business school, a few classmates and I asked to meet with him in his offices at Garage Ventures, and Mr. Kawasaki was kind enough to humor us. The author, entrepreneur, venture capitalist, and recreational hockey player is a little like a jovial force of nature that has difficulty sitting still in its chair.

And he writes. A lot. There has to be a dedicated server over at Twitter just to handle his throughput. His recent 10 Questions to Ask Before You Join a Startup is a good article, and in the spirit of the collaborative conversation of the web, I thought I’d add my perspective.

If you are considering joining a startup team, you need to think like a venture capitalist. After all you are making the ultimate investment–yourself.

Early stage venture capitalists are in the business of managing risk, and for startups that risk primarily occurs in four areas:

• Market Risk – Will this company’s product or service succeed in the marketplace?
• Technology Risk – Will this company be able to successfully build this product or service?
• Management Risk – Will this team be able to get the company to the next level or beyond?
• Financial Risk – Are they significantly capitalized to achieve the milestones of this funding round?

When you are evaluating an opportunity with a startup, you should frame your questions with the same thoughts in mind. I should probably point out that some of these are “hardball” questions (such as the cap table one), and it is probably best to wait until after you have received the job offer to ask them.

So without further preamble, here is the Darth Capitalist guide to the 10 Questions You Should Ask Before Joining a Startup.

Financial Risk:

1. How much money is in the bank and what is the monthly burn rate?

Mr. Kawasaki and I agree wholeheartedly here. The point is to find out how much time is on the clock. Divide the cash position by the monthly burn rate and you know how much time you have. Keep in mind that if the company is ramping up the hiring, the burn rate will increase. You might want to discount the number of months remaining by about 20%.

2. What are the financing milestones?

When venture capitalists invest, they are actually buying something with the money. There will be a set of milestones that will enable the company to get to profitability or the next financing round. If the company doesn’t hit those milestones with their current cash position, the likelihood of a follow-on round is pretty slim. Have a discussion about those goals and how they map to the company’s priorities.

3. When will you need to do another round?

This is more of a gut check with the company leadership. Map the response to this question with your own calculations from questions 1 and 2. All three of these need to sync. If they don’t, then you should have grave concerns about how well the company’s leadership has thought through their financial, staffing, project management and sales plans.

4. May I see the cap table?

This is the mother of all hardball questions. The capitalization table is the snapshot of the company’s equity ownership. This will tell you the number of shares outstanding in the company and who owns what. You will be able to see what percent of the company your equity compensation equals as well as how much is owned by the investors and founders and how much is set aside in the employee pool. The employee pool reserve is important because it offers insight into the hiring plans that the company has. At the very least, you need to know what percentage of the company your option allocation equals, otherwise those options are just a meaningless number.

Market Risk:

5. What is the size of the market?

The market will make or break the company. This is the most important piece to understand. You need to know how company leadership views the market and the company’s place in it. This will also speak to future plans for product diversification and growth. It is critical that you and the leadership team are strategically aligned on this point, and if you aren’t, have a conversation to understand why.

6. What is the sales pitch?

In any economy, not just today’s, if the product or service doesn’t provide tangible value to the customer or partner, it won’t sell. Period. There has to be a compelling reason why organizations will partner with you, develop on your platform, buy your product, advertise with you, etc. It all comes down to ROI. If the value proposition is a soft sell such as “enhance user experience” and “foster community,” head for the door. Fast.

7. What are the revenue streams?

One revenue stream is nice, more are better. As you surely know, businesses ebb and flow and the ones that can draw revenue from multiple sources are going to be better poised to smooth out the peaks and valleys of business cycles.

8. What are the unit economics?

This is key to knowing the drivers of the business. How much does it cost to acquire a customer, a visitor or a registered user and what is their lifetime value? What are the switching costs for a customer once they are a client or participant? If these questions can’t be answered by the leadership team, this is a major red flag unless this is what you are being hired to figure out.

Technology Risk:

9. Does the technology scale?

This is the flip side of the unit economics coin. How much does it cost to produce your product or provide your service? How many users or customers does the current architecture / procedures support? This is important because reengineering underlying support infrastructure can be extremely costly, especially if the business development / sales team is outpacing implementation and creating backlog. This will result in unhappy customers and unrecognizable revenue.

Management Risk:

10. Does the company have an office manager?

I’m serious. Even in a 10 person startup there needs to be a thoughtful division of labor. If the CEO is ordering pens and refilling the refrigerator with Diet Cokes, his/her priorities are way out of synch with the needs of the company. This is a good proxy for evaluating the overall judgement and priorities of the leadership team.

My father was in software sales. His advice to me: ‘Don’t be in software sales.’ A good friend of mine’s father was an attorney. His advice to his son: ‘Don’t be an attorney.’ Ask a venture capitalist who hasn’t founded a company what prior experience makes a top-notch venture capitalist, and he just might just tell you the opposite of his background. The grass is greener, so they say.

There has been a long-running debate in the venture and entrepreneurial communities about what is the best prior experience to be a successful venture capitalist. I have asked many entrepreneurs and venture capitalists their opinions on this matter, and the answers vary greatly. Is it the former entrepreneurs? The former C-level execs? The HBS Baker scholars? The guys who left the venture and startup worlds to spend 18 months at Microsoft (read: me)?

Dan Primack of peHUB wrote a little piece on this question a few weeks ago where he looked at the Midas 100 List and classified them as C-suite guys, low-level operators, and non-operators (bankers, consultants, etc.). His results were that 54 lacked operating experience, and of the remaining 46 operators, 21 were at the C-level. His conclusion: inconclusive.

I’m not going to begin to dive into questions of methodology and subjectivity, but in the words of a former mentor of mine, ‘venture capital is a funny profession.’ What he meant was that it takes all kinds of skills, all kinds of backgrounds and years to find out if you’re any good.

I recall Michael Moritz of Sequoia once remarked that since he has spent his career fighting fires, it must make him a fireman. To me, that is the soul of the successful venture capitalist: you do what is necessary to put out the fire, and how you found yourself in the middle of the blaze is irrelevant.

When I lived in New York fifteen years ago, my grandmother and I had brunch together each Sunday.  My grandma picked restaurants the way most New Yorkers make decisions, based on how many people were waiting on line.  The longer the line, the better.  Her reasoning:  who would return to or tell friends about a bad restaurant?

It seemed crazy to me at the time, but it turns out that free-riding on the crowd is often a very effective decision making shortcut — there is wisdom in crowds.  Imagine our ancient ancestors walking the savanna in search of food.  Chasing a large group of hunters who were running after something out of view was probably a better survival strategy than pursuing animal tracks that may or may not have led to food.  Gregory Berns argues that Mankind’s propensity to follow the crowd is at least partially a result of evolutionary biology.

It is so ingrained in human nature now that we will go to ridiculous lengths in order to adjust our beliefs to those of a group.  In the 1950′s Solomon Asch ran a series of conformity experiments. According to Wikipedia:

“In the basic Asch paradigm, the participants — the real subject and the confederates — were all seated in a classroom. They were asked a variety of questions about the lines (which line was longer than the other, which lines were the same length, etc.) The group was told to announce their answers to each question out loud and the confederates always provided their answers before the study participant. The confederates always gave the same answer as each other. They answered a few questions correctly but eventually began providing incorrect responses.

In a control group, with no pressure to conform to an erroneous view, only 1 subject out of 35 ever gave an incorrect answer. However, when surrounded by individuals all voicing an incorrect answer, participants provided incorrect responses on a high proportion of the questions (36.8%). 75% of the participants gave an incorrect answer to at least one question.”

Asch Experiment

Crowds are wise when independent, diverse individuals bring their knowledge to the system — they communicate value by selling and buying stocks, impart wisdom by editing a Wikipedia article, or passively match queries with web pages simply by using hypertext links on a blog entry or the like.  The law of large numbers tells us that a larger sample means a better approximation of the truth.  Unfortunately, as David Hirshleifer describes in The Blind Leading the Blind:  Social Influence, Fads, and Informational Cascades, “If there are many individuals, then…with virtual certainty a point in the chain of decisions will be reached where an individual ignores his private information and bases his decision solely upon what he sees his predecessors do.”

Word of mouth and viral marketing work because people have learned that making decisions based on what others are doing is more efficient *and* usually more accurate than relying on private information alone.  The crowd is usually right, so why bother doing the work on your own (index fund, anyone?).  But for the crowd to be wise, participants must bring an independent point of view to bear.  Following the crowd is best strategy for an individual until too many people follow the crowd, and then it’s a terrible strategy.  The irony.

So what do you do?

If you can identify the intrinsic value of something, have the courage to withstand ridicule and bogus but widely accepted “evidence” that you are wrong, and you have a small group of partners to stand by you and take the long view, you can win big and win consistently.  In the Asch experiment above it’s quite clear that the answer is “C.”  Don’t compromise and you will eventually be rewarded.  Of course, this is much easier said than done.  Warren Buffet has mastered this strategy by focusing on the intrinsic value of stocks (fundamental financial statement [and CEO character] analysis), by finding a long-term source of funds in Berkshire Hathaway, and by partnering with Charlie Munger.

Can crowds remain wise in an increasingly socially connected world?

If informational cascades destroy knowledge and Facebook, MySpace, Twitter, and the iPhone are essentially informational cascade services, aren’t we doomed?  How does PageRank survive in a world where more and more URLs are published and re-Tweeted through Twitter?

In day to day life, there are some things that are objective and others that are subjective.  When trying to find a restaurant or bar, most consumers are quite happy to have their social networks influence their decisions.  The number one feature of a bar is who else is there, so informational cascades might actually improve the experience.  And there is signal in social networks — friends are friends because they probably share common interests and values.  Their actions are almost certainly better signals for highly preferential things than the wisdom of a random crowd.  For fashion, games, movies, bars, gyms, salons and a host of other “subjective” things socially driven informational cascades have the potential to improve discovery.

For objective things, informational cascades have the potential to do great harm.  When people discuss their point of view on something before voting with their behavior, conformity will destroy knowledge.  Instead of picking the wrong line as in Asch’s experiment, stock prices get driven too high and then too low or false reports surface like the premature reports of Patrick Swayze’s death.

I wonder if the way people find things bifurcates into solutions for subjective things and solutions for objective things?  Might social networks like Twitter replace Google and Yahoo! on subjective discovery while the current incumbents retain the keepers of the global truth for objective topics?  Will someone use the social graph to sanitize information — that is, use the knowledge of who knows who to de-dupe amplified data and to kill informational cascades?

Vinnie raises two very good points about Moore’s Law and consumer vs. enterprise scale, all in response to Chris Anderson’s contention that the tech industry preoccupies itself with managing scarcity when it should be taking advantage of an abundance of capacity and encouraging waste.

I want to pick on Moore’s Law for a minute, which is relevant because Anderson devotes a significant amount of his foundational argument to it. Moore’s Law is one of a great many axioms that gets bastardized to fit any argument and in the process the originating thesis is discarded for convenience. Metcalfe’s Law and Gilder’s Law are similarly applied to things they never we intended for… I guess the only true law is that every industry sector believes they are deserving on their own grand unifying theory that can be used to justify continued capital expenditures.

I don’t consider myself an expert on semiconductor manufacturing but I do know enough about it to understand that Moore’s Law focuses on the cost of manufacturing as a consequence of fitting more on to a single chip which results in greater density on a wafer which then results in greater yield because wafers are round and flaws typically concentrate around the perimeter which as a declines as a percentage of total volume as the wafer grows in size and/or achieves higher density. The declining consumer cost was not a result of chip density but the manufacturing unit cost decline experienced through increased yields.

Unfortunately for those that attempt to apply Moore’s Law for their own purposes, there is a second law that Moore observed that the R&D and manufacturing capital expenditures are enormous for each new node on the curve, rising exponentially for each new generation of fab. This helps explain why the semiconductor industry hemorrhages money when operating at anything less than 100% of capacity.

There is something quite relevant in Moore’s second law that counteracts Anderson’s free theory… because we all know that nothing is free and services that are free to the consumer are simply cost shifted to another constituency. Like semiconductors, in order to Anderson’s free theories to apply the producer has to be able to sustain massive volumes as near 100% of capacity utilization in order to justify the increasing capital expenditures required for each new generation of service.