Monday, January 30, 2006


I came across Dave Winer's post, "How to reform the VC industry," and found it to be interesting enough to respond.

We don’t need the partners, limited or general, they gum up the works. We need money to start new ventures. Luckily we know the people with the money, they’re the users. And we need people to validate the ideas. Same people, the users.

User money? How are you going to accumulate enough capital from users to rapidly develop and grow a company? Does he really believe people will give enough money to sustain a company or even allow its employees to live more than three months in the Bay Area? Maybe, just maybe Vietnam, which I heard is developing its technology-related entrepreneurial activities.

Creating an imaginary scenario, if Friendster's 18 million users (assuming these are not all a crazed group of millionaires) during its heyday donated $1 each, that $18 million still wouldn't have been enough to keep it afloat beyond this year. More realistic numbers might assume 5% of Friendster's user base (900,000 people) donates $25 each (average donation for a political campaign), that's $22.5 million. Still not enough to save Friendster. Think about the hundred of startups with only a few hundred thousand users. Can you imagine all the cereal, Hormel products, and dollar menu meals that would be eaten with Winer's model versus the existing VC model?

Also what users is he referring to? I assume these are users of Web 2.0 companies? Those on the outer fringe of consumer behavior patterns like me that join 20 different online social networks, read 30 blogs a day and use 5 different tagging systems? Yeah, this is the REAL market I want to tap to blow out GoingOn Networks. I would soon be going back to my favorite college meals of Vienna Sausages, chili mac, and Ponderosa buffets.

So what did the middlemen do exactly? They invested in all kinds of idiotic things. Anyone could have made the bets they did. The users hadn’t had time to fully absorb the Internet in the 1990s so they bought all the garbage the middlemen shipped, leading to online pet food companies with market caps exceeding the largest industrial companies.

I wonder what Dave would have invested in back in the boom times? Anyway, not really a fair assessment. Venture capital is a home run approach, so you have to expect investments gone nowhere or sour. What venture capitalists do, if you get a smart one, is add value to a company in obvious ways that I don't need to list here. If a handful of people approach me, who is on the bottom of the entrepreneurial totem pole, every month for informal advice or asking me to be an advisor, there is an obvious desire and need from entrepreneurs that seek out valued advice, thinking and access to a better professional network than their own.

Matt Mullenweg hasn’t taken on any VC to start

Not knocking on Matt Mullenweg, but he is not my entrepreneurial hero nor is Dave Winer. Some startups actually need a lot of capital outside of Dave's realm and require sophisticated thinking, which some VCs can add. I wonder if Dave went through a capital raising or company building process with VCs that turned sour?

This thing will be public from day one. The purpose of the company will be to invest in promising young Internet companies, chosen by the users, nurture them through startup, get them liquid through acquisition or IPO and distribute dividends to the shareholders accordingly.

Definitely living in a Web 2.0 cushioned room. In Dave's world, I assume "users" would invest in and a countless other no-business model startups that are out there. If Microsoft, Google or Yahoo! don't acquire them, Silicon Valley would become a wasteland of fool's gold and technology for a very niche group of people... like me :)

UPDATE: Another reason why I like the guys at alarm:clock...

Web 2.0 honchos quickly beat the meme horse to death with the notion that the VC model is broken and that the solution might be that VC firms should take more of a shotgun approach and make more, smaller investments. Dave Winer takes the lead by labelling VCs useless 'middlemen,"...

From conversations we've had with VCs, many don't like Web 2.0 companies because they have low barriers to entry, and so far there have not been overwhelming liquidity events.

Through our glasses, we think the stink about the VC model being broken reflects the fact that thousands of Web 2.0 startups are looking for funding and don't understand why they can't get it. The argument that the VC model is broken is silly and boring. Next meme please.
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Michael Arrington at his CrunchNotes blog has a more serious response here. He also led me to John Roberts' post here and Robert Scoble's post here.

UPDATE II: Another reason why I love Tom Evslin's blog and his insights. A well written response to Dave Winer's post:

Short answers:

Two big changes are the lower cost of getting started (means less need for VCs early and more for them to look at later) and VCs blogging (a good thing if you’re an entrepreneur).

The VC industry has been disrupted by compression of the time between when a company first needs money and the time it is an acquisition candidate, Even if an initial round is needed, a second may not be. Harder, then, for VCs to put money to work. Moreover, it is likely that the initial round needed will be small, so an extensive and expensive round of contract writing and due diligence simply isn’t justified. The best VCs are learning how to efficiently put up smaller sums.

Although I would love to have Dave as an advisor (and have benefited from his advice in the distant past) and Rick sounds like a very good VC and both of them have correctly diagnosed industry problems, I don’t agree with either prescription. I’m afraid being funded by a public shell would lead to private startups having many of the reporting problems and transparancy issues of public companies without the (dubious) benefits of being public. Publicly traded holding companies for startups have been notable failures in the past. And a board of advisors – even the brilliant ones that Rick suggests – is still a committee. Entrepreneurs come to VCs for money. Committee time is wasted time at best and a dangerous distraction at worst.
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There have been so many posts surrounding Dave Winer's original post, but I'm posting two that captured my attention.

One excellent and insightful post by Jeff Nolan, "The "broken" VC model"

After 8 years in the venture capital business, which I think still makes me a rookie, I have the following observations to share with you:

-Venture capital is a cottage industry and whenever too much money comes into the system there is an imbalance which shifts the investment model from demand driven to supply driven. Enter the bubble.
-The serial entrepreneurs are key to the whole mix and really have a lot of power. Their market power increases exponentially as they bring additional people with them, in other words transitioning from a serial entreprenuer to a serial team. They have pricing power and can often pick from several funds competing to get into their deals.
-The best venture funds are well ahead of the curve, case in point is Brad Feld and his investments in companies like Newsgator and Feedburner... he wasn't sitting around talking about how great RSS was, he was out putting money to work when most VC's were googling RSS to find out what it was.
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The last point I copied and pasted is so money. Brad and other great VCs are ahead of the curve, and others just try to follow what these guys are doing.

Christopher Allen, who just commented on this post, has an indirectly related post
that provides some good thoughts on being an angel investor. Check these out.

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