Thursday, November 13, 2008

VC Model Broken?

Adeo Ressi, founder of TheFunded, recently gave a speech that started the blogosphere to buzz again with a repeated story... the venture capital model is broken. I must have read these posts last year and the year before.

TheFunded - Canarie
View SlideShare presentation or Upload your own. (tags: lp investing)

Fred Wilson provides another side, "A Slightly Different Perspective," which I agree with more. As Wilson states, there are too many VC firms and too much money in the industry. So you get a lot of "me too" deals and some firms funding second-rate ventures, which sometimes indirectly harms the first-rate competitors that they are chasing. As with hedge funds and other asset classes, there will be a shake out. In the coming years, there will be less firms, less money, fewer startups but a higher standard for startups.

As a former entrepreneur, I will say the professional make up of the VC industry needs a shake out too, or my prior assumption of a higher standard of startups might be moot. There are too many former bankers and finance-oriented professionals in the VC industry. As Vinod Khosla said, "95 percent of people in the venture business think it’s a financial business, it’s about investing. It’s not. It’s about building companies, which is a different thing than investing. It’s about taking large risks in science and technology. That’s what we do."

While the financial perspective is needed, there needs to be more assessment and guidance from an operational viewpoint. Entrepreneurs need a reality check from people that have been there and done that. Generalizing, professionals with solely finance experience only give feedback on your financial projections and what to cut. Entrepreneurs deserve better.

On the other side, I disagree with Adeo and other entrepreneurs that are whining about the black box of venture capital. He comments on Wilson's post, "There are THOUSANDS AND THOUSANDS of great companies that require capital, and they can't raise the money that they need..."

Please. Adeo cashed out, so if there are so many great companies how many have you invested in as an angel? There are not thousands and thousands of great companies. Going to countless events in Silicon Valley, reading all the major tech blogs, and receiving several random business plans every week I just see a lot of noise. Rarely does any startup peak my interest.

If these companies were so great, at least the smart VCs would be pounding on their doors. Also there are less companies funded by a napkin drawing. Performance sells. Bootstrapped startups that have a million eyeballs with a viable business model will get funded. I wonder how many of those thousands of thousands of startups are generating millions of eyeballs or a few of dollars?

Yes, there are great companies and ideas that should get funded by a drawing on a napkin, but those concepts have to be really kickass. Of course every entrepreneur believes there idea to be kickass, but the reality is that only a few percent really are.

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