VentureBeat - Latest Comments in The VC model is broken

Re: The VC model is broken

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Re: The VC model is broken

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Re: The VC model is broken

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Re: The VC model is broken

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Re: The VC model is broken

Dereck — Sat, 25 Apr 2009 06:00:55 -0000

One way or another capital will make some flow changes, but in the end will find it's interest. Always have been, always will.

Re: The VC model is broken

Valto — Fri, 05 Dec 2008 19:32:43 -0000

I'm so glad that we we are working to make some change in this field. with Grow VC. www.growvc.com will be more than current VC or Angel business model on steroids. Grow VC will break the mold and restructure a new better working model for new international start-up ventures. Grow VC will change the way new ventures will be funded...

Re: The VC model is broken

sudeep — Fri, 28 Nov 2008 19:56:32 -0000

I think point #2 is right on the money. Too many mee-too firms gets funded and this casuses wasted investments.

Like all asset classes, VC industry has attracted too much capital to be allocated prudently. The shakeout is long due

Re: The VC model is broken

Adeo — Sat, 15 Nov 2008 11:52:34 -0000

Here are some further thoughts on the presentation and the VC model in a written form:

http://www.adeoressi.com/20...

Re: The VC model is broken

Maxwell — Fri, 14 Nov 2008 14:56:49 -0000

"Too much money has swept in, with too few deals to accommodate it. This has distorted the economics badly. Valuations are driven up for the good companies, making it prohibitively expensive for VCs to invest. Everyone loses."

You touched on the crux of the issue right there, but it applies to the financial industry as a whole and not just VC. Capital is overvalued and the new bubble. While investment in human capital (the infrastructure that makes people more productive has been in steady decline for the last half century.) There is a magic formula of capital + labor + innovation (technology and entrepreneurship) that equals success. Developing and empowering our human capital for long term success has taken a back seat to throwing money around to the point where there is no longer return on investment for the most part.

Re: The VC model is broken

harryy — Fri, 14 Nov 2008 06:09:41 -0000

VCs are financial intermediaries. As such, there are two sides to the equation: the entrepreneur side and the investor (LP) side and each has a role to play in the system.
While the entrepreneur side knowledge base developed over the last 20 years tremendously, the LP side remains almost unchanged, despite the fact that LPs have the higher stake in the success/failure of VC backed companies.... Clearly, this is the broken component in the system, inducing its inefficiency to the other side too.
I don't think the system is broken but is clearly not optimal and now is the right time to fix it. Debates like these (Adeo, Matt and al.) are essential to trigger a change, even if the optimal equilibria is not clear.

Re: The VC model is broken

JDD — Thu, 13 Nov 2008 19:19:12 -0000

Matt - you should talk to Paul Deninger at Jefferies/Broadview – he agrees that there is far too much VC money chasing a few good deals here in the U.S., and I believe he has stats showing that European VCs have a much better “asset class ROI” than their U.S. counterparts. He was emphatic about it on a panel discussion I attended a few months ago.

Re: The VC model is broken

Matt — Thu, 13 Nov 2008 13:59:20 -0000

I agree very much with the overall theme of this presentation and commentary, VC is "broken". However, I strongly disagree with the conclusion that we actually need fewer, "better" VCs. In my view, part of the reason that VC performance has become so stale is that the compensation system for venture capitalists drives them ever upward in terms of fund size. If they have success with a "small" fund they will raise a larger one.

A friend just recently closed a $250mm fund after being part of several smaller funds. Over dinner his comments to me were essentially that the partnership did not actually expect they would make returns in this new, larger fund. But, on the other hand, the 3 partners would be splitting over $8mm per year in fees between the various funds. He is activity investing in real estate on the side. Have any of you ever met a VC partner that wasn't "rich"? The data would indicate that the majority of these people are not making money for their investors?

In general, I believe it is much harder to make good returns with larger funds. If a company is raising $50mm there will be intense competition by investors trying to get money to work. On the other hand, in today's environment, if a company needs $3mm they are dead in the water no matter how good the company and deal. So few investors are doing those deals. For a fund group with $500mm under management a 10X return on a $3mm investment just doesn't "move the needle" and it isn't worth the hassle.

So, I think the right answer is that the groups that invest in funds need to think hard about sponsoring the next generation of fund managers. We need to create 10 $50mm funds for every one $500mm fund. I know this will be difficult because pension funds are massive and it is tough to deploy into small funds. But, if we don't somehow restart the "farm team" system I fear the end of venture capital is not far off.

Re: The VC model is broken

Allan — Thu, 13 Nov 2008 13:41:56 -0000

John,

I think that reform you speak of might come in the form of a return to evergreen funds that do not have a limited lifespan. They will also be smaller as Dave McClure suggests. This will keep the focus on sustainability and generating consistent steady returns rather than the big VC model of gathering as many assets as possible and living off the management fees while having to chase big deals in order to put sufficient money to work. I was part of the founding team at the largest student-run venture fund and we were lucky to have had two billion dollar IPOs on the NASDAQ and we found that managing a smaller pot was more feasible and forced us to invest selectively with discipline.

Re: The VC model is broken

Allan — Thu, 13 Nov 2008 13:38:01 -0000

Dave,

Your point about smaller funds doing better makes a lot of sense to me. I think the community would be well-served to see a return of the evergreen fund with smaller pots. That way, the incentive is not in asset gathering to mooch off the management fee but rather to generate great returns. Returns are greatest in the seed stage, even if your scenario of smaller exits with increased frequency remains true.

Re: The VC model is broken

VCHack — Thu, 13 Nov 2008 13:00:54 -0000

Oh please - how the hell is a VC who spends money on behalf of others now attributing themselves to be the drivers of the US economic value creation. Tim Draper and his cohorts should take a close look at the mirror and realize that they are nothing but a post-box system transferring money from an investor to an idea creator.

Btw, economic circumstances have changed too such that smaller companies are able to go much further on their own....so much for VC assistance....the last time I heard advice on my business from a stuffy HBS grad VC, who by nature of being an MBA, has no risk-taking capibilities, I nearly died of laughter on how off market and non- operational he was.VCs are only talented in one thing - "buying" their way onto other peoples' Boards with other peoples' money.

Re: The VC model is broken

mdangear — Thu, 13 Nov 2008 12:57:47 -0000

Actually you are right that VC have evolved towards being financial guys, when really they should not. Vinod Koshla said it all in a recent interview (http://venturehacks.com/art...
>>
We make money by building entities over the long term. We’re not in the business of transacting or doing deals. We don’t even allow that word here. It’s not buying and selling, that’s a transaction. You don’t invest in something and say I can sell it tomorrow or next year. We take a five year, ten year view and say we can build a company that can significantly change the landscape.
<<
VCs should be about building businesses, not being financial guys. This is what got the system broken, and this is why they should to go back to the original model of working with Entrepreneurs to help them build their business if they really want to do it right.
Back to helping rather than profiting from entrepreneurs, and back to seed rather than later stage.

Re: The VC model is broken

Robert — Thu, 13 Nov 2008 12:31:54 -0000

I think John hit the nail on the head earlier when he said "There is no liquidity."

There hasn't been a great IPO market since before the 2000/2001 bubble burst. So it's kind of M&A or bust, and now we are in a recession and it's tough to justify buying Facebook for 10 billion (I would imagine).

Which means that all these hot startups with huge valuations have a problem. No IPO market + shrinking M&A pricetags means all you can do is hang around and wait until it gets better.

Could they find buyers hypothetically? Sure. But not for 500 million to buy a widget.

Re: The VC model is broken

Hank — Thu, 13 Nov 2008 12:10:46 -0000

sarah- your comment about kiddies heading back to "whatever midwestern town they originally hailed from" is indicative of what is wrong with this business... far too many in the self absorbed "Bay" have this attitude. Get off your holier than though asses and find companies and ideas that solve problems, fill needs, etc. not just some lame new gadget that only "cool" people like you will pretend to care about for a minute or two.... or you will all be eating government cheese. And deservedly so.

Re: The VC model is broken

Ellen — Thu, 13 Nov 2008 12:05:26 -0000

I don't think the VC model is broken per se, it's that VC's tend to approach investment opportunities through a limited - financial and technology - set of perspectives. Investments are typically made based on business models driven by new technology or new uses for technology. While this has worked in the past, the market is too saturated for this to work any longer.

VC's (and the entrepreneurs looking for funding) need to learn to identify the true needs of their markets, then then develop solutions that satisfy those needs. Some are fairly good at identifying market needs, but where I see it fall down again and again is in the inability to translate those needs into a viable offering. This requires an understanding of how end-users will perceive the offering, rather than what they say they want or like. Consumers are too empowered now to work around product or technology deficits.

I've been doing this work for a long time and have helped large companies who make tangible products and services to reap billions of dollars in new revenue. Yet when I talk to VC's or entrepreneurs about this, it usually falls on deaf ears. I think Greg hit it on the head - they are too caught up in funding than creating something people will pay for. I would add that they also get too caught up in perfecting the thing they are making, than honing and communicating the value it will provide.

We need VC's to get better at this. When and how can we get them to listen?

Re: The VC model is broken

Greg — Thu, 13 Nov 2008 11:29:44 -0000

To me it looks like companies get more caught up in funding than creating something people will pay for.

Re: The VC model is broken

Sam Whitmore — Thu, 13 Nov 2008 11:28:21 -0000

He may have secured an audience at HBS but someone should tell Ressi that "canary" ends in a y, not an ie.

Re: The VC model is broken

elliottdahan — Thu, 13 Nov 2008 10:34:45 -0000

Dave -

Thanks for reading my post. You write "altho i disagree with some of his conclusions" - which conclusions ? I'd like to have as defensible a presentation as possible - I'd als0 like to leap tall buildings in a single bound.

My email = elliott@thegrowthgroup.com

Re: The VC model is broken

Don Jones — Thu, 13 Nov 2008 10:03:45 -0000

The venture capital business is fundamentally a financial services business. My belief is that like most other financial service sector industries now, it will be forced to consolidate and shrink, due to under-performance. There is still too much money chasing too few deals that will ever exit for decent returns.

Re: The VC model is broken

Eze Vidra — Thu, 13 Nov 2008 06:47:28 -0000

Matt,

I liked your analysis. See my response to this post at: http://www.vccafe.com/what-...

Re: The VC model is broken

Sarah — Thu, 13 Nov 2008 06:08:16 -0000

The problem isnt that VCs are Harvard MBAs, the problem is that the companies are being founded by 26-year-old Harvard MBAs.

It used to be that tech companies were founded by geeks who created a cool technology and got funding to take it big time. Now, we have an annual migration of MBAs heading West to get their class project funded. TechCrunch and Demo are positively choked by all that crap. And see Cyprus. 26-year-old MBAs should not be funded, as a rule, unless their pet project actually gets momentum first (ala Facebook). We're not running a babysitting agency here.

The other thing is VCs need to stop relying on EYEBALLS. What is it 1999??? One well-known Web 2.0 company that told me in a BD meeting that their investors only cared about traffic numbers, not monetezation or revenue plans (when I asked). Advertising is not the way. Insist on products that someone might actually want to buy. I know that sounds shocking, but...

That's the one good thing about this bust. Those kiddies head back to whatever midwestern town they originally hailed from before professors and alums filled their heads with Tesla dreams, and the geeks get back to innovating. I'm seeing some cool stuff happening in garages all over the Bay, no MBAs needed. I hope the VCs are noticing.