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3.5 Hey, Vc, Your Model Is Broken.
TheFunded.com Open Letter
Posted by MrCleanTech on 2008-05-18
It seems terribly ironic that the people who gauge whether to invest in innovative start-up models have a broken model themselves. If anything, it's a probably a sign.
Having read TheFunded, VentureBeat, Venture Hacks, PEHub, and many other venture capital news sources over the last year, it's clear that the venture industry is at an all time low. The industry has poor fund returns coupled with an equally poor liquidity market. An unseasoned crop of new venture capitalists is entering the profession while most senior rainmakers are retiring. Angel groups and private equity firms are attacking the venture market from both sides, all while the cost of starting a large business is dropping. AND... there is a high degree of distrust between entrepreneurs and the funding professionals.
Here are some obvious suggestions that would have a dramatic positive effect on the industry:
1. Implement Oversight: Venture firms, just like the companies that they oversee, should have a board of directors that meets quarterly to evaluate fund decisions, progress, investments, and returns. Allow the portfolio entrepreneurs to complain to the board if their assigned partner is causing problems or destroying value. Give these oversight boards the power to remove underperforming partners. It's hugely hypocritical that venture firms don't practice what they preach with respect to oversight.
2. Focus / Specialize: Pick a geography, an industry, and a stage. Define the kind of terms that you offer, and make all of this public. Nobody knows which fund does what kind of deals because it seems that everyone is willing to make exceptions and chase "the next big thing." The broad investment mandate of most firms creates market confusion that hurts entrepreneurs, innovation, and dealflow.
3. Invest in "Singles and Doubles:" As the losses have mounted across the venture industry, it seems like every single firm is looking for "a billion dollar idea." Great companies either with $50 MM, $100 MM, or $200 MM potential or in an unpopular market segment remain unfunded. Not only is this a major market opportunity, but it has the potential to revolutionize venture capital. Most billion dollar ideas need smaller "foundation technologies" to exist, and some of these smaller opportunities may prove to be a lot larger once executed.
4. Add Systems / Processes: Venture firms have weak systems and bad processes to manage opportunities, especially compared to their portfolio companies, and every fund does things differently. Entrepreneurs have to prepare different diligence packets across different timetables for every firm that they pitch, causing major headaches and inefficiencies. Get your association to implement some standards, hire a project manager, install a CRM system, and do away with businesplan@ email address processed by a secretary. Tell entrepreneurs when you will reply and what to expect. It's 2008!
5. Elicit Feedback: It's about time that venture firms learn and care about what people think. Is your pitch process reasonable? Are you treating entrepreneurs well? Are you adding value to your investments? Read TheFunded, and get people to tell you the truth about what is working and not working. When you hear about a problem, don't dismiss it, but, instead, try to validate and address it.
These changes would certainly make my life better as an entrepreneur, and that's not a bad place to start with venture capital reforms. Feel free to quote this post, and please agree with it as well.
