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Open Letters

This section is for entrepreneurs and investors with a Certified Profile to post Open Letters about how to improve the fundraising process. Postings should discuss the terms, the treatment, the model, and the practices of venture financings. Here is your chance to share your views on how to make the fundraising process better.

Sign-up for Membership Write an Open Letter to VCs


My Materials are Confidential, Please! Open Letter

Posted by Anonymous on 2007-07-27


A number of posts have come up about how venture funds are sharing pitch materials, business plans, and even financials with the competition. This may seem crazy, except for the fact that, as a venture funded CEO, I get these materials from venture capitalists, too. I actually know many of my competitor's financials as a result, and I want to go on the record and say that this needs to stop.

I am not even sure if it is OK to give me a high-level verbal synopsis of a competitor's financials, which I have also received on multiple occasions. I do think it is OK to provide me with high-level insights on the market that is derived from seeing multiple business plans.

It's like rubber necking. You know you shouldn't look, but when a plan hits your inbox, you open it, see what it is, and then you can't turn away. I commit to deleting all such emails in the future (and I have been for some time), but, more importantly, the venture industry needs to stop this practice. Members, if you agree with me, agree with this post - both as an entrepreneur that receives the materials and as an entrepreneur that has probably had their materials shared.


Kill the Participating Preferred Open Letter

Posted by Anonymous on 2007-09-30


Dear Venture Capitalists, it's time to do away with the participating preferred mechanism that has become more commonplace in the last few years. Coupled with liquidation preferences, venture financings have become more and more onerous. Management and employees end up at the bottom of a large stack that resembles indentured servitude. Angel and founder investments get crushed, too. It's feels like everything needs to be a home run with these types of terms. Aren't we all in the game together"

Members, agree with this post to send a message to the venture community: the participating preferred should be a mechanism of the past!


Feedback & Communication Open Letter

Posted by Anonymous on 2007-05-20


We all know how busy VCs are, but so are the entrepreneurs. When a meeting or a call is setup, feedback after the call is really appreciated by entrepreneurs. We all know that some entrepreneurs do not take negative feedback lightly, but that's no excuse to leave them hanging for 10+ days without even answering emails. At least, a VC should set the expectations of the entrepreneur in terms of a 'response timeframe' AND stick to it (Many do the former but fewer do the latter). VCs need entrepreneurs as much as entrepreneurs need them (if you don't believe this, ask a VC that didn't meet the Limited Partners' expectations.) It's up to the VCs to show respect when it comes to giving timely feedback. No one is too busy to send "We didn't forget about you. We're still discussing your venture" or something like that.
Best regards


Be Honest about Doing "Research," Please Open Letter

Posted by Anonymous on 2007-06-21


Dear Venture Capitalists,

I get frequent calls from your firms, normally from an associate, asking to learn more about my company. I would like the venture community to tell me up front if they are doing research. Simply say: "I am calling to do some research on your sector, and I would like to learn more about your company." Instead, you say things like: "I have heard great things about your company, and we would like to learn more. Are you raising capital""

The best part for you is that I will probably help you out with your research, as the rising tide floats all boats, and I will respect you for being honest. Asking about my company under the false pretenses of an investment insults my intelligence, wastes my time, and, frankly, makes you look disingenuous. And, I would rather not share sensitive information in the context of research that you normally ask for under the false pretenses of an investment. Thank you!


Management of VC Funds Open Letter

Posted by Anonymous on 2007-08-08


VC firms need to know that an inexperienced associate ( a person with a couple of years of low level experience at a company followed by an MBA) should not be put on company boards. Pretty much most entreprenuers hate to deal with the know-it-all, clueless associates who like to pick up ideas from some VC conference and push it at the next board meeting. Dealing with their pompous attitude and trying to help educate them takes a lot of time. On top of it, they also tend to be political, and force the CEO to deal with boardroom squabbles, rather than dealing with the business.

We need to develop a rating system for VCs, where firms that hire successful entreprenuers as partners get a higher rating than firms that hire associates and promote them (they should get the lowest rating). I have noticed that founding VCs who never started a company, tend to hire associates who also never started a company, while former entrprenuers tend to hire people who were successful entreprenuers as their VC partners. This will force VC firms to hire qualified former entreprenuers and make the firm more professional. Associates should work for a VC firm for a few years, and then should be encouraged to leave the firm and take up a job in a portfolio company.

Also, several VCs puff up their resumes, and take credit for investments that they were peripherally involved with, or not at all. We should post their bloated profiles on the web site and have former colleagues critique it, and set the record straight in public.

We should list all the companies funded by a VC firm at the time of funding, and then list their status as they progress. That way all the bad investments will also show up against a VC who invested in a company. CEOs of the portfolio companies, esp those that failed, should be invited to comment on a particular VC. That will provide an accurate picture of a particular VC and his contribution to a company's success or failure. That will balance the comments by shills that write for a VC after he sends out emails to his friends.

Many VCs are better at fund raising than helping companies succeed, especially those that put unqualified associates on their portfolio company boards (they give them a title of 'principal' to make them look experienced). The average VC fund returns about 16.5% return during its lifetime - not exactly spectacular. LPs should be invited to anonymously send in fund return information for their VC fund and the numbers posted against each VC fund. They should also post the total management fees charged by the VC firm. It will show to people that most VC funds make as much money on fund management as they make off the actual returns. That will be an eye opener, and will help get rid of the bad VC firms.


Tell Me Where I Stand Open Letter

Posted by Anonymous on 2007-10-25


Dear Venture Capitalists, it would be really great if you explained your deal process up front and then provided me with a regular status update.

Here's an idea: you could even have a one sheet outlining your decision process that you can hand out in the pitch meeting. What are the steps to close" When does a deal get taken to committee" What materials do you need" Who are the decision makers" Do you front-load diligence or do it after terms are offered" Do you ask for an exclusive period" Maybe you assume that entrepreneurs just know, but I can assure that we do not, especially since each process is slightly different. We are navigating your fund blindly most times, and it would help all parties to have a little foresight.

Here's another idea: you can let us know where we stand against this process every week or two with a nice follow-up email. To save time, you could even write some friendly templates, like: "Hey, we just took your deal to committee, and I will get back to you in 2 weeks once my partners have had more time to review the materials." Not to get too bold, but you could even invest in some simple tracking tools to help automate the whole thing.

Do other Members agree with this" If so, hit agree, and let's send a message. A little foresight into the process would certainly help me as an entrepreneur. Thanks!


Don't Fire the Founder (Period) Open Letter

Posted by Anonymous on 2010-04-30


There is a great post by Ben Horowitz with supporting data on why founder CEOs should not be fired.

Two thirds of founders in a CEO position are removed by professional investors. There has never been any strong evidence that this makes sense for the company, and it is good to see an investor taking the time to outline why it's frequently bad.

From my experience, professional investors attempt to remove founders as the CEO when:

1. they want to own more equity in the company,
2. they want to force a financing, sale or IPO,
3. they want to hibernate the business to make their portfolio look better,
4. they want to give a job to someone they know,
and least likely,
5. the founder is actually not competent or did something unethical.

Since professional investors complete due diligence before investing, it's unlikely that the founder is incompetent. The investor would be incompetent for doing the deal, then. The reality is that the investors choose their own self interest over the greater good of the company.

It is very common to see companies with the founder removed die a slow death. The professional replacement can do a good job, but the soul of the organization is often lost and the morale is damaged.

Let's send a message. If you think it's time for professional investors to stop firing founder CEOs based on weak justifications and greedy self interest, please AGREE with this post.

Posted by Anonymous on 2010-04-30 13:03:12

there should be a section on the funded that points out the firms who do this. I know of 3 from first hand interaction. each time, the founder went on to create a new more successful company with the right investors. each one was different and they learned from it. The investor groups (not just vc's but angel groups - which are the worst at this) need to be named in the spirit of this site. thoughts for all on this before i name names --

Posted by optimisticskeptic on 2010-04-30 13:55:20

I agree with naming names of VC's who as a matter of course fire founders. This has not happened to me (yet) but I remember a VC coming by a booth at a trade show once. One of his VC friends happened by and the first guy started bragging about all the CEO's he fired. It was like a notch on the gun kind of mentality. Guys like that should be called out. In this case I cannot remember who the guy was, as this was a while back.

Posted by poptech on 2010-04-30 13:59:42

We should maybe add they want to buy the entire business at a significant discount to current valuation.

Posted by Black Squirrel on 2010-04-30 17:42:19

Maybe there should be a disclaimer on term sheets - warning, hazardous to your continued employment as CEO. But you already knew that, right?

An alternative possibility is that the system functions effectively overall. No doubt there are instances where founder CEOs are removed incorrectly - and those are unhappy stories - but in the grand scheme of things, perhaps the founder isn't *supposed* to stay for the full ride?

My personal view is once you take the (expensive) money that you need to fund your venture, you must do so with the full knowledge that you may not be around to see the end of it.

Posted by will on 2010-05-01 09:17:20

BSquirrel - so true.

The only real way to assure that the CEO (founder) gets a fair shake is to make sure the board is "fair" and not stacked against you. If unreasonable investors have little power to be unreasonable, then you are fine. Also, if you suck as a ceo, then with a fair and balanced board, you will be and should be removed. As a founder, if you cannot take an investment under these terms -- don't take the money. If you have to take the money under these terms, then you get what you get!

Posted by Dr. Steve on 2010-05-01 11:07:11

I agree - mostly. What founder/CEOs need to work on is sales and marketing. Products & services never sell themselves. They require nonstop marketing and sales efforts. The founder/CEO who "gets that" is a lot less likely to get bounced out. The founder's passion needs to extend to all aspects of the enterprise, including investor relations and fiduciary responsibility. Those are the founder/CEOs that are "investment grade".

Posted by pogo on 2010-05-01 12:04:18

Sorry to be the contrarian here. I've founded a few companies and run about a half dozen others so I TRY to look at this issue from both sides.

In this case, I think the author left out the most important and common reason the founder is replaced and that's because investors think there is someone better than the founder to run their company. You can view that as an investor bringing in a friend, but that's a pretty cynical view.

First, investors don't boot founders so they can buy more equity. Today investors can buy equity at private companies at pretty cheap prices. It's a buyer's market. They don't need to eliminate the founder to do that, they just dilute the crap out of them.

Second, the founder, by definition, has accepted the terms of their financings which often include adding new directors to their board (losing control) and bringing in a new chief executive. If a founder doesn't like those terms, they shouldn't accept the money.

Finally, for every founder like Steve Jobs that has led their company to extraordinary success, there is a professional manager like Eric Schmidt who parachuted in and took their company to the next level. I don't think investors care if it's a founder at the helm, they just want to optimize their chances of success (read: high stock price = large capital gain). If Jeff Bezos (Amazon) decides to start another company, I'm sure his new investors won't want to replace him. On the other hand, if Julie Wainwright ( starts another company, she may be the first to go.

Posted by MedTech Expert on 2010-05-01 17:16:39

The key to this dilemma is the Founder and his/her attributes, attitude, and the complexity of the task. It is very rare to see the founder take his/her company forward to commercialization in the life sciences. Founders typically do not have the breadth of skills (nor appreciate what is required) required to guide the company's development through the regulatory maze it faces - both here and abroad.

Posted by wolf pack on 2010-05-01 18:24:03

I "agreed" with the post, but a VC who is giving me some *side help* said to expect it and keep a seat on the board and be a CTO or other role that suits your temperment/background.

Posted by Anonymous on 2010-05-02 11:50:03

@pogo: Investors boot founder CEOs all the time for more equity, even in the market today. Most private companies don't sell equity to just anyone. So, if a hot company does a new round and the old investors do not get good pro-rata rights in the deal, they will act to remove the founder CEO. It's happening to a friend of mine right now.

Also, your definition of "investors think there is someone better than the founder to run their company" leaves something to be desired. What do you mean by "better?" From a VC perspective, this means someone who can get the company to a sale or IPO faster, which is the point of the poster. Sometimes, a company should not sell or hasten an IPO, but the investor needs liquidity. This is not better for the company; it's only better for the investor.

I am willing to bet that most (~75%) of the venture IPOs filing S1s right now are being forced out by investors. The founder CEOs would rather not go public, but going public is not a horrible outcome, either. I know of at least two that are in this camp for sure.

Posted by TheDragon on 2010-05-02 19:05:32

Don't fire the founder. Pure and simple. Chances are that if a founder feels inadequate, s/he loves the company so much that s/he will urgently ask to bring in someone else. re: Larry / Sergey.

Again, just don't fire the founder. Pure and simple. It's not difficult to understand.

Posted by optimisticskeptic on 2010-05-02 21:55:18

Another blog post on this topic

Posted by pogo on 2010-05-03 11:57:05

I'll stand on my statement.

I never said that founders don't get fired for the reasons stated in the original post. I said that there is a FAR more common reason and that is that investors want to bring someone in who is more capable to run the company.

@10. You said "from a VC perspective, this means someone who can get the company to a sale or IPO faster." Duh. Yes, that's PRECISELY their motivation. You didn't know that? If they weren't seeking liquidity, they wouldn't be called INVESTORS. They are looking for someone to get it done as fast and as big as possible. Period. They have NO OTHER motivation.

As I said, if the founder doesn't like those terms, don't take the money.


Simplify the Terms Open Letter

Posted by Anonymous on 2007-06-28


Dear Venture Capitalist,

I know that not all funds do this, especially the good ones, but it is time to start eliminating the ridiculous investment terms that started to appear after the dot-com bubble burst. Do you really need BOTH a liquidation preference and participation" Can't you just pick one based on the business case" The creeping annual dividends rates add insult to injury. In the end, it is the management and employees that get hurt, and you need them on your side. I understand that sector IRR for funds has been hurt, but picking pennies off of the floor is not going to change that, nor is de-motivating management teams with absurdly high preference thresholds before anyone makes a dime.


Consistency Open Letter

Posted by Anonymous on 2007-05-19


Communication and honesty are the keys. Be consistent from the very first contact to the closing of the deal (or rejection). Tell what you think, and keep your promises (if you cannot - just don't promise anything).
Irrational behaviour, and changing the deal terms along the process do not build trust.


The Early Stage Gap Open Letter

Posted by jetskier on 2007-08-31


As a serial entrepreneur on the East Coast, I am finding that there is a funding Catch 22. I am actively pursuing funding for a new startup with a massive potential market. The issue seems to be that there is very little appetite for early stage funding. Generally, the reaction that we get is that we have an interesting space, a large potential market and unique technology concept...BUT come see us when you are later stage. I am wondering whether others are seeing this early stage funding gap on the East Coast. It seems as though managed risk has turned into risk avoidance. I am sure that we will break through this issue as we progress, but it seems as though the market reticence for early stage funding is one of the largest issues facing entrepreneurs today.


Obama, Please Don't Bailout Any More Fat Pigs Open Letter

Posted by Mr.Smith on 2009-02-10


So, I read some worrying articles that were linked from TheFunded, and they inspired this post...

Venture capitalists, from Eric Hippeau to John Doerr, and their lobbyists, like the NVCA President Mark Heesen, are pressing hard in Washington to get the government and/or the SBIC to support entrepreneurship by supporting venture capital. As an outsider, it seems logical to help entrepreneurs by bailing out the people that appear to be "experts" in funding entrepreneurs. These "experts," the venture capitalists, have seen a staggering drop in their investment resources because their own investors have pulled out "due to market conditions." So, the logic goes that if the government pumps $50 to $75 billion into venture capital, then this will replace the money lost by VCs when their own investors jumped ship, allowing the VCs to fund thousands of great new ideas, and, as a result, the economy will magically recover within 3 to 5 years... Right?


Problem: Venture financing is the most prejudicial, non-transparent, unregulated, and secret financing available in the world today outside of the black market. The cryptic, oppressive, and non-standard investment agreements coupled with a shockingly homogeneous track record should be enough evidence of this. But, to make matters worse, venture capital is a ruthlessly guarded monopoly controlled by a privileged few who do not even try to represent the general demographics of the US population.

Solution: THE BEST THING that the government could do is to back alternative investment ideas that diminishes the VENTURE MONOPOLY on early to mid stage financing. Options and transparency are good solutions to problems. It forces better behavior from bad actors. If the lobbyists win and gain unfair support of the venture model, implement complete transparency on every deal financed by forcing a publication of the terms and mandate some modified form of equal opportunity.

Problem: The present day venture model has proven not to generate neither investor nor societal returns when measuring capital invested versus total returns. With huge annual management fees and staggering upside percentages, these "expert" VCs buy sailboats that are worth more than mid-cap public companies! If you think bankers are overpaid, visit the multi-million dollar homes of a half-successful VC. Please don't bail out any more fat pigs!

Solution: If the lobbyists win, just match 10% to 25% of the funds invested by VCs into early stage companies ONLY under the condition that none of the money goes to (a) venture fees, (b) venture upside, or (c) extravagant deal legal fees.

Problem: Venture capitalists are ruthless and often destructive capitalist predators. They will frequently attract young or desperate entrepreneurs with a solid business idea and some "traction" with the promise of sound advice and money. Then, more often then not, they will seize control of the company, terminate management, and force the company into a "get big or die" scenario, usually at the cost of logical growth.

Solution: If backing another type of funding model fails and the lobbyists win, at least allow the entrepreneurs to grade the venture capitalists as a check and balance and then stop supporting those that fail.

As a longtime entrepreneur and avid Member of TheFunded, I can think of nothing worse for the state of entrepreneurship then to have the government bailout venture capitalists. If you agree with this, then hit agree. Let's send a message to Obama.

PS: Quote me freely.

Posted by Anonymous on 2009-02-10 04:19:48

Right on! Totally agree.

Eric Hippeau is not the brightest tool in the shed. He has ruined dozens of investments, one of which I was involved with, and his handling of Yahoo is clearly abysmal. If he is a spokesperson, then the VC community could do a lot better than the bumbling editorial he wrote linked to above.

Well, at least they have John Doerr involved - not! Isn't he the one who broke the law with the HP spying scandal, forcing him to resign from the board, and then he is quoted that white male Harvard and Stanford students make the best investments???

Well, if this is the pick of the litter, then Mr. Smith is right. Time for change.

Posted by Anonymous on 2009-02-10 08:35:54

More venture capital available to entrepreneurs would be a good thing. Using the existing VCs for disbursement would be a bad idea on many levels.

Posted by Anonymous on 2009-02-10 12:15:55

Here here, couldn't agree more. Entrepreneurs should be a recipient of stimulus package funds. Startups are the creators of jobs.

Posted by incog on 2009-02-10 12:30:29

Totally agree. VC is broken. Please let us all know how you get this into the Obamastration, and how it is received.

Posted by ArcAnge1M on 2009-02-10 14:04:48

Count me in.

Posted by spouse of msjane on 2009-02-10 14:13:10


Posted by JonKessler on 2009-02-11 07:12:43

Thanks for bringing attention to this. Every minute spent snarfling at the trough for government dollars is one not spent creating innovation, jobs, wealth, etc. For the most part, government cannot create wealth, only redistribute it.


You Threaten. We Walk. Open Letter

Posted by Anonymous on 2008-08-20


Dear Venture Capitalist,

It appears that some of your compatriots, such as EDF Ventures, Dolphin Equity, Hercules, Matrix, Steamboat, Greylock, and, are actually THREATENING ENTREPRENEURS to try and silence their opinion. In some cases, they have unsuccessfully moved to take legal action. Let me give you a piece of advice. This is a really, really bad idea, and it places the whole venture capital industry in a bad light.

Last I checked, your job as a VC is to help entrepreneurs and to consider different viewpoints, not to whitewash the truth. No entrepreneur in their right mind should work with a venture fund that threatens legal action over expressing an opinion. Imagine what will happen in the boardroom or with a difficult decision" Are you going to sue every time that you do not like something, someone, some opinion, or some situation"

Maybe you should talk among yourselves and agree that this is a foolish reaction to feedback. Maybe all of the entrepreneurs on thefunded should agree never to pitch EDF Ventures, Dolphin Equity, Hercules, Matrix, Steamboat, Greylock,, and any other fund that engages in this practice.

You threaten. We Walk. What do others think"


Open Letter to VC's: Why You are Disliked. Open Letter

Posted by Anonymous on 2009-05-17


Adeo lead a panel today at TieCon. The question came up about the public image of VCs held by entrepreneurs. Adeo really tried to soften this question and just relayed the theme of the postings on TheFunded. So, Adeo was going out of his way to make sure that they did not feel baited.

The VCs on the panel pretty much guaranteed that no one in the audience should seriously consider them. Without exception, the VCs were hostile and defensive.

The VCs (Mark Fernandes, Sierra Ventures
Saad Khan, CMEA Capital
Raman Khanna, ONSET Ventures
Carl Showalter, Opus Capital )
acted like entrepreneurs were children who couldn't take "no". To which my answer is ... later, dude!

News flash VCs! 90% of the complaints on this website can be summarized as :

1. "pretended to be interested and then blew us off."
2. "was more interested in the blackberry than what I had to say."
3. "wanted to prove how smart he was, and how dumb I was"
4. "was late and inconsiderate"
5. "strung us along forever and then invested in competitor"

In other words, the majority of the complaints are just basic courtesy. I have *never* seen any complaint about a quick "no". "No"s are not the issue, it is the rudeness that is.

If you are not interested after 10 minutes. End the meeting -- don't check your blackberry.

If you are interested but then change your mind. Say "I thought I was interested but after thinking about this some more I have decided that it would not be a good fit, for these reasons: .... You may contact me again if these conditions change."

If you are late, call!

If you are so smart? How come you aren't running a company?

In the meantime, I am working really hard at creating a company with a cost structure that means VCs will not get a piece of the pie.

Posted by Iggy on 2009-05-17 03:07:17

I can believe how much this post hits the nail on the head and how passionately I agree with it. In all my time here, I can't remember anything but appreciation for a quick 'no'.

Posted by Water on 2009-05-17 03:28:56

VCs are about to learn a hard lesson. The same kind of lesson that the music industry has learned. The lesson is that water flows downhill and will not be stopped by rocks in the way. Innovation might be slowed down but it will not be stifled or stopped by a lack of VC money. The longer the VC market is constipated, the more alternate funding methods will be strengthened. This is a good thing.

Posted by sfonative on 2009-05-17 13:51:45

"If you are so smart? How come you aren't running a company?" I think the widespread rudeness and arrogance comes at least in part from a sense of insecurity. Playing with other people's money may be lucrative, but it is a far cry from the entrepreunerial experience. Add to that the fact that returns over the last several years are abysmal and many firms are shrinking or evaporating, and you have the recipe for unhappy people. And unhappy people tend to treat others poorly.

There are good VCs out there, but few and far between.

Posted by gofundgo on 2009-05-17 14:30:12

As a serial entrepreneur who has pitched our startup to the VC community for the past 8 months, I jaded and happy to see the industry in turmoil. The weak performers and all their antics (see original post) need to close down. They are not adding any value, only destroying equity capital that many risked everything to create. Their LP's should show their displeasure with poor performance by not reinvesting in new funds. Let the weak go out of business. It's a healthy exercise for the VC community and for the economy. The same logic should apply to any industry. The weak should be allowed to fail. Unfortunately, they are still out there, looking for low valuations and low risk at later stage. The entrepreneurs who are seeking later series investments are forced to accept low valuations, and the ultimate dilution of stock that occurs. The other option is to reduce headcount, and hope for the economy to turn around. Neither prospect is attractive.

We have been frustrated by the lack of term sheets from those we have pitched for the past 8 months, even after we have recevied kudos from almost every VC we have approached. As a result, we are rebuilding our startup model. We have become a 'virtual' company, with limited overhead. Using tools such as Skype, Go to Meeting, Free Conference Call, Priceline, etc. to collaborate and create, we are keeping our costs very low (read capital efficient). We can source almost everything we need through consultants, and we are seeking global manufacturing partners within our industry who have invested in infrastructure, but who have available capacity for us to tap. We are moving forward without the VC, and hope to get to revenue with no or minimal dilution of equity. We will ultimately need capital, and I am seeking TARP or other Gov't funding, and am putting together an Angel Syndicate. In our case, the VC have lost their usefulness, and I for one am delighted to see the whole industry evolving and improving. It would be good to see half of them go out of business. Who is going to miss them? Not me.

Posted by atsysusa on 2009-05-17 14:39:56

At the outset let me say that I am somewhat of a Lurker here. We are a startup in the infrastructure development sector. The scope and scale our undertaking [$10MM development cost; price points $25 - $250MM] does not fit the risk profile of Angels or VCs. So perhaps I have a somewhat more dispassionate view of the VC "industry."

I was not there and cannot judge the reaction of the VCs on the panel. I have attended a couple of VC sponsored events and observed their behavior.

From this admittedly limited exposure and my reading of the postings here I would have to agree with the opening post. Most VCs are arrogant, rude and self absorbed. They live by the Golden Rule - he who has the gold rules. But now their gold is tarnished and perhaps they have to get off that gold standard and adopt a new one.

However, this is a 2-way street. I have read too many posts that seem to have been written by someone who failed 8th grade english. If you don't know the difference between a singular and a plural get someone else to write your business plan.

I have read too many posts that express surprise that VC would question the thoroughness of the preparation. If you have not thoroughly tested your invention, software or business model do it before you seek funding.

I have read too many posts that confuse tough questions for arrogance. If you cannot answer the question you are unprepared.

I have read too many posts that promote trivial uses of technology to holy grail status. An attempt to replicate the success of others is not new art and writing code is not business expect for those employed to do so.

If you will excuse my arrogance, I have a few observations on the "entrepreneurs" posting to this forum:

1. Just because you think that that you have a brilliant idea does not mean that everyone has to agree;
2. If you have never experienced a moment when it occurred to you that you do not have the solution to everything you are too immature to run a lemonade stand; and
3. Just because it is your idea does not confer the CEO title. If you have never run a real business drop the vanity plate.

Posted by Winston1 on 2009-05-17 16:35:16

I agree with Water. Alternatives are starting to formulate in the Angel Investing community. Different Angel groups are beginning to cross network, share deals, and syndicate deals to raise bigger rounds (like $1m to $4m). If you have a business model that allows to you get customers/revenue with that money, Private Equity is beginning to look at deals like that.
The VCs are so bloody arrogant with so little value add, alternatives will end up being better than them.

Posted by r2d2 on 2009-05-17 20:17:22

First "If you are so smart? How come you aren't running a company?"\


In my experience, most all the VC's who have started and run companies are way more professional than those who have not ... except the few who just lucked out once and now think the Sun shines out of their ass ... we know who they are ...

Second "In the meantime, I am working really hard at creating a company with a cost structure that means VCs will not get a piece of the pie."

This is an interesting comment. So am I. And in the last few months I have talked to a whole bunch of repeat entrepreneurs who are working hard to do the same. This is especially true in the SaaS space where PaaS environments and associated development tools are making it possible.

With all the hosting issues taken care of by the PaaS vendor and with the kind of high level application development tools that are available today it is now possible to deliver serious business applications via the cloud in just a few months at costs (other than your time) ranging from free to $49/mo per developer. No funding required here.

Once that is done you can take a fully working app to early customers and get them on board. This is much easier than signing customers up based on a .ppt andyour good looks :)

Once you get some traction with customers (not to mention cash flow positive from day one) the VC's will be calling you not the other way around.

And if the idea does not take off, no big deal. All you lost is a month or two of work. Move onto your next great idea.


Posted by nomer on 2009-05-17 21:50:48

News flash the funded! 90% of the complaints on this website can be summarized as :

1. "pretended to be interested and then blew us off."
2. "was more interested in the blackberry than what I had to say."
3. "wanted to prove how smart he was, and how dumb I was"
4. "was late and inconsiderate"
5. "strung us along forever and then invested in competitor"

which are very petty and useless criticisms. What is the point of this website if it degrades into a never ending bitch session about how VCs did not fund your company. I have raised money from VCs for multiple companies and am very familiar with the painful shortcomings of the VCs, but would like to offer some practical advice about how to deal with these rather than whining all the time.

The VC model is certainly in trouble and 50 to 70% of VCs will probably be out of the industry, but this is not because they are rude, it is because they don't make money on their investments.

If you can start a company without raising VC you should. The drawbacks associated with VC; loss of ownership, ceding control of your company to someone who probably does not know what they are doing, forced friends and family hires, etc. are substantial. Owning 100% of your startup and bootlegging is probably the future of entrepreneurship and should be the first goal of any entrepreneur.

VCs often have huge, but fragile egos. The huge ego comes from the fact that they are used to having entrepreneurs come beg them for money. The fragile/insecure ego comes from the fact that they haven't done much, are afraid of loosing their(highly paid) job and have no transferable skills and they know that the industry is going to have a shakeout.

If a VC does not say "no" and are not in communication at least every other day they are not going to fund you. Look at what they do, not what they say. If you are not one of the top three deals in their stack and they aren't actively working on diligence, just assume it is a "no" and move on. I'm not trying to defend this behavior but dealing with difficult people is part of being an entrepreneur. Imagine how much worse it would be if one of these bad VCs actually funded you and ended up controlling your company.

Posted by Anonymous on 2009-05-18 02:27:20

I was at the panel, and the VC community has an awful PR problem. There were a lot of things that bothered me about the VC responses...

Funding your friends: When the panel was pressed about secrets to cut through the clutter, they said don't bother emailing in plans and get introduced by a trusted source, essentially a friend. They went on to say that VC is a 'hits based business.' Well, a 'hits based business' where you fund stuff from your friends seems pretty dumb.

No repeat business: Adeo pressed the panel to tell stories about repeat business with good entrepreneurs that they had funded previously, stating that successful entrepreneurs try to avoid venture capital, and nobody had any stories. They all mentioned, on the other hand, that thousands of entrepreneurs come through the door every year, and some of these were great entrepreneurs because they 'once worked at Google.' Adeo said, '10,000 people show up in an african village when the rice truck comes, but that does not mean that anyone likes the men with guns on the truck.'

Get ready to be fired: Adeo asked the panel what a founder could do to avoid being fired, and the best advice was to 'prepare to accept a different role,' which Adeo clarified with the panel to mean being demoted. Every VC on the panel admitted that they start preparing founders to be fired during the term sheet negotiation, so it does not come as a surprise later.

Does any of this bother anyone else? And, this was the tip of the iceberg...

Posted by Mr. Smith on 2009-05-18 02:34:35

#8 @nomer makes great points.

(1) If a VC is not focusing on your deal with follow-up and diligence requests, then the deal is dead. Assume VCs are going to engage in bad behavior, and hope for the moment while pitching when one does not... Then, you may have a deal.

(2) Everyone who closes a round should write a detailed review of their funding partner a few months or a year after the deal is done. Pitching can be bad, but working with certain VCs can actually be worse (believe it or not).

Posted by original poster on 2009-05-18 05:42:36

@nomer --

These are not petty criticisms because:

First, rude behavior is uncalled for. Period. Rude behavior is unprofessional. Even if the other person is rude, professionals should behave professionally.

Second, wasting the entrepreneurs time cost him/her time and money. This is rude and detrimental to their effort.

Third, this has nothing to do with "never ending bitch session about how VCs did not fund your company". Anyone who has ever dated has gotten a "no, not interested." Sometimes that "no" can be changed, sometimes not. No sane entrepreneur should assume just because they print up business cards with the "CEO" title that they are entitled to cash. VCs are not a charity. Nor are they giving out no-strings-attached grants.

Fourth, the entrepreneur respected the VC enough to ask for the VC to be part of the company. The VC should accept the complement and spend the 15-60 seconds needed to send a reply with at least one sentence of feedback.

I personally have no sympathy for anyone that whines about not getting funded. Hell, I am not getting funded at this point and I am not going to whine about anyone who has turned me down.

If the VCs want to only fund their close friends, I don't mind that either! Just tell me that so I don't waste my time or theirs. If this means they miss out on great deals, only the LPs have a right to complain about this.

Bottom line: empathy and clarity will go a long, long way. A "no" should be delivered quickly, clearly, in writing, with meaningful feedback, and without being a dick.

Posted by Anonymous on 2009-05-18 11:07:23

I still think most of this comes down to basic courtesy (the polar opposite of arrogance). And founders and CEOs can be arrogant, too... although it would be hard to perfect the arrogance of a young VC.

After developing an idea and figuring out how to make it into a product, we work hard to develop our busines plans and refine our presentations. We don't necessarily deserve funding but we I do think we deserve a fair hearing - after all, it's the VC's job to write checks. They need our good ideas just as much as we need their money. Today, perhaps they need us even more.

I think giving an entrepreneur 30 or 40 uninterrupted minutes to hear their story without having to text your girlfriend or leave the conference room is a basic courtesy. I wouldn't do that to a vendor or a job candidate, a VC can do the same.

Posted by santo1025 on 2009-05-18 11:54:01

After reading the comments the word that keeps coming to my mind is integrity. This is not to imply VCs lack integrity. It means I expect VCs to communicate in a direct and timely manner. I do not expect anything more - particularly at the startup stage. From the entrepreneurs perspective, for the relationship to work, it must be a win-win. The vast majority of VCs do not view that way and that is where the issue of integrity comes into play for me. Are both parties being clear, direct and honest in communication?

This is important for startup entrepreneurs because, lets face it, if your company needs more than Series B you will not be around and the likelihood that you will receive any significant returns should the company succeed in the future drops significantly. I do not expect to be given anything but there continues to be a huge disconnect in expectations by both parties that can begin to be addressed by both sides discussing the reality from the beginning.

Posted by original poster on 2009-05-18 13:42:09

My second addendum.

Most of the positive ratings come for entrepreneurs reporting a quick considerate "no".

There are also many (and thus worse!) negative ratings from entrepreneurs who were funded, who only discovered later how bad an investor was as a board member. And (drum roll please)... those bad board members turned out to be rude, arrogant, etc.......

And this is where it really hurts VCs. Even if the VC is offering the only term sheet, any entrepreneur worth her salt will check here and walk away from a VC with a bad ranking.

90% of the *praise* is when the entrepreneur is treated well, but not funded!

Once again, as a group we are not demanding that you fund our anti-gravity, perpetual motion, warp drive. Just politely send us a note explaining that you are not interested but will be happy to fund us after research has discover a error in thermodynamics and relativity theories.

Will there be the stalker-types who are adamant and persistent? Of course there are -- but would you fund a CEO who wasn't? Take this as a sign of praise and don't piss on the fanboy. Watch "Incredibles" sometime - the fanboy turned villain had a bunch of fundable ideas didn't he :-) ?

Bottom line:
A positive feedback cannot be purchased.

This is a solvable problem without demanding charity only humanity.

Posted by nomer on 2009-05-18 13:50:24

It would be great for people here to share some ideas/suggestions for alternative funding sources. One of my points is that the guys who did not take VC and ended up building a company are the ones to listen to.

A more passive approach might make some more sense for lots of VCs. They tend to get into trouble when they try to add value. Remember the primary value add of VCs is money, everything else is a bonus. I have often seen a very active board member inadvertently destroy lots of value.

One of the most fun ways to test if someone is respectful is to go to a restaurant and see how they treat the wait staff. If they are a dick to the busboy then they will be a dick to you.

Posted by Anonymous on 2009-05-19 18:21:55

In business what goes around comes around. I am a serial entrepreneur and a limited partner. So, I see the issue from both sides. I think that many VCs tend to operate by their own rules and the quick kill mentality makes for arrogance and rudeness. Some of the luminaries in the business happen to be some of the most personable people that you would ever meet. It is unfortunate that it is not the rule.

For my part, if I feel that a VC has not treated me in a professional fashion, I will not do business with that VC again. That means that I might be the person that you approach for the M&A of your favorite company and I may not take your call.

In the VC game, the entrepreneur is likely to end up representing an outcome for a portfolio company. As such, everything cuts both ways. Sometimes it just takes a while

Posted by pnkearns on 2009-05-23 19:17:03

My only addition to the list would be:

6. "Can you look at the b-u-s-i-n-e-s-s I'm showing you even if it isn't the 15th version of the hot trend you heard about last night over drinks?".

Posted by jetskier on 2009-06-05 23:41:41

I love being right. I was just asked to look at a company for M&A that has funding from a VC that dissed me. This one is going to be very interesting. Wonder whether I should spend the whole meeting typing on my Blackberry. :-)


Timeliness Open Letter

Posted by Anonymous on 2007-08-17


Dear Venture Capitalist,

If I can take the time out of my busy schedule to come and meet you in your office, usually at your request, then I expect you to be there ready to meet me. AND, by "ready," I mean both on time and prepared.

I expect at least one partner in the meeting throughout the whole pitch. I expect to have some basic services, such as a projector, to present you my company. I expect that you will not be reading email or answering calls while I am talking. I expect that you have some idea about my company and my sector.

It would be nice if you asked a couple questions that showed you were listening. It would be even nicer if you gave me a realistic indication of initial interest.

Thank you!

BTW, please leave your dog or other pets out of the pitch room.


Entrepreneur's Guide to Venture Capital: ) Open Letter

Posted by jetskier on 2007-10-03


Entrepreneurs Guide to Venture open letter

Background: I am an entrepreneur who co-founded a company in the late 90's. We had a lucrative exit and I have been trying to get a new enterprise financed. So, in the spirit of edification and potentially poking a bit of is my list of axioms. Feel free to add yours.

If you show a VC a potential $1B market, they won't believe you. If you show a VC a potential $100M market, they will consider the market to be too small

Over the life of the company, the entrepreneur will do 90% of the work; the VC will collect 90% of the return.

Patents are important as a barrier to entry only if you don't have any. Otherwise they are considered unimportant.

If you failed in a past venture, you will fail again. If you succeeded, it was luck.

Investments outside the comfort zone will not be considered, even if potentially lucrative. Investments inside the comfort zone will not be considered as there is too much competitive pressure.

VCs that you have made money for in past endeavors are the worst potential new investors. Everyone knows that lightning can't strike twice.

Entrepreneurs are a dime a dozen, VCs are a rare breed

Any idea worthy of investment must be fatally flawed in some respect.

No means "no" and "yes" means "maybe"


Hey, Fred, the VC Model is Broken! Open Letter

Posted by Mr. Smith on 2009-07-06


It is shocking to see someone as smart as Fred Wilson say: "The venture industry is not broken, but some of the participants in it are."

Let's take a look at this statement for a moment. The model of taking other people's money and investing it into startups for 2% as a management fee and 20% as carry is not inherently broken. That's like saying the model of selling hamburgers is broken. If everyone sold hamburgers that killed the consumers, then you could argue that selling hamburgers was broken. Similarly, the infamous "2 and 20" model breeds widespread bad behavior and poor performance, which is essentially the same as being broken. So, how is it broken?

Well, most venture capitalists have started to optimize for management fees versus carried interest, or sharing in the profits generated. It simply makes sense to raise larger funds every two or three years so that each partner can earn $2 or $3 million a year in guaranteed fees. With exits taking longer and failures rampant, praying to generate personal returns from the carry after paying back your principle is unrealistic. Returns are too uncertain, and some funds have been unable to return the principle, forget profits. And, the math is clear: a 2% management fee over 10 years generates a little less than $50 MM in fees on a $250 MM fund. Meanwhile, a 2x return on a $250 MM fund also generates $50 MM in carry, yet the carry is a lot harder to get, takes a lot longer, and is much more uncertain than the fees.

Venture capitalists pump new fund money into the "flavor of the moment" industries at a staggering rate. The goal is to quickly empty out an existing fund to make way for raising a new fund and to start earning the management fees. Firms only earn fees on invested capital, creating an incentive to invest quickly in "hot" industries without much thought. This roulette table investment strategy, where everyone bets on an industry in a short period of time, barely worked with telecom and the internet, but it looks like an abysmal failure with Web 2.0 and cleanteach. It seems like "0" and "00" have come up back-to-back. There are many analogies to justify the roulette strategy, like the "rising tide floats all boats" or "safety in numbers." You could also use the analogy: "lambs to the slaughter."

Caring about the entrepreneur has become an afterthought, almost a myth. What firms care about is raising their next fund and returning the principle. It's become a game. Return some principle, then raise a new fund. As a result, great entrepreneurs rarely go into venture capital anymore. It's financial three card monte, not entrepreneurship support. Meanwhile, all of the junior associates employed in venture capital need career mobility. These business school jockeys were brought in to identify classmates as funding targets and to run complex capitalization table analysis. The next thing you know, venture firms are populated with b-school grads as partners, who, in turn, are hiring and promoting more b-school grads. Now there are a bunch of "career venture capitalists" with no idea on how to start or grow a company besides watching others from the sidelines.

If all of this were not problematic enough, the current venture capital model requires deal syndication to justify next round valuations, ensuring that many different firms work together, whether they like it or not. The problem is that behavior in a syndicate deal can only be as good as the best investor, and is likely to be just a little better than the actions of the biggest jerk. For example, if one partner in a deal is constantly trying to oust management and take over a company, it's difficult for all of the other investors to fight this behavior. Even good investors with good intentions often take a back seat to the jerks, and they're quick to write off a deal, while sipping cappuccinos brewed off the fat of their fees. Preferred voting rights and shareholder politics are so complex that jerks prevail.

So, Fred Wilson said that venture capitalists need to look at the entrepreneurs "as the client." Essentially, he is saying that the model is not broken, just everyone is doing it wrong by focusing on the fees. Maybe the model encourages people to do it wrong, Fred. Wake up.

(please feel free to quote me)

Posted by mig8080 on 2009-07-06 20:47:02

I agree. I believe I had it right that VC's funded only 16% of the Russel 2000. So what are the great entrepreneurs doing to raise capital? Basically we need a new model that eliminates the VC middleperson that lines up the sources of capital to those who can make use of it, with a due diligent/oversight mechanism that has a stake and risk in the deal.

Posted by Anonymous on 2009-07-07 09:46:16

Great point. It seems fixable too: what if LPs encouraged VCs to take 30% carry and no management fee. Great entrepreneurs (like Marc Andreessen) and proven VCs (like Fred) should jump at that proposition since they have enough money that they don't need salary and because the carry income is taxed as capital gains (which is a huge scam, but that's another story). Because it's so much cheaper to run a small shop due to improvements in technology (cheap computers, Google docs, gmail), VCs shouldn't need the management fees just to operate.

This would not tempt VC to raise any more money than they think they could get a great return on, because they'd make nothing at all if they lost money.

By analogy, if an entrepreneur came to a VC and said I want a better valuation in exchange for never taking a salary or other non-preformance based compensation, the VC would be all smiles.

Posted by Anonymous on 2009-07-07 10:20:58

#2: Great point, and I agree. In order for a carry-only venture firm to work, the firm may need to receive distributions before the principle is paid back in full or have reasonable operating expenses reimbursed first. Another strategy would be to mandate that general partners contribute 10% or more of the principle. The challenge is that you may incentivize firms to seek quick liquidity versus long-term growth. A good approach would be to identify the desired behavior and the build the incentives to create that behavior. The "2 and 20" is fostering the wrong behavior, clearly.

Posted by muse on 2009-07-07 12:31:31

This is exactly on the money. In general, our culture has encouraged jerks and not capital effectiveness. In fact, the current structure is inherently ineffective. In the case of web 2.0, it doesn't take into account the nature of the business - doing lots of different opportunities and affording a much higher loss ratio than typical (1 in a hundred instead of 1 in 10). These deals that do get funded can easily be injured by the jerk behavior. So the competitiveness of venture capital is reduced by a factor of 100 to one on top of these success numbers because of this jerk factor, because the jerks blindly kill off ventures to rush to the next fund to feed at the fee trough. They are wrecking the entire ecosystem for deals whole cloth now. The reason they still raise funds is that most limiteds are staffed by morons who don't re-evaluate - they just put money into the same old funds (branding stasis). This will continue until those morons are forced out and new ones take over. I expect this will be a long five to ten years. In the meantime, there are other conduits of funds, and TheFunded should be exploring those more fully.

Posted by hollywood on 2009-07-07 15:29:35

Great thoughts, however, we actually need much more broad reaching VC activity. If 97% of all net job creation since 1989 has been from small business and less than 1% of our GDP is invested by VC's it stands to reason that our economy has stalled. If small businesses can't get equity, which BTW used to come from their home equity line, they can't borrow any money. I'm not just talking about tech here, I'm talking more broadly. That won't solve the problem of tech investing, since the blind leading the blind has always been the rule. To most VC's I would say you should focus on developing businesses that can generate cash flow, not just eyeballs.

I have a company that can do $100M in revenue in 2010 on a $25M investment and VC's won't even look at it. Ironically this business is capable of growing to almost $400M with $175M in EBITDA by 2012, so exit strategies are many.

I suppose that if you can't get funding easily for this company, the whole thing is really broken. Even more ironic is the VC who passed on the investment, only to have the partner who presented the idea invest personally.

May the Valley RIP.

Posted by Anonymous on 2009-07-07 16:03:46

Very well done. Thank you.

Not only do the "jerks prevail," but there really are no consequences for being a jerk in venture capital. (a) Entrepreneurs are fearful of retribution or blacklisting, so they tolerate bad investor behavior. (b) Most startup lawyers live off of fees generated by venture capitalists, so they often refuse to pursue litigation on behalf of entrepreneurs and companies. (c) Other investors will often roll over rather than engage in a time consuming fight, and, with the funding environment so bad, jerks do not even get blacklisted within the VC community.

In fact, jerks are rewarded because they get their way.

Posted by crunkykd on 2009-07-08 20:08:46

Guys, this website is devoted to startup founders. We need to know who to avoid. So start naming names - not "some VCs".

Posted by tylerwillis on 2009-07-08 20:58:10

Not sure I agree with everything you've said. Without commenting on your thesis statement, these are the points that gave me some pause:

Your Statement:
"Venture capitalists pump new fund money into the "flavor of the moment" industries at a staggering rate. The goal is to quickly empty out an existing fund to make way for raising a new fund and to start earning the management fees."

There's an easier explanation here -- there are more entrepreneurs, with more ideas, more technology breakthroughs and more people supporting them. The rate of innovation has inarguably risen and it's safe to expect that VC involvement would rise in connection.

Your Statement:
"Even good investors with good intentions often take a back seat to the jerks, and they're quick to write off a deal, while sipping cappuccinos brewed off the fat of their fees. Preferred voting rights and shareholder politics are so complex that jerks prevail."

In my experience, good investors will often help companies combat investors who've gone off the deep end -- unless they think the jerk's move is actually raising the value of the company. This is based solely from personal experience. It sounds like your assumption is too. This strikes me as something that needs more data before a conclusion can be drawn. You may have a point in this, but it raised my eyebrow.

Your Statement:
"the infamous "2 and 20" model breeds widespread bad behavior and poor performance, which is essentially the same as being broken. So, how is it broken?"

Actually, this is an incorrect statement, broken would imply it does not work, or that it is not working according to the design. As I understand it, the system was designed with this incentive structure knowing firms had to have operating capital to keep the lights on. While funds can be short sighted in raising several concurrent funds just to milk management fees, they will have a hard time raising money for their next fund if they don't return the investment. That means there are negative incentives for over-committing (if it decreases your ability to return profits). Your argument doesn't support that the model is broken, but it could be restructured to support support a statement that the model is inefficient and should be improved, which I'm down with.

May sound like I'm splitting hairs, but it's easier for interested parties to get behind increased efficiency, but their response to "this is broken" will almost always be inherently negative.

Posted by Mr. Smith on 2009-07-09 02:14:33

@tylerwillis: In terms of the "pumping money" statement, billions per year have poured into new new industries, one after the other. More entrepreneurs are being funded, true, assuming they are pursuing opportunities in the right sector. This creates a problem of "false positives" for the VC model. It's easy to game the system by bulking up your resume and jumping into a hot field. The "visionary sheep" VCs will fund a sector until the LPs are bled dry...

Posted by carlwimm on 2009-07-18 07:13:49

Fred Wilson does have it wrong.

The VC industry has it right.

The fees come from the investors. That is a guaranteed flow to the VC partners. The carry is just the come on. Maybe it works, maybe it does not. But the VC gets the fees anyway.

Once funded, all the VC is really doing is piling up a great story to get re elected, into a new fund once the old one is finished.

And just like Congress, where incumbents get re elected 90% of the time, the LPs pile into the old "names", even when they have not performed.

Do you want a model that shows the VC is truly performance based????

Make it all carry and no fees.

Let the VC demonstrate his own "skin in the game" by paying his way for ten years and getting his reward out of actual success at the end of the game.

But ... you say ... that would mean that a Venture Capitalist actually "ventured".

Never happen.

The real "venture capitalists" are the entrepreneurs who do work for ten years, without any fees and who succeed only if the project succeeds.

The last people who actually venture are the "money brokers" who work with OPM.


Reporting Should Go Both Ways Open Letter

Posted by Anonymous on 2008-01-11


As a CEO, I provide my VC investors with extensive reporting on my plans, my progress, and my financials. It would be great if each of my VC investors delivered quarterly reports on the value that they are adding to my business.

What is your attendance rate to Board meetings and calls ("attendance")" How many deals have you introduced me to that have closed ("deals")" How many top advisors and managers have you helped me recruit ("recruiting")" What issues have you worked with me to resolve ("issues")"

This is a classic example of practice what you preach. Do other Members agree" What other categories of "value add" should VC partners track" Add them below.


Simple VC Office Management Open Letter

Posted by Anonymous on 2007-08-17


Okay, we know you VCs get hundreds, if not thousands of business plans every year, so here's a simple solution.

Have an office admin person provide a quick email stating the plan has been received and if there is no action taken in six months, it will be shredded or deleted.

If a meeting has occurred, have the admin person send a similar note letting the entrepreneurs know that an answer will be sent in X weeks (AND have him / her responsible for sending the final "answer"). If it's still in doubt when date X comes, the NewCo should be sent a note saying give us another 4-6 weeks.

Plain and simple, communicate your actions and most entrepreneurs won't be offended.


Hey, VC, Your Model is Broken. 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.


The VC Model is Broken: Ideas, Anyone? Open Letter

Posted by The Founding Member on 2008-11-12


The following presentation was delivered to key faculty at the Harvard Business School to start a dialog about the future of venture capital. The presentation was shared by a Member in attendance. Members, please add your ideas on how to improve the model by posting feedback below. Enjoy!

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

Posted by dude on 2008-11-13 10:07:50

Great work, Adeo! Let's hope they take heed.

(but is canary being both dead and misspelled two things worng?)

Posted by anonymous on 2008-11-13 10:21:13

I both agree and disagree. I agree that the VC model is broken, in that it is too, well, incestuous. It focuses on funding companies within its own network, thus avoiding all the great value opportunities elsewhere. It is also deeply subject to a herd mentality, everyone chasing the few hot ideas, rather than a more rigorous analysis and diversity of investment (which is the first rule of investing).

I disagree in that the VC model isn't for everyone. The VC model is focused on big hits... but the overwhelming majority of companies that need funding are not looking to be (or shouldn't be looking to be) big hits. They are companies that can generate $5MM, $10MM, maybe $20MM in annual revenues in many years, and are thus good, solid businesses.... that would be destroyed by the "get big fast" pressure of VCs. What these firms need is: (a) an understanding of what the VC model is, so they can avoid it; and (b) opportunities to approach other investors.

Posted by Anonymous on 2008-11-13 10:29:23

Excellent job Adeo. Socialize the message please.

For the amount of smart people investing it is amazing that they havent processed the data and found these patterns.

Clearly we need a VC approach to recognize that companies like Google, Ebay, Amazon, Facebook can be incredibly huge and also to bet big on them.

The problem is then why the other companies that they invest in, dont amount to anything. Is it a problem of judgement where they can only get one out of 10 (or less) right. Or is it because the VCs are inept at actually helping these other companies succeed and it is really a matter of founder ability, luck, timing, etc for the one success they do get.

Posted by Sharing is good on 2008-11-13 10:48:02

It does feel broken, in many of the big ways you cite. From a personal standpoint, the smaller recommendations at the end about standardized term sheets and getting early stage investments to cost less than $10k feels so right and so critical.

Last year, my startup spent 10% of its money on legal fees -- to close a round of financing and work on the terms of use contract, and that was after big "discounts" from my law firm. And sure, $25-$70k closing fees aren't a big percentage of $1-$5m dollars, but it does feel preposterous in real terms. There are so many better ways to spend that money.

The me-too investments drive me crazy. I've watched competitors that are so lagging and faulty get funded and I think, who did the diligence? And I also see new ideas not get funded because there is no benchmark to guage their market or technical viability. I don't have an easy answer for how to solve that.

Posted by Anonymous on 2008-11-13 12:20:33

A friend of mine just left a very prestigious and high-paying job at a big VC firm to run a startup company. He said that getting good returns is damn difficult, even at his blue chip fund.

Posted by anonymous on 2008-11-13 15:31:13

I probably have a unique perspective, having run a firm for 12 years that did damn good due diligence for startups. I participated in a lot of VC pitches, sitting on the entrepreneur's side of the table. Here's a tale:

We spent several months talking to potential customers for a semiconductor startup's product. We got strong interest and developed business and co-funded development opportunities in two market segments.

We did a partners meeting at KPCB. Five full partners were in the room, including one whose name is on the door. We presented facts, business and investment terms offered by industrial partners, and more than most startups could ever wish to have at a pitch meeting.

The comments from the partners were unbelievable. "We did this at XXX and it failed," said one, not mentioning that he did it radically different, and it was 28 years ago. "Intel is the best performing semiconductor company, and their returns aren't good enough for us," said another, with not a small amount of arrogance. Not one question about the publicly-traded companies who had offered to co fund development, or about the other business opportunities we developed.

After the meeting, one partner (who had 20+ years of operational experience) pulled me aside and said he wanted to learn more. While the rest disappeared to the catered seafood buffet that they enjoy every day, he asked intelligent questions about the markets, potential partners, and sales opportunities. It was clear that he did not feel comfortable addressing these issues in front of the group, although he is a full partner, and is personally on the list of wealthiest people in the world (His sister had a run in with the SLA a while back). This one guy, although he came from a vastly different industry, had more business sense than the rest of the room combined.

I used to think that this was an extreme case. Now when I read the posts here in TheFunded, I realize that much of the VC industry is in the same boat, and has the same unrealistic expectations. Although the So if you ask me if the VC model is broken, I'll say, yea, and the reason isn't what the presentation above describes. The reason is the way that VC's have come to view themselves and their position in the world. Just count the number of times the word "arrogant" comes up on this site. The VC industry won't be fixed until that changes.

Posted by mrblack on 2008-11-17 01:05:04
Posted by pnkearns on 2008-11-24 16:24:41

It seems that the VC model is structured more as a club than a business.

Posted by Anonymous on 2008-11-24 17:45:32

Evergreen funds are a good idea.

Posted by anon on 2008-11-30 21:55:29

The presentation points out lots of flaws with the VC biz model
The solutions don't make too much sense, if returns are low, how does funding more companies increase returns?
The shakeout that should have happened in 2001 will happen in 2009 - 2010 because ten year returns (which are what the LPs evaluate asset classes on) are now officially terrible. Hopefully this will help improve VC quality. Our entire capital economy was affected by cronyism the last two decades and VC was no exception, but certainly wasn't exceptional. The survivors of the two market crashes will by definition be solid and hopefully the next generation of VCs will be better.

Posted by beaner on 2008-11-30 21:58:23

the interesting observation is that ebay accounted for a huge % of the returns of the entire industry. If you add a few more companies; skype, google, you tube, paypal to this list you see that most of the returns are generated by a small handful of companies.

Another idea is small money in + modest exit = good % return


Hey VC, How Good are You? Open Letter

Posted by Mr. Smith on 2008-04-16


Dear Venture Capitalist,

You have complained that the public ratings are gamed or manipulated or vengeful or inaccurate. You may be right or you may be wrong. You have certainly called me a few times asking for a public review...

Your personal rating was just revealed publicly for the first time yesterday. The only people who have rated you are people that know you, since there is no incentive for users to secretly bash or compliment your performance when nobody was looking. You can actually see if you are any good at what you do.

Your ego may be bruised, but you are not going to get 20 reviews. You probably worked with 20 CEOs in your entire career. You'll be lucky to get 5 reviews, and they are going to be honest. Guess what, if you score below a three, you should be concerned. The mediocre button for partners is number three out of five. So, even if you score a three, this means that people think you are... mediocre.

My guess is that the wheels of manipulation are already starting to turn, as you are asking "who can I call to rate me"" I am going to recommend that you take the feedback to improve your performance, rather than manipulate the outcome to look better. Being better is actually better than looking better. If you are scoring below a two, you're not doing your job well and the people that you work with probably do not like you, either.

You can improve. Here is your chance. Run with it.

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