Invest Different
From my previous
blog post it should be clear that life of
the Venture Capitalist (VC) isn't that easy. And
if you run the numbers from the presentation
attached to that blog, you'll find that the
economics of VC (cumulative) don't work out. As
many others before me (like Josh Kopelman, Managing
Director of First Round Capital) have pointed
out, statistically almost every VC firm would
need to yield an exit in the range of Facebook
and MySpace valuations to produce satisfactory
returns to their Limited Partners. That story
has been covered by VentureBeat and others,
so I will not digress.
But in my view, something much more fundamental is wrong with VC:
1/ The majority of VCs currently operate as a premium market with traditional rules, not unlike Hollywood - ready for a makeover. Those rules include investing in trends, previously successful entrepreneurs, analyst consensus, commoditized application development etc, all of which are guarded by MBA associates with very limited real world experience. But we know better; the best investments made by the top producing VCs come from The Long Tail of opportunities. Facebook, MySpace, Google - non of those came from the precedents described above. 95% of VCs that don't produce a killer return, need to fundamentally change their model to get access to real innovation.
2/ The majority of VCs invest in technology silos, domains or segments. That's why a large corporation like Apple ran circles around the VC community in owning the music (and now video) distribution business. No investor in the Valley today invests in the synthesis of consumer, desktop and server capabilities in one offering. We are introduced to a new definition of innovation that comes from the synthesis of existing proprietary or open architectures across the segments that collectively form a unique business proposition, rather than the depth in every technology segment. So, a macro-economic view of the world would not hurt either (see: In search of the Economist VC)
3/ Many investors are cheap. They believe allocating as little money as possible is a prudent business practice. Pre-technology companies (even those with seasoned professionals) are often given a little bit of money to test the waters. What that really communicates is that the investor does not believe the investment will truly achieve world domination. Now, I am the last person to squander funds, but every investment has its own unique investment profile. Moreover, do we really need to prove to the investors that we can build technology? I don't think so, creating a market is where the investment risks are. So, if you are not ready to pony up as an investor, you should not play. Too many companies get killed by investors that suffocate companies with inexperienced business leadership, lack of vision, pushing products with marketing dollars that are not ready for prime-time or uneven distribution of the company ecosystem.
4/ Investors are hard to approach and sometimes plain rude. Considering their business model that is not a real surprise. Many investors are not entrepreneurs themselves and frankly, have the vision of a lemming. As a result they take considerable amounts of time to sift through false positives and false negatives, or simply brush the entrepreneur off when time runs out. But the best deals come from tapping into the Long Tail of the innovation market, reaching out pro-actively into unchartered territory, with experienced business people.
Investors need to reinvent themselves ahead of markets and technology, not in the least because the majority of VC returns are below the water mark.
The role of an experienced Venture Partner with a strong vision, who understands macro and micro-economic impact of technology is more crucial than ever in finding those unique opportunities. (Shameless plug: come get one here.)
But in my view, something much more fundamental is wrong with VC:
1/ The majority of VCs currently operate as a premium market with traditional rules, not unlike Hollywood - ready for a makeover. Those rules include investing in trends, previously successful entrepreneurs, analyst consensus, commoditized application development etc, all of which are guarded by MBA associates with very limited real world experience. But we know better; the best investments made by the top producing VCs come from The Long Tail of opportunities. Facebook, MySpace, Google - non of those came from the precedents described above. 95% of VCs that don't produce a killer return, need to fundamentally change their model to get access to real innovation.
2/ The majority of VCs invest in technology silos, domains or segments. That's why a large corporation like Apple ran circles around the VC community in owning the music (and now video) distribution business. No investor in the Valley today invests in the synthesis of consumer, desktop and server capabilities in one offering. We are introduced to a new definition of innovation that comes from the synthesis of existing proprietary or open architectures across the segments that collectively form a unique business proposition, rather than the depth in every technology segment. So, a macro-economic view of the world would not hurt either (see: In search of the Economist VC)
3/ Many investors are cheap. They believe allocating as little money as possible is a prudent business practice. Pre-technology companies (even those with seasoned professionals) are often given a little bit of money to test the waters. What that really communicates is that the investor does not believe the investment will truly achieve world domination. Now, I am the last person to squander funds, but every investment has its own unique investment profile. Moreover, do we really need to prove to the investors that we can build technology? I don't think so, creating a market is where the investment risks are. So, if you are not ready to pony up as an investor, you should not play. Too many companies get killed by investors that suffocate companies with inexperienced business leadership, lack of vision, pushing products with marketing dollars that are not ready for prime-time or uneven distribution of the company ecosystem.
4/ Investors are hard to approach and sometimes plain rude. Considering their business model that is not a real surprise. Many investors are not entrepreneurs themselves and frankly, have the vision of a lemming. As a result they take considerable amounts of time to sift through false positives and false negatives, or simply brush the entrepreneur off when time runs out. But the best deals come from tapping into the Long Tail of the innovation market, reaching out pro-actively into unchartered territory, with experienced business people.
Investors need to reinvent themselves ahead of markets and technology, not in the least because the majority of VC returns are below the water mark.
The role of an experienced Venture Partner with a strong vision, who understands macro and micro-economic impact of technology is more crucial than ever in finding those unique opportunities. (Shameless plug: come get one here.)