Andy Sack: I've been surprised by how much negative commentary has been flowing in the local startup community about the role of venture capitalists. If you believe the recent comments on blogs and the chatter at startup events, Seattle venture capitalists are out of touch, slow, arrogant, and generally unsupportive of entrepreneurs.
As a managing partner at Founder's Co-op, I'm (sort of) a venture capitalist myself. In addition to starting and working with early-stage Web companies, I now invest money (mine and other people's) to help get them off the ground.
Sure, the seed stage investments that I make places me very close to the entrepreneurial zone. But nonetheless, I'm on the opposite side of conversations from entrepreneurs when it comes to negotiations on valuation and liquidation preference.
I also know I've gotten a reputation for being direct and valuation sensitive (nice way of saying cheap).
As a person who's been a serial entrepreneur -- and now an investor in early-stage companies -- I wanted to write a piece on the positives and negatives of venture capital.
Moreover, I wanted to explore the question: Do Seattle venture capitalist suck as much as their public opinion suggests?
In a nutshell, the local venture community is getting a bad rap. However, it's also easy to understand why entrepreneurs have come to view them the way they do.
Here are the pros and cons as I see them:
WHY VCS DON'T SUCK
I've personally raised over $50 million in venture capital for five different companies, and in my experience the benefits of venture capital (if you can get it) significantly outweigh the negatives. Key benefits include:
Capital: There's a reason venture capitalists receive thousands of applications for capital every year. The capital they inject into startup companies is absolutely the most valuable thing they do. And frankly, I think most entrepreneurs (myself included at times) take this access to capital for granted. It's almost as if the community is somehow entitled to the money!
I suggest you travel to a city in the U.S. or another country where the venture community isn't that well established. You might just stop and appreciate their presence. Imagine trying to grow your company without growth capital. In some cases, it would just not be possible. And try to name one major billion dollar Internet company that hasn't taken venture capital. I can think of many that have: eBay, Amazon, Google, Apple, Facebook, Twitter.
Credibility: A venture capitalist's investment brings a vote of confidence that matters in the eyes of customers, partners, press, other investors and employees.
Relationships: Relationships can open doors to partners, customers and potential employees. Like credibility, the value of relationships may be enormous. The value ultimately depends upon the match between the personal relationships of the VC partner and the market that your company is operating in.
Big picture perspective: Most venture capitalists aim to help entrepreneurs see the forest and not just the trees. The fact that venture capitalists are equity holders in a company -- but not present in the market or the company every day -- means that the VC often can see the bigger picture more easily than the executives. If the venture capitalist does this well, he or she becomes an important thought partner to the CEO and the executive team.
Pattern identification: Venture capitalists can be very helpful in pointing out patterns (of both success and failure) because their job enables them to see dozens of companies trying to scale at the same time. This perspective can be very powerful and helpful. What works in one market as a tactic or strategy may well work in another.
External accountability: Venture capitalists act as time and promise keepers. Knowing when to hold executives accountable and when to let a promise pass is a vital skill for a VC to possess. In early-stage companies, it is too easy for entrepreneurs to allow missed milestones to become the norm. Having an external promise keeper increases the accountability of the CEO and the management team. In so doing, that helps the company succeed.
WHY VCS DO SUCK
There are some structural reasons why many people think venture capitalists suck. First, it's easy to forget that the business model is to invest $5 million into 20 companies (for a $100 million fund) and have two of the companies return the entire fund plus some. You know the saying that one in 10 companies pays for the entire fund.
To be successful, that means a venture capitalist may receive 2,000 business plans, look closely at 200 of them, and actually fund 20.
In other words, for every 100 business plans, a venture capitalist says NO to an entrepreneur 99 times. That's a lot of people that are told that their plan isn't good enough, that their business doesn't scale, that they're not qualified to be CEO, etc. That's a lot of "NO!"
Another way to think about this is it's five or 10 times easier to get into Harvard University than it is to get venture capital. Of the 20 "lucky" entrepreneurs that venture capitalists say "yes" to, about eight will be singles and doubles and 10 will be losses or flame outs. In the situation with the 10 losses, the venture capitalist and the entrepreneur are going to have a lot of tough conversations.
Another implication of the structure of venture capital business model is that they press entrepreneurs to go for the home run.
As a result, they are inclined to encourage entrepreneurs to take risk and to spend money aggressively. Sometimes this risk is wise. But often it dilutes entrepreneurs and places their equity stakes at risk.
Moreover, we've all heard stories of venture capitalists not willing to sell companies for hundreds of millions even when the entrepreneur wants to sell. Much of this activity is a result of the structure of the venture capital business model.
The structure gives the entrepreneurial public plenty of reasons not to like venture capitalists. But there are other reasons too.
Here are a few 'non-structural" reasons that often come up:
Accountability: I've invested in a number of funds that haven't returned capital. Shouldn't their limited partners be having conversations about management change with the venture capitalist? Heck, when one of the CEOs in a portfolio company isn't making the kind of progress that a venture capitalists wants, many of them are quite adept at firing CEOs and VPs in an attempt to secure a return. I'm not arguing that venture capitalists are wrong to change management. I'm just pointing out the unfairness of the game. When it comes to partner level accountability in venture capital, it is sorely lacking.
People skills: Growing an early-stage technology company is about nurturing and loving an organization from fledgling to profitability. It is not a process in management. Because they're not pouring their heart into a company, venture capitalists often appear to care less about the people side of the business whether that be the office manger, the account manager or the VP.
Invest like sheep: Venture capitalists tend to invest in the "trendy" or "tweetworthy" flavor of the month and they like to do it with their friends. There seems to be a group think out there of what's a good deal and what's not. An adjunct of this criticism, is the common wonder of where the "venture" is in venture capital -- as they look toward safer and bigger later-stage deals.
Arrogance: There's a bit of a power trip vis-a-vis the thousands of entrepreneurs that have to ask VCs for money. This is probably unavoidable. But venture capitalists seem to do little to avoid the perception. Heck, their offices are on the 30th or 40th floor of some sweet office building. They don't feel like entrepreneurial places.
Out of touch: Venture capitalists may often lack the market and/or the business experience to make qualified and quality judgments. (i.e. they don't know what the they're doing).
GIVE 'EM A BREAK
Despite some of their very obvious limitations, I still think that Seattle venture capitalists get a bad rap. We've got a vibrant startup scene -- much more vibrant than when I moved here 10 years ago.
But the fact of the matter is that the area needs another big technology win -- like Amazon.com, Blue Nile or Isilon. And that won't happen without a vibrant venture scene.
No doubt part of this negative perception is the venture community's fault -- either structurally or because of attitude. But our venture capitalists as a group are well meaning, smart and fair business people striving to create some great companies and some wealth at the same time.
Don't blame the venture capitalist if you don't get financing. Personally, I'd like to see the entrepreneurial community give the VCs more of a fair shake.
That means understanding their business model and their role in building big technology companies. That means appreciating their capital and their genuine efforts in helping entrepreneurs succeed. That means giving venture capitalists constructive feedback.
If you're a venture capitalist in Seattle, I'd suggest you demonstrate a deeper understanding of the entrepreneur process.
That means more openness. That means more accountability. And, that means, a bit more humility.
There are lots of ways to do this without saying yes to more deals.
Andy Sack is the co-founder of The Founder's Co-op. He blogs at A Sack of Seattle. Opinions expressed in guest posts are those of their authors, and don't necessarily reflect the views of TechFlash or its staff.
READ MORE and COMMENT
No comments:
Post a Comment