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Fixing Venture Capital (continued)
I am not sure I really like this title since I don't think venture capital needs to be fixed, but it seems to get a lot of activity, so I think I'll keep using it.
My basic thesis about venture capital is that its fine the way it is, but there are bad VCs and uninformed entrepreneurs and the result is things get messed up a lot more than they should.
This blog and others should help the entrepreneurs become more informed. That's a really good thing.
Outing the bad VCs is more complicated. I don't intend to say anything negative about my colleagues in the venture capital business on this blog and my guess is very few others would either. In this regard, I think entpreneuers need to do a lot of checking around.
Entreprenuers themselves are blogging now and that should be a great source of information about the VC/entrepreneur relationship.
Tom Evslin is going to blog his Nine Lessons on Dealing with VCs over the next couple days. I expect they'll be very interesting.
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Listed below are links to weblogs that reference Fixing Venture Capital (continued):
» Tom Evslin Offers an Entrepreneur's View of VC from Subsidiary Thoughts
http://blog.tomevslin.com/2005/02/venture_capital.html... [Read More]
Tracked on Feb 22, 2005 2:35:22 PM
» Tom Evslin: Venture Capital - An Entrepreneur's View from jB: no - that's definitely not good enough
Tom Evslin has posted two articles on his blog concerning his experience with VCs from an entrepreneur's point of view - a really good read, not only for entrepreneurs, but VCs alike... Part 1 | Part 2 [Read More]
Tracked on Feb 22, 2005 5:40:31 PM
» Tom Evslin: Venture Capital - An Entrepreneur's View from jB: no - that's definitely not good enough
Tom Evslin has posted two articles on his blog concerning his experience with VCs from an entrepreneur's point of view - a really good read, not only for entrepreneurs, but VCs alike... Part 1 | Part 2 [Read More]
Tracked on Feb 22, 2005 5:43:20 PM
» Carveouts from The Hitchhiker's Guide to 650
Below is comments I posted on A_VC a while back in regards to Fixing Venture Capital.
Not terribly current but I’m trying 1) archive some of my longer comments 2) learn to use wordpress. So pardon as I ramp up on the application.
great post D... [Read More]
Tracked on Jun 10, 2005 4:44:24 PM
Posted February 22, 2005 in Venture Capital and TechnologyComments
entrepreneurs would be wise to check references on VCs the same way we check references on them. i'm amazed how many DON'T do this, especially when in most deals they have multiple funding options.
Posted by: another.vc | Feb 22, 2005 12:51:27 PM
I just recently finished a book on Asian high technology, startup incubation and venture formation that is coming out in the U.S. this May(http://www.ricebowlandchips.com), and there are also some interesting things I found during my research. For one, many of the venture capital funds in Asia are to some extent insured by their governments, which sort of negates their being risk funds.
On the other side of the coin, the NY Times recently ran an article on how China is purchasing U.S. brands (like the IBM PC brand) to gain access into the U.S. market. It may surprise some people that the Chinese Communist Party is actually very business savvy - many of the startups that came from the Chinese Academy of Sciences (CAS) were allowed to fail.
Mao must have read Schumpeter and his ideas on creative destruction!
Dennis Posadas
Posted by: Dennis Posadas | Feb 22, 2005 8:37:32 PM
Indeed, a very sensitive topic and alas, the plot thickens. Good post Fred. Shows a lot of integrity. In as much every industry needs to re-invent itself from time to time, I think, you’re on the money, the VC business does not need any sort of overt "fixing".
What does need to happen, and what Joel has probably inadvertently achieved, is that entrepreneurs need to PUSH BACK. Not easy. It’s not like there is a consumer tribunal or people like me ooze with bargaining strengths. But, if I may suggest, exploding term sheets- absolutely must go. Honestly, I’d just turn around and go else where if one was given to me- and that’s my right as a buyer of money. And the whole, “offer you can’t refuse game” game as well- there is no way I’m going to be showing my financials to anyone ever again prior to a commitment.
For how long will we allow private equity to remain a grossly inefficient, gun-slinger, “need to know” sort of market? I dread to think of all the BS I have to go through to even talk to a venture capitalist. I am embarrassed half the time because I spent my time in the garage tinkering with code rather than schmoozing at the annual AVCAL conference.
Indeed, the majority of the market is not as forthcoming as Mr. Wilson, Mr. Feld, Mr. Hornick, Mr. Hall and the larger constituency of VC bloggers. Honestly, for me at least, approaching VC’s feels more like jumping through hoops than completing transactions, in the manner that I do with my accountant.
Believe it, the young Turks will come, cut through every sort of sacred referral network and reform the VC business if the Incumbents won't do it. And hell, it’s happening all ready- let’s welcome Mr. Branson and his “Branded venture capital” to the party. No one can hide behind information asymmetry forever. Better offers ARE going to be made to entrepreneurs, and they will find out about it.
Honestly, I just can’t wait until, I see a venture capitalist on TV or on the web and say to my self “Wow, this guy is really cool, really different, I really want to be a part of his vision”. You know? And I wanna feel like a bloody client when I am at the meeting and not like at circuits or an interrogation. Which brings up a question, how often do venture capitalists conduct satisfaction level surveys on their customers (‘caus I have no idea).
Posted by: Danny | Feb 23, 2005 4:49:46 AM
great post Danny, many people (from previous comments) assume that the market is efficient and that any negotiated term by definition is "fair." I believe this is only the case where there is no information asymmetry. The market was inefficient in the past, because sellers of equity did not have all the information required to properly “price” the value of their equity and terms in the financing. Today, blogs like this one are reducing the information friction between entrepreneurs and VCs, which will help created more "fair" financings EVEN IF the terms stay exactly the same. (simply stated, know what you get yourself into)
While on my soap box :) A previous comment from part I of the article mentioned that "carve outs" compensates the management team in the case that the liquidation hurdle is not met in an acquisition. The key here for entrepreneurs to understand is that the "CURRENT" management team is essentially cut into the deal in order to convince them to stay through the transition processes. In most cases, those entrepreneurs that are no longer active part of the management team will not get a penny. There is a lot going on here than what meets the eye.
1) Selling below liquidation preference means that the company at one point probably did not perform to expectation, as a result, founders are most likely out of the company
2) The existing management team is most likely recruited by the VC and are experienced veterans in the industry. Thus, VC’s have an inherent interest to keep a good long term relationship with “powerful” executives in the industry, AND owes them a “favor” for promising riches when first recruiting the management team.
So what does this mean for the entrepreneur?
1) Don’t count on the carve out when negotiating the termsheet
2) When the VC’s ask you to step aside, if you don’t have confidence in the new management team, don’t walk away quietly especially when the company is doing well, stay involved in an operating role
Because the financial interests of the entrepreneur and VC are not aligned, conflicts often rise in a startup. This is the reason why you see entrepreneurs fighting with VC’s to stay on with the company. While VC’s claim that more experienced management team is needed to take the “company to the next level,” (completely valid argument!) founders have the financial incentive to fight to stay on because there is a probability that the new management team will make some money while he or her will not make a penny. I’m not making judgments on whether a management team changes is good (it’s a case by cases thing), but just that the entrepreneurs need to realize the full economic impact of the events that are taking place. Of course, there are plenty of startups where founders deserve NOT to make any money and deserve to be force out of a startup.
Posted by: will | Feb 23, 2005 3:40:10 PM
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Posted by: acura | Oct 31, 2005 1:06:52 PM
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