What Have VCs Really Done for Innovation?

http://www.techcrunch.com/2009/09/20/what-have-vcs-really-done-for-innovation/

by jasonlbaptiste • 17 years ago

41 42 17 years ago

techcrunch.com

vaksel2• 17 years ago

81% of all programmer jobs? Man these VC guys must be smoking crack

ujjwalg• 17 years ago

so, not only they make all the money, they also want to be credited for all the innovation and leadership...

fnid• 17 years ago

The venture capital market is crumbling. It used to cost a lot of money to build a company, but not anymore and VCs are no longer the gatekeepers to success. Their exits are puny and most of them fail. They are hunting needles in haystacks. The supply is greater than demand. Their 2+20 scheme is too expensive. The wealthy don't need the VCs anymore and the returns they are bringing in aren't worth the risk.

This crap from the NVCA is not an isolated event. This absurd notion of a founder visa is another data point in the trending decline of venture capital.

VCs are losing their power. They are struggling to keep it. They are crying out for help. They are being destroyed by scrappy startups and small funding orgs like YCombinator.

VCs are going the way of universities and print publications and even television. The barriers to entry are not what they used to be. The Internet, and tech in general, is the revolution they claimed it was to their original investors -- so revolutionary in fact that it is defeating even their own industry.

Why did they think they were immune to Moore's law. As technology costs decrease, supply increases. VCs operated on supply and demand just like every other industry. They controlled access to the supply of capital to startups and to the supply of startups for investors - but not anymore. The Founder Visa is another effort on their part to regain control of that startup market. If they can increase the supply of ventures only they can enable, then they regain power over other startups. If they can get 50% of a startup from India for $1M, why would they fund the same startup for the US that wants to give up only 20%?

Technology is changing so quickly that similar ideas are popping up all over the place. There are a multitude of ideas the vcs can fund. Look at TwitVid here a couple months ago.

All the signs are there. The question is, are VCs going to be able to create hype around another industry that actually needs them or are they going to try to defend the fort like the newspapers are doing now?

The Internet might just be the biggest innovative idea since the printing press. It could be a long time until another change of this magnitude will come along. Venture Capital will always have a place in a growing society, but the opportunities are declining and the number of VC firms will decline as well.

Here are the tips for VC: Make your operations more scalable, increase diversity, fund in smaller amounts and expect less control and equity in exchange.

EDIT: I want to add that I know this is true because VC firms have approached us several times wanting to invest. Other companies in our market were funded in the millions by VCs and they are already gone. They couldn't build the kind of revenue or customer base the VCs expect, but a smaller startup like we are can easily sustain itself.

VC investment is having a negative impact on the potential success of a business because expectations are wildly out of bounds. It takes longer to make money now and the competition for the business idea is so great that investment of capital is not a differentiator like it used to be.

A VC funded startup may have more capital than we have, but we have _way_ more time than they have.

vaksel2• 17 years ago

this applies to internet companies, but any other business needs VCs. Sure you may code your startup in a few years on your own, but how are you going to open a factory without any outside investment?

ibsulon• 17 years ago

Who isn't outsourcing to China anyway? :/

TomOfTTB• 17 years ago

The reason VCs are tied to technology is because a VC is generally formed to fund rapid growth companies. The whole point of being a VC is to get in early on something that's going to explode and hence make you a lot of money. It's hard to do that with a company dependent on physical assets.

In general companies that need physical assets to operate and grow get funding from private investors who are in for the long haul or banks who grant long term business loans.

gruseom3• 17 years ago

Maybe when your tantrum dies down you can revisit the fun fact that the founders' visa isn't a VC idea at all. I was going to spell out the details, but they are so obvious that I felt embarrassed.

chaosprophet• 17 years ago

It is not a VC idea, I agree. However, in order for the founde visa to work, you would need to get atleast some VC's on board, which is what the OP is arguing against, I believe.

adrianwaj3• 17 years ago

I hope you're right.

But syndicates of VCs are willing and able to invest large amounts of money in startups in emerging industries (eg CleanTech) and I liken them to promoters who hand out steroids, hoping for a win in the next Mr Universe. The steroids could mean ultimate success or ultimate failure. (edit: actually it is always a failure if you want to IPO or stay private but instead a buy-out offer comes in beforehand - eg Mint, and your investors are impatient for their 'exit event')

Also, the more corporate R & D decreases, the more startups will be in demand for corporates to take-in in order to stay ahead, either by integrating the startup or burning it if a threat.

danielrhodes2• 17 years ago

You are talking about two different things here, which I think it goes to everybody's benefit to learn about.

There are lifestyle businesses and there are VC-backed businesses.

Lifestyle businesses usually operate in safer, more pre-established markets. You can access already existing customer bases and in general the VC and the entrepreneur don't need each other because the entrepreneur can get to some level of revenue that enables him or her to cover operating costs. The VC isn't interested however because the market is already established and the returns and likelihood of you taking over the entire market are quite small. They are called lifestyle businesses because there is less pressure, so you can maintain a life outside of the startup (at least after you have stabilized revenue). Some people enjoy these startups: they are relatively less risk and they allow you to get decent returns. It's akin to starting up a cornershop. Just don't pretend you are starting an empire. fnid: it sounds like you are in such a market.

VC-backed businesses are there because there is a new and potentially huge market to be found and VCs put their cash into these companies so they can move quickly, out-perform competitors, and get a large chunk of that market before it gets too fragmented. Growth explodes because they have found a new market capable of sustaining that growth, not because of some magical entrepreneurial powers.

We should all be happy there are more lifestyle businesses developing on the internet: it means these markets are growing and bringing more people into the fold. But don't trick yourself if you are in such a market that you will be the market leader as you have probably already missed the boat or the market size is too small for you to ever realize massive potential. The smart entrepreneurs and VCs leave quickly to refocus on more promising opportunities once they figure out that something is not as big as they once thought (hint: when people are jumping ship, it is not necessarily because you won).

These two types of businesses are not mutually exclusive.

What's cool and new about the internet is that it is continually getting shook up by new markets. The permutations seem endless.

abalashov3• 17 years ago

Here are the tips for VC: Make your operations more scalable, increase diversity, fund in smaller amounts and expect less control and equity in exchange.

I would add to that:

Allow founders to [partially] cash out early.

I think that may be the single most significant thing other than investing smaller amounts. Founders who have to wait 4-6 years gambling ever higher stakes on a "liquidity event" that may never happen (on the VCs' terms, that is) are increasingly finding that it's better to just tell institutional investors "blow me" and wing it themselves, unless the project is just prohibitively capital-intensive.

Nobody who's young and on the margin of broke wants to be strung along by condescending "carrots" of "future incentives" and encouraged to "think about the big picture" instead of focusing on getting some actual payoff from one's efforts.

gruseom3• 17 years ago

Some of this critique is surely valid. But people are way too binary about this (vcs-suck vs. no-they-don't). You can see that in the first paragraph, where he argues that VC money wasn't essential to either Microsoft's or Google's success. I don't believe that's true in Google's case. I'm pretty sure that without VC money they wouldn't have been able to hire or scale in the way they did, and without those things they wouldn't be Google.

sachinag5• 17 years ago

Oh, totally: the VCs were smart enough to see that Google was different enough that both KPCB and Sequoia went in 50/50 on the first $25MM round. And Google had a totally failed monetization strategy (their intranet search appliances, of which they sold a single one, to RedHat) before Sergey and Larry capitulated to allow advertising on SERPs. Google needed the VC money to survive until AdWords finally delivered a coherent monetization strategy.

It's a little sad that someone with so much good analysis of the NVCA's overreaching had to throw in a jab so easily refutable.

gruseom3• 17 years ago

I agree, it's superfluous and undermines his case.

This is interesting:

their intranet search appliances, of which they sold a single one, to RedHat

I knew their appliance business wasn't that big, but is that really true? How do you know it?

known• 17 years ago

I believe Angel Investors (not VCs) contributed a lot for innovation.

http://paulgraham.com/angelinvesting.html

sachinag5• 17 years ago

Angel investors are now, and always have been, the engines for innovation. Bankers - the old angels - funded Henry Ford. Back in the day, you could get a loan from a bank for a new venture. You can't any more; this, more than anything, is why new innovation is so concentrated in geographic areas.

In the old days, New York banks would give money to an engineer in Detroit. Now, if you want angel money, you need to be physically near the angels. You can raise VC - follower - money from outside your area if you 1) have traction or 2) are a known quantity with a past exit. But a new team in a new market with a new idea? Get thee to the Valley or Route 128, cause that's where the angels are.

EDIT: I should say networks of angels for first money in. SV and Mass have enough angels to syndicate a deal. You're restricted to sugar daddies doing $200K by themselves outside those areas (and maybe NYC). First Round led Mint, but they syndicated it in the Valley. Same deal with iSocket, where Tim Draper of DFJ led, but the deal was syndicated to angels.

And, of course, if you're Shai Agassi, you can raise a ton of money for Better Place, even though you have no experience in battery tech or distribution, because you're Shai Agassi.

tomjen22• 17 years ago

The banks properly can't legally loan money to something so dangerous as a new business. FDIC could never afford to cover _that_.

danielrhodes2• 17 years ago

Very true. At least in the valley, VCs count on angels to bring them deal flow.

lucifer• 17 years ago

The very fact of the continued existence of VCs for software technology businesses is a sad testament to the inability of the geekdom to capitalize on their knowledge. Perhaps we are unconsciously worried that we will suffer the fate of the Templars, but at least that last group of disruptive geeks managed to squeeze a few centuries on top of the Pyramid from their collective knowledge base.

pg2• 17 years ago

Maybe the NVCA statistics are somewhat bogus, but there is a pretty compelling way to answer the question empirically: how many tech companies have made it as far as an IPO without taking money from VC funds?

Maybe the world is changing. Maybe now that it's cheaper to start startups, some will start to make it all the way to IPOs without VC funding. Obviously I would love it if a company we funded could make it to an IPO without any further dilution. But that seems like insanely wishful thinking.

prakash3• 17 years ago

how many tech companies have made it as far as an IPO without taking money from VC funds?

Any particular reason you are looking at an IPO as a milestone? Somehow I see the YC companies more like SAS.

pg2• 17 years ago

It's unequivocal. You could also use a revenue threshold.

sachinag5• 17 years ago

The issue with IPOs as the marker of "success" is that public market investors are much more hostile to companies without the VC stamp of approval - they're relying on the implicit due diligence of the VC firms to make sure that there are no issues with the technology, the patent landscape, and other various hangups. (This applies much more to health care companies, where my VC experience was, but the mentality is the same as the public market investors are the same regardless of industry.)

wavesplash• 17 years ago

Could you help clarify this? In my experience the only things that seem to matter are the offering bank and the financials.

adrianwaj3• 17 years ago

I'm unsure of how you'd execute on it, but have you thought about rolling up many startups into 1? From there you could IPO, cross-own, etc.

I think the founders, especially the ones closest to an exit would need a good reason to change their path forward.

There'd be no shortage of talent, although acting as an organization mightn't be so attractive.

Check out Web Conglomerate if interested to learn more: http://tr.im/wgxn

abalashov3• 17 years ago

although acting as an organization mightn't be so attractive.

I think that's the key issue undermining the economic coherence of such an endeavour.

prakash3• 17 years ago

I am guessing the study didn't include YCombinator!

abalashov3• 17 years ago

YCombinator is not a VC organisation.

prat• 17 years ago

Venture capital is just the fuel that is required to keep an innovative enterprise running. Can oil industry take the credit for bringing industrial revolution? No.

Education, innovation and hardwork of entrepreneurs is what keeps the VCs alive. VCs depend on entrepreneurs not vice versa.

kansando• 17 years ago

VCs are clearly exaggerating their contribution but it is easy to forget that they are the only long-term investors in the current financial system. Who else will commit to eight years of involvement with an unknown entity? Do they need to restructure - yes, but their disappearance will not be good for startups.

frisco• 17 years ago

There's this confusion that VCs exist primarily to help innovative startups get off the ground. This just isn't true; they really exist to generate returns for their investors. The complaint that entrepreneurs are so underserved by VCs misses the point: a VC only needs to make a couple investments a year to meet their goals for their LPs. VCs aren't, and have never been, the gatekeepers to success -- and that's not their intention.

Yes, there's a long tail of crappy VCs that don't make money and are generally wastes of space -- but that's more an argument for less venture capital in the valley, not more, at any price point, whether it's $200k or $2 million.

fryduck• 17 years ago

What VCs do: Swamp ideas with money and kill off the better ideas, while continuing to lecture the rest of us about how our PPTs should be, what dress we need to wear, and how to be respectful of their time.

What Have VCs Really Done for Innovation?

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