Playing The VC Game: Take the venture out of the venture capital.
There is no true definition of a 'venture' that I personally feel comfortable with. The cathexis we often face in coming up with one, is hardly an effort in its true sense. But I do understand one core issue facing the venture world: It’s a people's game, but as the cartoon suggests, no one cares a damn about people.
According to me, it’s not the product that makes or mars the venture, it is the entrepreneur. It is the mind that puts the venture into a capitalist equation, not the other way around. No true entrepreneur thinks: I need to make a lot of money by making sure I model an early M&A exit with an angel fund and think up of a product that can be positioned as such. The thought is usually around: I see a need, I see the gap that is currently trying to fill that need, I know a way to fill that need cheaper, better, faster, maybe people have tried to address it before and failed but I will go ahead and try it differently in the hope to succeed.
But time and again, VC's like to hear that the entrepreneur is willing to step down if and when the need arises or let someone else manage the company immediately upon signing the LP or the founder is clueless about forming a successful capital structure as he is a 1st time entrepreneur. And here's my favorite comment: I need to see sales traction and profitability in 3 years, irrespective of what you have achieved as an idea, and change the product if you have to.
Does anyone see a problem with this picture? I am sure there are good reasons behind everything in the arguments above but seldom are they in favor of the original idea or the person bringing them that idea. These thoughts from majority of the VC's come only from a capitalist mind-set, which is not a bad thing However; they usually kill or become a hindrance towards the original solution the idea was conceptualized for. Just because the founder is clueless about structuring a public offering or has not made millions for VC's before or is clueless about presenting his idea in the best interest of the investor does not make him/her a 'problem'. Just because the entrepreneur wants to fill a gap in the market that is not proven, does not make him clueless about market needs and penetration. Sure, from a profitability stand-point, but then whoever thought the guys who had the idea to place the plastic tripod stand between a pizza and the pizza-box from messing up the pizza during delivery, would make millions. The idea was off course shot down by all the VC's that the founders approached.
A proven entrepreneur in a VC's eyes is not someone who is an evangelist or someone who truly believes in his idea or the concept or someone who is passionate about his vision. The 1st trump-card thrown at the founders is: is this your first venture? What was your deal valued at your previous venture? What is your current valuation? How do I know you will yield 5x on my fund? So if exit valuations and profitability et al are so important to VC's, why call them 'venture' capitalists. Just call them the latter and at least it will give them some respect. Because in reality, it all comes down to whether you can make money and affect a large pool of market share. VC's would care a damn if your product saved lives of 100 people but the fund yielded only 1x. But if your product added some marginal value to some dog-walking software but is liked by half the country and you are looking at 5x+ exist valuations, you're the great entrepreneur of all time. Everyone loves you and everyone goes home happy. It’s the good ole' Microsoft philosophy: Build a mediocre product, a 'good-enough' product and throw it out to the world. No need to be perfect! You own 75% of the market share and there are monopoly law-suits on you (which in fact VC's would rather have over the 1% market share you are trying to get).
VC's like the word Risk Mitigation a lot. They try and measure your IRR (which again has its own set of problems with reinvestment rates of projects, and IRR's being greater than the capital cost itself, etc.) constantly and prove that you are NOT going to make them money when they want you to. But hey: isn't venture capital all about risks? Why try and weed-out risks to the extent that you can pretty-much predict the outcome. Ventures are speculative in nature and VC's play a game to reduce that speculation as far as they can. This is good to the extent that you can execute an idea effectively. . But the minute you play the efficiency game, the speculation is over. The difference is: effectiveness is what you mediate with the market and send your message as such that the market would react as close to how you may want it to driven by your product and sore idea. And efficiency is how I think I should change my vision based on what I am required to present to the market. (And this is not the same as listening to the market).
A true VC should find an idea that benchmarks a meaningful revolution. It does not have to be 100% functional. It does not have to be initially liked by the majority. It does not even have to be lead by ex-CISCO or a Google founder. It can be out of a garage down the street from MIT.
This is a more philosophical question than plain economics I guess. In the end, winners and losers are defined by the state of things that really don't measure the true success of the entrepreneur. This is a people’s game and ideas, inventions and curiosity should drive the venture: not the deal-size & valuations. Today's landscape, unfortunately, is very different and does not reflect what should be. It’s a shame that thousands of good ideas die everyday because of this attitude. I don't have a perfect answer to this, just my thoughts at this point. Somewhere in hopefully not so distant future, I will reach a fine balance between venture and capitalism.
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posted by Janak Joshi @ 2/15/2006 11:30:00 AM
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