Wednesday, November 28, 2007

The decadence of Venture Capital

Venture capital is out. The financial world is evolving and so are investment strategies. In a recent post Guy Kawasaki pledged for focusing on inexperienced entrepreneurs. About a week ago I was on a panel with Henry Wong from Garage Ventures inviting everybody who want to start a company to grab his business card. His pitch: "Don't worry about valuation - think what you can do with all the money".

An experienced entrepreneur would just roll his eyes and walk away. The ROI on Sandhill Road is no better than Wall Street. So why take the risk? VCs are in trouble and the latest post "In search of inexperience shows it".

The 7 reasons why entrepreneurs avoid Venture Capital today:

1) Ownership
Creating a company and following the entrepreneurial instinct is more than just fulfilling a dream to be one’s own boss. It is creating something that is better than what we have today, a journey to find people who help shape the idea, will buy it because it is better and a journey of evolution, improvement success and failure. Entrepreneurs need partners and not a financial owner that takes 50% of a company for a hand full of dollars and make it their own.

2) Passion
Entrepreneurs are extremely passionate about their idea and need to go their way with no interruption and constant "help" from an investor. Passion is not a guarantee for success but a key ingredient that once broken, breaks the business

3) Founding Leadership
A recent report from Morgan Stanly compared the world leading innovators such as Microsoft, Google, Cisco and others. One of the metrics was passionate founders in the executive bench. 9 out of ten got a check. VCs typically replace the leadership team within 3-5 years and bring "experienced" executives to the team, making the founder a second degree player.

4) Business Objectives
VCs are in the business’ business. Making money from shoving around companies. Butting less and less money in the first place to invest in more and degrade to 1:10 ration of a winning deal to a 1:20 ration. It's also called risk management. Entrepreneurs aren't players who like to play in that category. Business objectives of both groups have departed to far from each other.

5) Disruption
True entrepreneurs come up with disruptive ideas and try to make a difference. VCs are not really looking for such ideas - even so they say so. When Google was founded, it was Andreas Bechtolsheimer, one of the founding members of Sun Microsystems who gave Google money not a VC - Jee who would invest in this where we have Yahoo. Since Google went public VCs invested in over 50 search engines. Very disrupting. VCs didn't invest in MySpace or YouTube in the first place but now invest in 100ds of social networks or video sites - very disrupting.

6) Investment Profile
True Entrepreneurs ceased building their business plan to match a best practices list of people like Guy Kawasaki hoping that it matches the trend. The opposite is the case, true entrepreneurs have counterintuitive ideas, don't follow mean stream and create businesses in very different ways. entrepreneurship is no longer matching the idea of a VC to invest in.

7) Venture Capital Success
Entrepreneurs became very critical when it comes to the success of a VC. While some entrepreneurs don't really care as long as they get the money - true entrepreneurs do care. Today’s ROI of an average VC firm is lousy. They are under huge pressure to deliver results to their investors in order to maintain their management fees of several hundred thousand dollars per head and keep their Aston Martins and Ferraries. That pressure makes them irrational. And the downfall continues.



At the same time very attractive alternatives raised from that downfall. Healthy individual investors are much more likely to invest in disruptive technologies and true entrepreneurs. Large successful companies all have investment arms and seek people with new ideas and the ability to make the idea a successful reality. Even banks, which kind of evaporated from the entrepreneur’s scene, are back with very creative offers. And as Garage Ventures strategy is just a representation of what other VCs doing, seeking inexperienced entrepreneurs at all cost - the success rate will further decline until Venture Capital may completely reinvent itself sometimes in the very distant future.

Clearly people like me know that they are "unfundable" after stating their opinion. But that's the point, we don't care. Venture capital is just no longer of any interest - we are going after true investors who have only one goal: using their money to make more money - instead of expressing their opinions on tactical measures at board meetings.


1 comment:

Gaic Conan said...

Hello Axel,

I liked what you said. I try to build an Entrepreneurs Investors community. Our idea is to bring to entrepreneurs advice that will help t hem in the growth process. They can post their needs. Most entrepreneurs are too isolated and just don’t know what to do. They also do not have all the financial resources to ask for advice. We will be honored if you can participate to our community.

I leave you the decision to publish the address of the website (thestreetmarket.com).

Thanks and good work!

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