The debate rages these days about the future of venture capital ... again.
The modern, app-savvy, social-media-connected camp dismisses the “classic venture capital model” as a dinosaur from the Silicon Valley days when the Jefferson Starship and the Doobie Brothers ruled the radio airwaves.
On the other hand, some venture veterans see today’s rush to new venture “platforms,” delivering incubation, acceleration, marketing and other services as a new attempt at value-added packaging that didn’t work in the past, wasn’t affordable then and isn’t affordable now. Critics muse that the 1990s also saw keiretsus, marketing partners, accelerators and incubators. Going international came and went a few times, and even crowd funding has roots in old attempts such as Draper Fisher Jurvetson’s “meVC” failed fund. I was wowed by ’90s platforms like IdeaLab, CMGI, Vancouver high-flyer Itemus, and hundreds of others.
Useful venture capital investing probably lies somewhere in between.
A good commentary on venture capital surfaced recently through the work of Sarah Lacy, founder-editor of pandodaily.com, and writer Erin Griffith. Griffith’s “History and Evolution of Venture Capital” chart graphs a hypothetical view of venture capital into the future, built around the assumption that the cost of creating a technology company has gone from $2 million in the 1990s to $5,000 today.
Based on this new low cost of creation, Griffith writes, “Serious venture investment is not required in the earliest stages of a company’s life, so angel investors have been getting the best seed deals. That spawned ‘super angels’ and their subsequent micro-VC funds, which in turn evolved into crowd-funding platforms like AngelList.”
The profusion of startup forums, demo-days and top-startup rankings is fabulous for drawing attention to great innovation, great new thinking and disruptive ideas, giving new entrepreneurs behind these initiatives a great opportunity to tell their stories and get early funding, sometimes even choosing from multiple competing financing sources.
Success at the earliest stage, but what happens after this is the same old challenge.
It might take $5,000 to create a company and get the first angel funding. However, as Lacy points out, “No matter how much we want to go on and on about how cheap it is to start a company these days, building a sustainable company has never been more expensive. Venture studies show the time and money it takes to get public are longer and higher than ever before.”
First, one should take a very hard look at the $5,000 startup cost. That may be the case for a nifty new app, or a small piece of software, but is it true for a life science company, a clean-tech venture, a medical device start-up or a quantum computer company? Probably not. And when the company wants to deliver on a real milestone and builds a small nucleus of talent with business skills and discipline – say 12 people – its monthly burn-rate jumps to $150,000 quickly. If it takes a year to nail the milestone, it will cost $2 million.
Another false notion around getting started with $5,000 is that the good founders will always get venture funding. However, the trick is to try to tell the really good genius founder from the lunatic dreamer. Trust me, they can sound and look the same, but there are 10 times more dreamers.
A practice of many successful venture capitalists over the years has been to – before investing – combine shrewd assessment of the entrepreneur with some period of time observing delivery against milestones, i.e., can he/she actually do what he/she says he/she will do?
Dan Primack of Fortune magazine has been as intrigued by this new/old venture model dialogue as I am. He offers the punchline: “We have no idea which model is actually better, from the perspective of generating high returns [which is the actual job of venture capitalists].
“Typical venture firms invest later and get far smaller stakes than they did 50 years ago. Deal flow is far less proprietary in an age of demo days, tech blogs and AngelList. Venture capitalists who perform well aren’t doing it because they follow new marketing trends. They are doing it because they are good VCs, the way Arthur Rock, Don Valentine and Tom Perkins were good VCs. They take risk. They coach entrepreneurs. They respect an entrepreneur’s plan, even if it deviates from their own. And most of all – they have millions to invest in multiple rounds into a company over time.”
Today’s entrepreneurs in Vancouver shouldn’t judge a venture capital firm by its model, its platform or its marketing pitch, no matter how novel or antiquated. Find finance partners who have good reputations, are people you can work with and build chemistry with, with whom you can share your real growth plans in an open and realistic manner. •
