Let’s put the “Venture” back in Venture Capitolist!
Venture capitalists, angel investors, and other seekers of opportunity are why we have a healthy culture of investing in innovation and embracing disruption. About 25 years ago, sitting at the San Jose airport, I met a man who turned out to be one of Silicon Valley’s pioneer VCs: Bill Draper. I was impressed with Bill, not because he flaunted how much he was investing (unlike today’s VCs) but because of his undying passion for the entrepreneurs and technologies he was investing in. When he spoke about his investments it did not feel like he was following the money and the herd, but like he was the engineer whose sweat was on the line.
I remember boarding my flight thinking how lucky this man was. Bill and VCs of his generation were not in the infinite cash, money-is-no-object, outrageous valuation betting game, but in the game of making innovation happen. They were active members of the Culture of Disruption. It takes more than money to help a startup company succeed and that is what the earlier generation of VC’s provided. I am happy to say that Bill is going strong and recently invited me to a meeting to discuss innovation. His book, The Startup Game, is a great read.
I yearn for more VCs like Bill today. Instead, we have a large number of VCs pursuing the same deals and building bubbles, spreading hype that defies reality, and investing vast amounts in companies that don’t begin to justify it but might one day…IF they were left alone to mature before being given $100 million!
We don’t need more people playing the numbers. My hedge fund does that. We need investors who truly care about innovation and disruption. Those kinds of people helped nanotechnology become reality, pushed to make biotech the next frontier, and brought about massive game changing technologies. Instead of pursuing game-changing ideas, most VCs are now in the business of placing blind bets. In the VC model, you don’t have to publish your financials. Once you raise the fund and collect the obscene management fees (which are not tied to performance—another obscenity) you can go silent. There is zero accountability.
My VC friends tell me they may invest in 20 things in the hopes of one big hit. That’s not investment; that’s roulette. To make matters worse, India, China and the BRIC nations are massive investors and we have aggressive global angel, super angel and micro VCs all jumping in. This adds up to panic to invest. Desperate to put their billions somewhere, investors dump tens of millions of completely unjustified dollars into companies, artificially inflating their valuations to absurd extremes while crippling their desire to take risks and innovate. It has gotten so bad that some VC’s are putting ‘blind’ money into groups who then identify opportunities. That’s like giving $10,000 to your buddy who’s going to Vegas and trusting him to increase it at the blackjack tables. The house always wins.
I have great respect for the principle of venture capital. But I have no respect for VCs who are all about cashing in and care nothing about real innovation. Investors should be deliberate, thoughtful, major players in the Culture of Disruption. Venture Capital is one of the main influencers of the Culture of Disruption, and we need to see much more deliberate thinking and focus from this group!
I’m sure you know much more about VCs than I do, but a few things are clear right on the face of it.
In the “you’re right on, Linda!” camp, it does appear that VCs just play the numbers. They see so many deals that they become convinced they are experts who can handicap the horses, though their track record for picking winners remains poor. VCs see such a number of deals that they can, and do, set valuations based on what similar deals went for — a “what the market will bear” model that is ultimately more a reflection of the behavior of other VCs than on whether the target company can really succeed.
On the other hand, it is not the job of a VC to “truly care about innovation and disruption” and I find it hard to believe that an earlier generation did that. The VCs limited partners (investors) are largely retirement funds, university endowments, and the like. The boss is whomever pays you, and these limited partners are paying the VC for one purpose: to provide a place to park funds for the right time frame with a good return. The retirement fund doesn’t care if its dollars change the world, only that they “be fruitful and multiply.” I can’t see how there is really “zero accountability” about this. VCs have their compensation tied to their fund’s performance, and their firm’s ability to raise money for the next fund even more so.
While picking a winner is crucial for any VC, I really believe for a product to take off you need VC’s too that are extremly interested in the solution being developed and are not merely “betting on black”. Creating an innovative product costs more than just throwing money in a pit and hoping a beast emerges that tears apart the market. In fact, in the long run, even prior to a quick exit strategy of aquisition, a VC who isn’t connected with a product may establish conditions that prohibit it’s devleopment and success in the market by tying the hands of the persons in charge of development. This is akin to cooking a great meal, you may have the greatest chef in the world with an mouthwatering recipies, but if you provide him with sub par or even average ingrediants you will end up with an awful chicken souffle.
I agree that VC’s are no longer inspired to drive innovationand entrepreneurism. I think thattoday’s VS’s are symptomatic of what you discussed in your book aboutmodern-day culture’s aversion to disruptive innovation. By-in-large, smart, educated professionalswant to make as much money as they possibly can. Take a look at what top-ten business schoolgraduates want to be – consultants or investment bankers. That should tell you all you need toknow. Where do VC’s come from? The ranks of McKinsey and Goldman Sachs. These people are not creating. They are not innovating. They are not inspiring. They work hard and make a relatively easybuck by playing roulette with other people’s money. By nature, these people are not hard-workingrisk takers like most successful innovators & entrepreneurs. They have looked at the risk-reward profileand found that studying hard and taking risks with other people’s money is thebest & safest way to become extremely wealthy. This will continue until people are incentivizedto create instead of gamble for a living.