The merits of value investing, especially in public markets, have been long espoused — thats the stuff legends are made of in that domain. Even late stage private equity follows largely the same route. Venture investing, on the other hand, is all about having the right momentum — how fast can you go from no product to a beta to some customers to sales rampup. The difference perhaps arises due to higher state of uncertainity in venture markets, as well as higher return expectations.
The difference should be understood while pitching to potential venture investors. It is important to demonstrate and plan for momentum, rather than worry too much about the specific valuation, or try and give that up too early. Venture investing is not about getting a 10% lower valuation. Its about getting a 50% faster company.
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Mona, Well said. You’ve put the entire VC biz in perspective by showing their limitations and their true contribution. They are primarily the middlemen who bring the moolah from wherever it existed in planet earth.
Alok:
What you say about VC’s could be said about every investment advisor, mutual fund etc. And though I don’t have VC stats handy I have seen many studies that show that a majority of investment advisors don’t earn their fee. Yet they stay in business.
Say you were raising you next fund and your current fund did not have great results. You could
1. Point to a previous fund that had acceptable results as proof your skills
2. If you did not have one of these but you had avg performance in your current fund then you could point out that this was a down time for all
3. If you had below avg performance then you have a little more dancing to do. But you point to the fact that most VC funds have a very small percentage, usually one investment, that yields most of their return and although that one investment eluded you this time, you are much better structured to capture multiple ones this time around. In any case past results should never be taken as indications of future results – positive or negative. Right?
4. Now if you really suck and have a talent for picking only looser and have had many funds fail, then you are probably right that you would terminate the partnership, but at that point each partner goes of and raises another fund, blaming his partners for having blocked him from investing in the winners or retires and claims that he had a long fun ride.
Which brings me back to my point that if you CYA, then even if your performance is sub-par you can raise your next fund and stay in businesses.
The varied performance between funds being an indication that there are causal reasons based on investing ability is a stretch. I could make the case that given that there are very few wining companies that make a fund successful, the funds that end up investing in these is through a high element of luck. Having a few of these under your belt you may be the ticket to more such deals as the entrepreneur would want some of this “success” to rub off and increase your chances of landing the deal, but luck is the major factor in the investment and the impact that the VCs have beyond that is limited.
So, are VC useless? No. I did not state that in my first note and do not have that opinion. Here is the value they could bring
1. They raise funds and make them available to the entrepreneurs. 100% of the VC’s do this
2. They help recruit a good team – 5% do this
3. They help negotiate a good exit (M&A) – 2% do this
4. The help guide the company to successful business models and execution –
Mona,
Simple fact about VC business — you stay in business only if you make money for investors.
Another fact — there is a lot of variance within performance of VCs in same markets — meaning its not all luck.
Something right must be happening out there.
Mona believes that VC are a necessary evil and if you know the beast you can take advantage of it.
VC’s are optimistic. They are optimistic because they have been lucky and really believe that their smarts made it all happen so they can replicate the success.
They are greedy and fearful just like all other investors but understanding their fear and greed is important.
Their investment decisions are based much more on CYA so I can raise my next fund and have a good management fee for the next 7 years, than on basic business intuition or acumen. Which in turn gets them to focus on their competition for these dollars (other VC’s).
They are greedy for a deal that every other VC wants and they are fearful that they will do a deal that no one else wants.
To get them greedy you have to get them to believe that you don’t want their money. There is an art to this, which requires its own thread. But it is why any plan that makes it to a VC desk without them having had to wring it from the entrepreneurs hand is a plan that is not read. Any plan they do not have to fight for is not a good one.
They fear funding something that can be mocked by other VCs as a bad decision. Hence they look for another VC to fund it with them and it has to be a top tier VC (which each one believes that they are). After all if two top tier VC’s bet on the plan there must be something in it.
But they also fear being left of the band wagon. Not having placed a bet in a space that is hot implies that you are not networked or are stupid. Hence there is a desire to fund even the stupidest plans in a hot space (CYA).
So, listen to Mona, keep the plan very simple, make the economics brain dead, and don’t worry too much about it, but put as much lipstick on the pig as you can. Work on getting the VC to believe that you have team, a business and plan that is hot and in demand. And remember to do this you have to say as little as possible. Don’t show them a pitch till you absolutely have to and if you have to on your first meeting, don’t expect funding.
Alok,
Your intentions are lofty and noble. The execution of it is where the rubber hits the road.