There have been a couple of discussions on venturewoods earlier regarding angel funding models, including Ycombinator. An excellent article on Read Write Web outlines the challenges the venture capital is facing. Amongst the salient ones include:
- Lowering cost of doing a startup and taking it to critical level
- Reducing role of distinctive technology in more and more (IT) startups
- Growing openness to acquire companies relatively early by likes of Google
- “IT doesn’t matter” – its hard to build large enterprise IT companies
There seems to be an opportunity for VCs to start investing even earlier in the cycle, and be able to make money not by one or two hits, but by more consistent performance across the portfolio, each exit perhaps being relatively smaller in absolute size than what VCs are used to today.
This calls for a new model of how venture firms are run, and in my view, opens an opportunity for a technology-enabled model. In order that each partner may still run an equivalent amount of money with smaller deals, the number of deals grows. However, given the early stage nature of these deals, the involvement grows. The only way to manage this is to critically examine the process and use technology to make it as efficient as possible. Some examples of such technology intervention would include an extranet platform to keep updated on interesting prospects, regular updates from portfolio companies linked to their own reporting systems, collaboration amongst investment professionals, and perhaps even content feeds relevant to each portfolio company and including its media buzz, competitors etc.
Amongst our own angel funding activities at the Indian Angel Network, I think there are significant opportunities to create a collaboration platform for angel investors to work together and make progress towards making investments. May be something like Angelsoft ++
From entrepreneurs’ perspective, what are the biggest inefficiencies in the venture process, which can be fixed by use of technology? Without compromising their ability to make as much money as they want to make for their investors, how do you think VCs can adapt themselves to suit the new age entrepreneurs better?
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Alok:
I don’t think there is any technology that will help VC’s deal with small exits. But I will not muddy the comments in this post in case people want to post a set of collaboration ideas. But you have inspired me to post on why VC’s shouldn’t even play the moderate exit game so I will do that.
Also RYK seems to like the CRV quick start model. I wouldn’t take the deal as an entrepreneur.
CRV’s model is big hits. What they are doing with a small amount of money is buying an option to fund you if you seem like you have a big hit on your hands.
When you come back and negotiate the A round, if they don’t agree with you on the terms and don’t invest, then no one else will believe you have a big hit (as the sophisticated insiders didn’t think this was a big hit). So they have a lot of leverage. You will go blue in the face trying to explain to othe firms that it was the terms not the business.
As RYK mentions “spend less time ,do more deals”.I take analogy of mistakes equivalent to entrepreneurship.Parameters are
1)Make MORE mistakes (intelligent ones leading to rising learning curve)
2)Make mistakes FAST (learn and unlearn fast)
3)Learn from other’s mistakes (Same mistakes should not be repeated)
This knowledge sharing would be of great worth to a budding entrepreneur.
I have compiled ,collected a lot of content regarding this.But yet looking for a marketable way.
Thanks Alok for your contri on Ycombi.
How about if VCs actually involved themselves LESS in the early stage of a project? Identify teams that can actually do things on their own, and that you can trust with the money and tell them to bugger off and get the software and real business model done and come to you when it is someplace.
I understand VCs like to have some level of control in the process but for these piddly sums you don’t want to spend too much time fine tuning the model – leave that to the entrepreneurs. Let them come and work with you when they’re more like early stage, when they have the need for the next “tranche” and they’re really thinking big. If they don’t get back to you after three-six months, you know either a) they’re clueless and have lost it or b) they’ve gone and found a business model that allows them to survive and grow with no further money. Both are bad for you.
But b) is worse than a). You can write off a) but b) is like a thorn in your side if the founders have lost sight of scale, in which case you ask for the money back with that convertible debenture you wrote and go find something else.
Either ways, you spend less time post-the-deal, and the auto-filter of three-six months tells you who’s going to win.
“There seems to be an opportunity for VCs to start investing even earlier in the cycle, and be able to make money not by one or two hits, but by more consistent performance across the portfolio, each exit perhaps being relatively smaller in absolute size than what VCs are used to today.”
I have always maintained that the flaw with the VC model is that it influences too few projects. Monish Pabrai wrote in his book Dhando Investor that VCs account for less than 1% of investments in the US and if they disappeared it would make no difference to the planet.
I know some VCs who have been commuting from the US West Coast to India last 4 years even 6 – 8 weeks (ouch !) and have nothing to their name; at best they have 1 or 2 investments. It beats me how they have been unable to find opportunity in this booming economy of ours.
I have never understood this “out the park” hit model of VCs. They claim that because of time constraints they can work on very few projects. I say:
1. Spend less time evaluating each project, do more deals. You need singles just as you need boundaries. Don’t be Sunil Gavaskar 55 not out after 5 days. Play like our T20 boys. Anyway playing more shots increases you chances of of boundaries, taking singles doesn’t mean you won’t get the boundaries, you will.
2. Invest early using Discounted Convertible Notes; way too much time is spent on equity agreements which are 60 pages long. Love the Charles River Ventures model here.
3. Ofcourse VCs and everyone else should automate. It amazes my how manual the VC business is.
4. Angels, do atleast 20 deals a year. If your group is not doing 20+ projects a year, you are not going to get good returns.
I am neither an entrepreneur nor a VC, so my perspective may essentially be flawed, but I’ve been saying for a while now that VCs need to change the way they work and get more involved with the firms they invest in.
Technology and the cost of technology is the killer factor in it, in the sense that technology as a commodity (hardware and software) is so cheap now that I’ve seen costs of actually building a platform fall by around 90% once you know how to build what you are looking to build, in less than a quarter. Thus, the competitive edge is in the knowledge pool and expertise that an existing portfolio might represent for a VC firm.
Building and scaling websites is no great secret, but new installations and deployments essentially go through the same learning curve that costs money and time, especially in terms of getting the product out of the door ASAP. If this expertise is provided as part of a knowledge pool in a VC set up, it saves both the portfolio company and the VC a truckload of effort/money and gains a competitive advantage that is something a start up working on their own won’t have.
There are more angles to it, like the value of IP owned etc, but that is a different and long story altogether.