Paul Jazefak has an interesting post on VC bashing. I was at the TiECon last week chairing a panel around fundraising, when the ultimate happened – a VC on the panel started bashing VCs! How much worse can it get 🙂
I think part of the issue here is a lack of understanding of the VC business – VCs are not angels (as much as angels arent – no pun!) They are in a business. However, in my view, there is a “value system” to each business and each individual. For VCs, my list would include integrity, empathy, access, humility, partnership and fairness. Not just because its good human nature to have these (which is true of many other things I didnt put up here, such as transparency,) but because these are values that IMHO help build a great VC business.
For folks out there who have pitched or tried to pitch to VCs, what have been the biggest frustrations and delights? For people who actually have VCs invested in their companies, what do you appreciate about them and what is it that you’d like them to change?
Update: Someone commented on this article on facebook, saying VCs suck because most of them have no operational experience. Does that really matter? Check out this analysis by pehub – doesnt seem to say so. But then, nice rebuttal here.
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Some possible ways to change
* The VC ‘business’ itself needs lot of ‘entrepreurship’: Experienced VC individuals, especially those with first hand entrepreneural experience, and who believe they know how to build great companies in India, should not work for larger VC firms, espeically foreign firms, where a lot of processy stuff, legal stuff, consensus building would waste their time and the entrepreneurs’ time. They should start their own 1-person or 2-person VC firms a la Warren Buffet or Vinod Khosla Ventures. My take is these individuals would provide a REAL early stage VC alternative in India and build great companies. Let the i-banker types run the brand name VC/PE firms.
* Meet fewer entrepreneurs and say no quickly. Don’t drive the evaluation process to death. Track your “average evaluation time” in months on a dashboard and try to improve it. I bet most VCs in India currently fall between 6 and 12 months on this.
* Let some of that ‘humility’ show in your actual actions. Spend more time with entrepreneurs learning about their thought processes and challenges, rather than evaluating or questioning.
There is a report published from IITM on the general state of the VC Industry in India. I was there for the report release.
I do have a few doubts about some of the processes used, but the numbers are still a first level snapshot of whats wrong, and whats working in India. Some interesting stats.
* More than 88% of the PE money is going into Growth stage.
* The Average time that an Investor stays vested in a company. 18 Months. (I think the average is skewing reality here, have asked for the min and max numbers)
* Most companies are raising their rounds of funding, a year before their exit. (Or maybe thats when its seen “ripe” for investors?)
* The average company raises its first round of funding, after “five to eight” years of operation.
* Domestic VC firms tend to stay vested longer, compared to the foreign funds (like Sequoia).
* Domestic firms also focus on companies focused on more “home-grown opportunities” like retail, infrastructure, healthcare, mobile etc, whereas foreign funds typically seem to focus on verticals they are used to in the west such as IT/ITES and predominantly financial services (>80% of money goes into that)
* Even most Domestic funds are raising money from abroad, since most financial institutes in India do not have an appetite for PE, so some domestic funds might also act like foreign funds because of the pressure by their LPs
* Gopal Srinivasan, who was there at the event noted that the key to changing the fundamental way the VC industry works, will also have to do with a significant awareness creation within the LP Community, as he was sharing his experience on how most investors are skeptical about any investment more 5years and that itself is too short for Indian businesses – typically need 7-10 year cycle.
As you are already aware, I believe the VC Industry is broken. Some things will have to be rehashed/restructured and redone altogether. It still works beautifully for those who do have the experience of a fundmanager and an Entrepreneur (as one of the commentors rightly pointed out), but unfortunately most funds – not just in India but all over – arent run by those fortunate few.
Having talked, met and pitched to several Indian VCs, I have discovered four distinct breeds based on my experiences with them which are obviously my own perceptions.My gut feeling is that most VCs will be alternating between these breeds depending on not just their own personality/motivation but also by what reaction they have to your team, plan, business. Evolution from one breed to another breed over time is also observed.
So here they are :
1) The Time-Wasters
The “Time Waster” replies to your 3rd email, schedules a call 2 weeks later,and then when you ping him/her several times offers to meet you. He/She kicks off the meeting with an associate or analyst talking to you and comes into the meeting late, answers phone calls during meetings, walks out early, tells his/her associate to continue the discussion / follow up.
You can also identify the time-wasters by the questions he/she asks which are so basic that you wonder whether he/she has even bothered to Google you or your company.
After the meeting, the Time-Waster will seldom get back to you with feedback, and even if he does, it will be so generic (stuff like we are not investing in early stage internet) that you will scratch your head wondering hmm… he could have told me that in reply to my first email.
The Time Waster makes you feel like he/she is doing you a big favour just by giving you some time, or that you haven’t come from the right school, background or pedigree to merit his/her attention.
Even if you are lucky enough to keep pursuing the Time Waster patiently until a termsheet , it is likely that the Time Waster will find other worthy things to do at that point or will come back with some absurd terms/valuation since he/she never got enough time to do any diligence to build a solid enough case.
This breed is an inefficiency in the VC ecosystem, and in seed/early stage can harm the company more than they good to it since the company has very little time on hands. Also, it shows serious lack of professionalism and mutual respect for time.
2) The AntiThesis Believers
These VCs have already formed a belief that your business/space/stage of business sucks and is not worthy on investment. Most of the time, this is a direct result of their belief that an alternative business model / related space working out, or as a result of burnt fingers in your space.
This breed will want to talk to you and question you to confirm their belief that your model is failing or fairing average just as they expected it to. Besides being very stiff, skeptical and reserved (they will never tell you what is going on at the back of their head), they might sometimes also voice their skepticism in a more direct manner, encouraging you to try something very different – “have you looked at the X space?”, “Why dont you try to build Y instead?”, “I would be quite interested in someone doing Z in your space. Some will go to the extend of shaking their head and saying – “I doubt if someone will even invest $100K in your business” etc.
You can identify this breed by their general casual attitude, less questions asked about your team/capabilities, sometimes not having done much homework on your model/product either. It is unlikely that a meeting with them will last beyond 30 minutes, and most of the time you will know they fall in this category right after the first meeting.
This breed is the one most likely to pass on the next Google & Facebook because they might believe in a Yahoo! or MySpace.
No grudges against them at all – entrepreneurs work passionately to prove them wrong everyday. Also, entrepreneurs should listen very closely to what they have to say and try to understand why they are saying it. Some of their feedback might be right, and you might end up being on the wrong side of history if you dont fix it 🙂
3) The Mentor / Partner / Friend
And then there is the third kind. This rare breed is my favorite and are the ones I would always want to work with. These people are rational, debating, honest, upfront, warm, supportive and are in the VC business to “genuinely” help build an entrepreneurial ecosystem in India. If they dont like something, they will explain in detail why. These people want to undertand your business on a whiteboard and dont want to waste much time on powerpoints / excels.
They are quick to identify since they would have done research on your space and will ask you a lot of relevant questions about your team, product, tech, model etc. and make you meet their partners / team with willingness. You can identify with them. Most of these have been entrepreneurs themselves or appreciate what the entrepreneur is going through at any point in his/her lifecycle. Most of all, they give the entrepreneur the respect and support he/she craves for and try to work as a team even during the pitch. After all, whether you fund the idea or not does not mean you cannot help the entrepreneur overcome challenges and offer him suggestions for improving his model, upside etc. Despite their biases and skepticims, these people take some time out to understand your idea, your team and your business model better and will tell you in the first or second meeting where your challenges are. They will also want to spend time with you to help you overcome those challenges. They will make introductions that help your business grow. Whether they invest in you or not is usually just a function of tweaking your model / timing / stage / expected return. They will keep tracking you.
4) The fourth kind is very very very rare breed and VCs never want to talk about them, entrepreneurs with horror stories tell you about them and you run into them yourself once in a while.
The fourth kind looks, smells, behaves and acts like the third kind but is actually a mix of the first and the second kind. His objective to meet you and look at your plan was just to get valuable information to support/debunk a thesis he had been working on or do groundwork for investing in another company in your space, or to just improve their “intelligence” about your space/company.
I sincerely hope that natural evolution will make the fourth kind extinct soon or evolve into the third kind. I also hope entrepreneurs will find a way to identify the fourth kind.
Alok – Keep up the good work keeping the open discussion between VCs and entrepreneurs going !
Aloke
iXiGO.com
In one of the guru sessions at TIEcon 09, Ranjit Sethi from the Indian Angel Network made an interesting observation when comparing US and Indian ecosystems. He said that in India, ‘angels’ behave like US VCs and VCs behave like private equity investors in US.
I suppose that’s a fairly good guideline for an entrepreneur in India to use when looking for investment.
Everyones money is as green as the next guys so the real difference comes in how they can help in addition to the money.
At various stages of the company you need a different sort of help and the ideal ‘VC’ varies by stage.
In the very early stages you need someone who can help the team pull in the same direction and get establish a thesis and build something. In the next stage you need someone who can focus the team on discovering, articulation and delivering their value. After that someone who can help them build a effective sales method to validate the business and finally some who can build a channel to scale the business.
Outside this basic framework, it also help to make sure that you have realistically aligned your criteria for success vs the investors.
If you would be thrilled making a couple of million or would like a cash flow business dont go get an investor who would only settle for a 100+M dollar exit.
Usually the people are smart all around but often get caught in the moment. They end up not (honestly) reflecting on with their needs and goals and leads to problems.
This has been an issue for ever, it has just been getting more visibile as the exits that traditional VC need have become rare.
On the flip side as the amount of capital required for the early stages has diminished you can choose investors in sequence instead of one at the start.