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Funding Innovation: Hit the Reset Button

TheFunded.com Open Letter

Posted by The Founding Member on 2008-12-14

PUBLIC:

On Sunday, December 14th, the following presentation was delivered in Tel Aviv to 150 CEOs and VCs during the Globes "Israel Business Conference." It talks about the need to reset back to the fundamental partnership between the entrepreneur and capital in the current economic crisis. Enjoy!

Posted by jerry on 2008-12-14 10:35:21

"""
YOU CAN DO IT!
COME ON!
ANOTHER ONE!
YEEES!
LET'S DO IT!
ONE MORE!
BLAH BLAH BLAH...
"""

Excuse me, is that the main course?
So... where is the meat?

Posted by Anonymous on 2008-12-14 12:11:43

Great deck Adeo. Jerry, Adeo is advancing the conversation, answers are hard for everyone to find. IMHO, unfortuanately, the problem is part of the nature of the beast, it's at the root: what kind of personalities choose to be managing angels and VC's when there are so many other ways that money could be invested? High rolling, risk taking, type A control freaks... it's about term sheets, control and returns to them, not a meaningful interest in the value that management is trying to create for society through execution. I don't know how that's going to change, but silence is not working.

Posted by cscottlong on 2008-12-14 15:42:50

I could not agree with slide 9 more about building great companies instead of billion dollar sales. For the venture capital industry to "return to it's early roots" many fundamental and social changes need to occur.

Over a 50 year span the model has changed from post-war development to absolute greed. How can our culture go from trying to build industry and jobs, to the hype that has overtaken the process to become the next billionaire? This is detrimental to our entire business culture, our global reputation, and is frankly part of the reason our economy is in such as mess.

Look at the hype that has surrounded the next big IPO. Investing is an emotional decision and a lot of people in the public markets have been bullshitted into believing false values in companies with overstated valuations.

It is one thing to promote your company and your vision as an entrepreneur, but when you get in bed with a VC to have them take an over priced minimal equity position just to take that BS valuation to the public markets, you have crossed a line.

This has happened time and time again, but no one seems to be calling anyone on it, not even the SEC because with restricted units it is legal. I suspect also because everyone is too busy trying to make quick money. I won't mention company names, as I am not trying to defame anyone but blame is a two way street here.

I believe that once this behavior began, and was reinforced, it changed the investment culture. No longer was it a good plan to invest in the entrepreneurs talent and vision to grow a great company to be proud of. Rather, it became more important to impose the investors staff to gain control specifically to hype it up and flip it. Talk about whoring ourselves out.

The NVCA has some interesting statistics. For those who are unfamiliar, venture capitalists pre-2001 saw an average rate of return of around 198.5% and typically stayed in a business for around 36 months. My point above. Today, they are seeing an average rate of return of around an 18% and are staying in companies for much longer. Mostly because they have no choice after the public caught onto the dot com BS and IPO's and acquisitions ground to a halt.

My point is this, the hype created massive rates of return and created a false economy that continues to inbreed itself. Despite the pain we all feel right now, I am hopeful the reckoning that is coming will put a halt to this behavior in favor of building great sustainable companies that we can be proud of, even if they do not help to advance the growing number of billionaires in this country.

Get back to pride of work and away from pride of wealth......

Posted by The Founding Member on 2008-12-14 15:49:03

Slides 9,10, and 11 present some recommendations for the venture market, venture capitalists, and entrepreneurs. Here are two particular points:

-- "Venture Capital" needs to return to its early roots where entrepreneurs and capital sources collaborated on building great businesses against all odds. It's not about whacky preferred equity rights, arbitrary ownership positions, or billion dollar exits. It is about building new businesses that have an impact on humanity, in my opinion (which I hope is debated).

-- Whole industries and sectors are under attack by the declining economy, and this common enemy forces competitors to collaborate in order to survive.

The original presentation was a bleak update to a talk given at Harvard less than two months ago. Since that talk, the situation has dramatically worsened for start-ups and venture, so the previous title of this talk was "The Other Shoe has Dropped."

Most CEOs and VCs now see how bad the situation is, so it is time to move the conversation onward about what can and should be done. Ideally, this will be a dialog. The post is an Open Letter, so please comment.

Posted by Mr. Smith on 2008-12-14 16:02:38

Best comment on TheFunded from @cscottlong:

"Get back to pride of work and away from pride of wealth......"

Posted by goodform on 2008-12-14 17:43:26

"Risk Investing" is divided into three distinct systemic models: Seed, VC, Exit.

This slide deck lumping all Seed investments into Angel and all Seed investments as those under $1mil. This is flat out wrong. Angel investing is a geographically limited investing model where some folks with extra cash find stuff they like.

There is an entire Seed Infrastructure out there - incubators, academia, tech transfers, economic development agencies.

Please stop confusing tradtional VC investing with Seed level investing. Please stop comparing VC investment methods and money to Seed investing methods and money.

Again - http://www.slideshare.net/ElliottDaha...

Posted by The Founding Member on 2008-12-14 18:05:28

@goodform: You are correct. Seed investing and angel investing are separate, especially when seed is defined as "incubators, academia, tech transfers, economic development agencies."

The presentation does not address nor reference the seed model, which has unique opportunities and challenges of its own.

Posted by 60ponies on 2008-12-14 18:21:41

There is a common link between Wall Street blunder, Detroit mismanagment, VC implosion , entreprenuer anger, and just about every business disaster headline these days...greed. When it is all about "my share of the pie" the question is not IF it will fail, but when. Yes, it is time for a reset,on many, many levels. Deals can be made that put a smile on everyone one's face if we define success in terms other than those driven by greed.

Posted by anonymous on 2008-12-14 21:35:07

I appreciate the call for VCs to "build the company", a.k.a. build real value.
Now, any idea (a) if they agree and (b) when VCs actually start trying to build some companies?

Posted by The Founding Member on 2008-12-14 23:25:26

@anonymous RE: VC responses to greed and building companies once again.

TheFunded is working to release a Pledge that all partner at operating venture funds will be invited to sign. In this Pledge and the firm Validation that occurs by all partner signing it, VCs will commit to treating entrepreneurs with respect and to operate with certain guidelines, like agreeing to honor confidential information.

Hopefully, enough VCs will sign to show where they stand on critical matters to entrepreneurs, and, if they break the Pledge as determined by Member feedback, they will lose their Validated status.

Posted by rhood on 2008-12-14 23:33:22

Can someone tell me what the chart junk on slide #5 even means?

Posted by The Founding Member on 2008-12-15 00:30:21

@rhood: Slide 5 shows the various countries that venture capitalists operating in the Unites States believe to have "high quality" dealflow from a survey conducted by the EE Times.

There are many articles about well funded US venture firms are looking to expand the model by opening regional offices or satellite branches. The goal is to find "better opportunities" abroad, like ICQ, Skype and MySQL. Keep in min mind that the talk was given overseas in Israel.

PDF VC GLobal Report

The problem is that exporting a broken model and hoping that the nascent market characteristics of your target geography will bring the venture capital back to the glory days is, in my opinion, a fool's errand. It'll just end up broken, too, on an accelerated timetable than it took in the United States...