TheFunded.com Open Letter
Posted by carlwimm on 2010-02-28
Another article in the NY Times
The idea is that a VC firm is going to try and bridge the gap between VCville as it exists now and entrepreneurship, which is what they need and cannot easily find, if at all.
You can all read the article for yourselves but here are my observations:
1) Since the "big huge fund", "living la vida loca at 2 and 20", all investments must be 20 million before we can be interested" model of VC is, by definition, an entrepreneurial non starter, ...
my first recommendation is to never go to a VC firm unless it has at least one E.I.R.
My reason is that, according to the article, you have someone who is at least partially entrepreneurial who sits during the presentations and then during the partners meetings.
Not only do you have a shot with an EIR that you could never have with a finance geek, but the VC firm itself might be influenced, at a Board level, by EIR musings.
Without an EIR, my first guess is that the Board meetings are and can never be more than an echo chamber - and quite useless for start ups.
2) do recognize that one EIR in the house (or 3 EIRs in the case of Austin Ventures) only gets you part way.
But ... as I said in point 1, half way is a lot better than "no way".
3) The best illustration of the limits of this approach come in the same article.
This one is subtle.
The article says " Silicon Valley legend abounds with tales of wild success sprouted from a garage where a pair of geeky unknowns toiled away" etc. etc. Then it names some Valley pairs.
Here is the subtle point. The pairs of geeks conglomerated around an idea (as did Gates and Allen, when they left Harvard to go to Albuquerque).
In other words, dear "two and twentiers". There is an answer to the eternal question, "which came first, the idea or the geeks".
Answer - the idea. The geeks coalesced around the idea. They became great business partners around an idea. They may have been friends before but they focused once the idea was in hand.
Trying to get some "geek groups" happening without a focusing idea is the wrong way around.
The EIR model is better than nothing but ... "a walk to first base is not a home run".
4) let me get this straight ....
15,000 a month for 6 months, offices, clubby lunches, etc. all to sit around and "muse" ......
Let's call this 25,000 a month in real or in kind - that is 150,000 dollars.
Do you know that you can substantially de risk an idea for that kind of money.
(and probably completely de risk it for double that)
So ... why don't the VC partners - who see themselves as doyens of the Valley - take 3 million (out of the 500 million that is happily creating the "2 and 20" for themselves) and start 20 new ideas.
Hell - go crazy. Start 40 ideas. that would cost 6 million.
How to finance that - in the first year of the fund (and in no other year) take 6 million out of the 10 million that the VCs want to take for themselves via the "2 and 20" on a 500 million fund - and start 40 crazy ideas.
After "living poor" on 4 million for a year, the VCs can live it up on the 10 million a year after that for the next 9 years.
Here is a possible new aphorism for VCs,... "a little less "2" in the beginning means a lot more "20" down the road".
I salute the VCs that want to get out of their closeted, echo chambers.
BUT - and it is a huge "but" - the premise of the VCs that you bet on the jockey and not the horse, is not correct.
The first bet is on the horse, boys and girls. You can always put on a better jockey later, once the horse has shown some promise.
Eventually, when VCs want to be of real use again, they will have to go to a "bet first on the horse" model.
The real value of a VC will be a) his stable of jockeys - which he can use to improve and smooth the path, after the horse/idea shows some promise ... and b) a warehouse of oats - after all, you don't keep Secretariat and Seattle Slew on a diet of weeds and crab grass once they demonstrate the possibility of a triple C.