I don't disagree with the ultimate conclusion that it is better to do without venture capital, if you can (and have the luxury of a choice), but I don't see where these specific facts, by themselves, directly lead to that conclusion.

I think it's a serious flaw in the study to only consider successful companies. What of the companies that never got off the ground for lack of funds? 16% of the 900 fastest-growing firms is likely much higher percentage than any other random group of 900 startups. And wouldn't the study also lead one to conclude that the more experience an entrepreneur has, the more they seek and obtain venture capital?

To Dude

VCs have to extend the sort of term sheets that they do because of the source of their money (and the promises made to secure it, in the first place).

Once you understand that, you understand that VC money is a last resort. You take VC money only if you have to, only if you absolutely cannot do it any other way.

The more interesting observation is that entrepreneurs on their 4th try get (or take) more VC money than on their first.

WHY?

One answer is that the first three were really no good and the entrepreneur didn't make a "capital kill" on any of them. So he has to take VC because he has none of his own.

Another answer is that really great deals are hard to come by. Most deals come in the door laden with uncertainty and risk. That is why you see them in the first place.

If a deal were totally de-risked, development de-risked with a product ready to go, IP completely in place, corporate structure de-risked by having the right shareholders and no debt (and no legal skeletons), the future de-risked by having capable management in place, and so on....

you would never see it. You would read about it in Forbes or see it on CNBC.

As they never walk in the door, they have to be made. And that takes guts, as well as luck.

So once you have it to where any VC would love to jump in, why have them jump in at all. Who needs 'em when they want you.

Dude, only 16% of the 900 fastest growing firms needed VCs at all! that is a very low percent. 84% that succeeded without the VC money is a good indication that VC money is not necessarily needed for success...

It appears my point was missed. Again, I agree with the principle that it is better to do without VC money, if possible, and you have the luxury of that option (both in getting a term sheet and having funding alternatives). I'm just saying that the facts that are used to support this specific article can be interpreted in various ways, and not a great article in that respect.

Perhaps it would have been better to post this in a place where the people you mention could respond.

This is a terrific post and I am surprised that there are no other responses. Thank you so much for doing this.

The main message I take away is one can stand up to incompetent VCs and ask them to stop screwing up the company's future.

Bravo!

@Mr Objective, good point. Any suggestions? Feel free to repost on my behalf, if interested.

Pretty interesting post. Thanks for the candid thoughts.

Wow. Basically, what Reuters said is that VCs funded a perpetuum mobile...

To Krassen

I hardly ever post in this forum But I couldn't resist posting here.

The real lesson for you is not what to do when you fight with the VCs but to arrange your affairs in such a way as not to need them at all.

It can be done.

Venture capital has a very grim future if IPO's do not return. If you as a CEO want to be taken over, help create false valuations for the public to buy, and then be sold - go for it. If not, enjoy your career.

Anyone who raises capital from angels or VCs need IPOs. Anything that can increase the number of exits and value of exits is good for the entrepreneur.

The whole presentation seems like a rescue plan for the members of the IPO machine (I-banks, buy side, exchanges, law firms, accounting firms, VC firms) to restart their businesses. But the IPO path may turn out to be a poor way for successful startups to reward their founders - M&A or remaining a highly profitable private enterprise may be better.

It would be great if they could help reduce their 4th pillar, regulatory review & SOX compliance, as well as anything to reduce the approximately $1M/qtr fee for being publicly listed. All this extra overhead adds little value and can be a big impact for a small but growing biz, one with revenues of less than $20M/yr.

Having served on the board of a NASDAQ company I can attest to the fact that being a public company is a hugh distraction for management and a continuing drain on resources that could better be spent on growth. The exception is if this is the "liquidity event" that you have been waiting for.... then go for it. However, if this is just a way for your investors to prematurely dump some of their equity and it really is not beneficial to the company in terms of having additional captial then there is no reason toconvert to public status. Being public brings only two things. Capital if you can get a good price for new shares and headaches dealing with the reporting requirements and pressures placed on management by public stockholders.

I am generally with NVCA that IPOs should return. It's not only good for the VCs and enterpreneuers, but it's good for the public, too, to own equity in young, innovative and disruptive companies. The relative risk is way overblown: look at how stale and supposedly "safe" companies like GM and LEH bombed out on their shareholders. Owning equity in old and ossified behemoths is by no means taht much safer than owning recent IPO shares.

The regulation reqs. can be good, too; being public, with all its disclosure requirements could be beneficial to a company, as a public corrective on executive incompetence and dishonesty. However, regulation needs to be smart and efficient. Overburdening the companies with paperwork and controls is not productive. My understanding about Srab-Ox is that it is so anal in some regards, that cos. need to account for every paperclip, while still leaving large holes and opportunities for executive transgression and mischief. Some reform will likely be needed.

@startupidea - Completely dead on. We were a $100MM company that was public and went private to save the SOX compliance nightmare. The burden is just to great and prevents many awesome companies from going public. Spend $2-4MM in compliance a year for the privilege of a one time capital raise and exit?!? Worse than debt. It also robs mom and pop investors the opportunity of getting into small high growth companies.

Gentlemen:

It is a very bad doctor that questions the validity of his patient's symptoms. Too many terrible doctors send a patient away with an aspirin and find him dead the next day of imaginary appendicitis.

Further, if we want to dish it out, we have to take it.

The very fact that a VC would laugh at the slide show means that it resonates with him/them, having seen it before.

It may not make us laugh much. So what.

And if it makes a VC chuckle, that will be followed by a comment about how entrepreneurs are guilty as well, so they can get off their high, TheFunded horses.

Even that will be progress for our side. To point out the things that entrepreneurs do is to acknowledge obliquely what VCs do and have always done.

I have no objection to making sure that my plan contains none of the flaws in the sideshow. Hell, if you think of any more points on that slide show, post them here.

I would be grateful. It is an efficient and effective way of eliminating
busines plan defects.

In return any VC I talk to, can get off his "devil talking to Jesus after 40 days in the desert routine". (I will offer you the world if you bow down and worship me).

Let us be grateful to the fellow putting up this post, make note of each of his comments, make damn sure our own plan cannot be accused of any of them and move forward and kick ass.

Nicely said, Carlwimm. A venture that overstates its market, exaggerates projections, ignores obvious competition... this isn't exactly a news flash people.

It was a very clever slide deck! We need to be able to laugh at ourselves and lighten up!

There are both good and bad VCs as well as enterpreneurs who overrate what they want to do. One VC I know has seen the slide deck and laughed. He is one of the good ones and commented that he knew of many who fit the tag of the slide deck. And he does not like working with them.

Slide 10: Preparation. Amen. Read the Board Materials and come prepared!

What is the purpose of this deck? I understand the frustrations of dealing with "professional" investors.

There is a underlying current at TheFunded of this immature glee at bashing venture capitalists. Some honestly hope and pray for the entire VC industry to collapse. That is all well and good, but some of our business cannot be bootstrapped or could only get so far, so fast self-financed. Hoping venture funding disappears smacks of a needlessly self-destructive over-reaction.

The unfortunate reality is that our companies often need capital. Traditional banks and debt financing only works under very narrow circumstances. Angel investors are an interesting route, but the conventional wisdom around here is that it is time consuming and not an overly productive way to raise capital.

Sure there are plenty of bad ones out there. Heck, I am about to write a review of one right now. I've had investors be late to meetings, cancel at the last minute, sit on their blackberry the whole time and out right lie to me. I've also met VC who listened attentively to previous hair brained ideas, provided sage and informed feedback and who have gone out of their way to open doors to customers, partners, investors with no obvious gain to themselves.

TheFunded is an excellent forum to level the information asymmetry that exists in the venture industry. Let's not let this place dissolve to useless and counter-productive VC bashing.

If the VC's were wise they would have money to invest in seed or series companies now. They do not have money because they have a herd mentality and invested too much money in too many deals that looked the same. It is safe to invest in a look alike deal if the guy down the street invested in a similar company. No one is bashing the VC's. People are stating the current reality. The VC's blew it. They spent their money and can't liquidate their investments. No IPO's. No M&A's. Perhaps if they had been so greedy and screwed over the little investors with disasters like Ariba there would still be a market for IPO's. No one is praying for the VC industry to collapse. Companies are praying for some WISE people to run the VC firms. Not reactionary fools. I call them fools because they can't find a chair and the music has stopped. They are not the sage and wise individuals that they would have us believe during boom times. Rather they are opportunistic and clueless. The VC math is broken because they have to make huge bets to be successful to cover the bad bets they make most of the time. The math is broken because they want people with track records. They want these people so no one can shoot them when the company goes under. The VC can say that the management had a track record. If they are only investing in people with track records then the Nocye's, Moore's, Grove's, and Jobs of this world will continue to toil in a cube or worse sit at home collecting unemployment because their jobs have been shipped to Shanghai and Banglore and Hyderbad. The USA is in a world of hurt because no one is willing to look in the mirror and ask the hard question: how did we get in this mess. The VC's are doing the same thing that the govt is doing. Keeping failing businesses alive in the hopes that they will some how recover their money. The VC's did not invest in any semi companies to speak of ast year.

I'm for more VC bashing..

I remember reading about all these other startups back in the day where VCs were there to help seed early stage businesses, and became actively involved as part of the team, similar to another co-founder, to ramp and grow the business. To make this interaction meaningful, it would be a requirement for a VC to have previously founded a successful business, to have real understanding of what it takes and all the challenges down the road.

These days, all I hear from VCs is whine whine whine, telling everyone to come back when they have lots of revenue or traffic, the standard rejection for anyone trying to do something new. While the founder in a seed stage environment is mortgaging their house, running up cc's to the limit, working like a dog, and they turn around and have to deal with these lazy investors that only want some perfect deal to land in their lap is ridiculous. Maybe there's too many business people in the business that have limited experience or real world advice & support to help the business move forward so they're unable to really do anything even if they had the inspiration. Any VC that makes an investment and then just sits on their hands watching it & pointing out the obvious, without actually getting their hands dirty, is probably getting what they deserve right now, reap what you sew..

sense of humor guys

how did you critique lawyer jokes

I agree that V.C.'s are like lawyers when it comes to good humor. They are a necessary evil in this world, there are only a few really good ones, and their industries deserve the bashing because so few actually create value. Most just transfer wealth from others to themselves. But, like looking down on a plumber's smile while the guy is fixing your toilet, it's unpleasant, but you're happy to have them when you need them.

http://www.avc.com/a_vc/2009/06/self-...

I guess I've been lucky. My view is more with kinflip.

I have, quite often, tired to help companies raise money.

Rule #1 - if a broker/middleman/consultant charges you one cent up front they are bullshit.

Rule #2 - read Rule #1 over and over again,

You got to see this guy's pitch captured on YouTube! They are the most successful angel group ever. Each angel invested $1M per year each. Not one company they invested in ever failed.

The sad part is that this guy was teaching this junk to entrepreneurship students in Sweden.

Many firms are successful using 'gobetweens' Casting stones at the merchant banker is silly. It is like casting stones at Park Avenue Investment bankers./ Goldman, Merrill, et al. Every single one makes money from up 1. front fees and 2. commissions upon delivery. Same gene pool, with different clothing ---perhaps. Do not be overwhelmed with yourslelf. You want money, pay for it ---- as for 'up front' it depends upon what your company needs as to shaping etc.

Do not be a dream merchant................and please 'understand capital markets' . IF you choose not to, the you are toasted. I am sure of it ---I know. Pay to play. What do you care if Merchant investment banker adds on fees. take Arithmetic 101. :-) toodles tc

You should pay nothing, unless you need work to shape.

Most of these scumbags are careful in their lies - Garcia is brazen. At one point he told me that his angel group invests $200M/year! I saw one of his lieautenants steal a newspaper in a Starbucks, and when he realized I saw him, said "Rich people never pay for anything". All around class act.

Add Mojo Partners LLC to the list.

I think you get what you pay for - nothing unreasonable about paying retainers for help raising $. B U T you need to do your own due diligence on the quality of the people you are retaining. You should be able to sniff out the confidence men/women or rolodex-flippers if you do a good job of investigating their track record, calling their references, etc. As mentioned previously, Goldman bankers make retainer $, but I don't think one would say they are not good at what they do.

This guy wanted $10,000 up front with no guarantees and 10% equity.

http://en.wikipedia.org/wiki/Rod_Unde...

Was recently pitched services by one such firm. Great sales story. Wow. Easy to be swayed by the salesmanship. Asked for references and could not find single confirmation of the sales pitch. The person was surprised that I was diligent about my reference checks. Needless to say, we did not do business with this firm.

I've run into some groups like this. One talked a good talk, we asked for references. Never got them.

Take these folks with a few kg of salt.

If you use finders who are unlicensed for security sales in California, you are automatically giving your investors an unlimited option to rescind for three years.

The videos are a waste of time, but check out http://johnpgarcia.blogspot.com/ for an entertaining analysis of his incredible claims (lies) and how he manages to continue to steal unabated, in a similar fashion as the invention development companies steal $300 million a year.

Interesting. I wonder how it might go along with this: http://tinyurl.com/trans2009

- Gary, WDX

They can do much, much, worse.

Governmental VC firms will have thousands of employees rather tens.

They will probably spend a dollar in overhead for every dollar they put to work.

If the US taxpayer is the sole LP, and the fund is evergreen, there's no reason to care about returns. You think VC is an old boy network now, just wait until the feds run VC.

Look at how RD money is allocated for military projects.

1) The Venture Capital stage of Risk Investing does not create or innovate - the VC stage provides money for growth when a Seed company provides "traction" (customer usage, sales, etc.)

2) The People's Money is best spent on commercializing innovation, providing a runway for the Seed company to get "traction" and creating jobs.

3) The People's money should be used to strengthen the existing Seed Infrastructure of Incubators, Academia, Tech Transfers and Economic Development Agencies

4) Private sector money, working on real world principles of profit and loss, should then be used to help grow what the People's money created.

The VC industry has learned how to approach Washington DC and it is exceptionally naive to think that the well coordinated and well connected VC industry won't try to get their hands on the People's Money.

The Feds already operate a fund similar to this. It's called DARPA, and has a reasonably good track record, both in terms of innovations brought about by the funding (like the Internet) and in terms of success ratio. Staff-to-investment ratio is indeed higher then the equivalent VC, but in turn they provide much more intensive program management (i.e. handholding) than a VC. In addition, while staff-headcount-to-dollar is higher, staff-dollar-to-dollar is better than a VC because the staff get paid civil service wages and not 2&20.

Don't be so quick to knee-jerk reject government initiatives to fund innovation.

Who gets DARPA money?

Boeing, General Dynamics, Lockheed Martin, Raytheon, the usual mafia.

Is this a good use of taxpayer money? No. Though the CIA does have a fund.

Will it be efficiently run? LOL just thinking about it.

Will it fail? Yes . . . what good VC would ever go to work for the government?

Can they do worse than other VCs? Nope. Plenty of VCs fail in all their investments, then cannot raise another fund and go do something else.

No matter how much money they get, you cannot do worse than zero.

I can believe how much this post hits the nail on the head and how passionately I agree with it. In all my time here, I can't remember anything but appreciation for a quick 'no'.

VCs are about to learn a hard lesson. The same kind of lesson that the music industry has learned. The lesson is that water flows downhill and will not be stopped by rocks in the way. Innovation might be slowed down but it will not be stifled or stopped by a lack of VC money. The longer the VC market is constipated, the more alternate funding methods will be strengthened. This is a good thing.

"If you are so smart? How come you aren't running a company?" I think the widespread rudeness and arrogance comes at least in part from a sense of insecurity. Playing with other people's money may be lucrative, but it is a far cry from the entrepreunerial experience. Add to that the fact that returns over the last several years are abysmal and many firms are shrinking or evaporating, and you have the recipe for unhappy people. And unhappy people tend to treat others poorly.

There are good VCs out there, but few and far between.

As a serial entrepreneur who has pitched our startup to the VC community for the past 8 months, I jaded and happy to see the industry in turmoil. The weak performers and all their antics (see original post) need to close down. They are not adding any value, only destroying equity capital that many risked everything to create. Their LP's should show their displeasure with poor performance by not reinvesting in new funds. Let the weak go out of business. It's a healthy exercise for the VC community and for the economy. The same logic should apply to any industry. The weak should be allowed to fail. Unfortunately, they are still out there, looking for low valuations and low risk at later stage. The entrepreneurs who are seeking later series investments are forced to accept low valuations, and the ultimate dilution of stock that occurs. The other option is to reduce headcount, and hope for the economy to turn around. Neither prospect is attractive.

We have been frustrated by the lack of term sheets from those we have pitched for the past 8 months, even after we have recevied kudos from almost every VC we have approached. As a result, we are rebuilding our startup model. We have become a 'virtual' company, with limited overhead. Using tools such as Skype, Go to Meeting, Free Conference Call, Priceline, etc. to collaborate and create, we are keeping our costs very low (read capital efficient). We can source almost everything we need through consultants, and we are seeking global manufacturing partners within our industry who have invested in infrastructure, but who have available capacity for us to tap. We are moving forward without the VC, and hope to get to revenue with no or minimal dilution of equity. We will ultimately need capital, and I am seeking TARP or other Gov't funding, and am putting together an Angel Syndicate. In our case, the VC have lost their usefulness, and I for one am delighted to see the whole industry evolving and improving. It would be good to see half of them go out of business. Who is going to miss them? Not me.

At the outset let me say that I am somewhat of a Lurker here. We are a startup in the infrastructure development sector. The scope and scale our undertaking [$10MM development cost; price points $25 - $250MM] does not fit the risk profile of Angels or VCs. So perhaps I have a somewhat more dispassionate view of the VC "industry."

I was not there and cannot judge the reaction of the VCs on the panel. I have attended a couple of VC sponsored events and observed their behavior.

From this admittedly limited exposure and my reading of the postings here I would have to agree with the opening post. Most VCs are arrogant, rude and self absorbed. They live by the Golden Rule - he who has the gold rules. But now their gold is tarnished and perhaps they have to get off that gold standard and adopt a new one.

However, this is a 2-way street. I have read too many posts that seem to have been written by someone who failed 8th grade english. If you don't know the difference between a singular and a plural get someone else to write your business plan.

I have read too many posts that express surprise that VC would question the thoroughness of the preparation. If you have not thoroughly tested your invention, software or business model do it before you seek funding.

I have read too many posts that confuse tough questions for arrogance. If you cannot answer the question you are unprepared.

I have read too many posts that promote trivial uses of technology to holy grail status. An attempt to replicate the success of others is not new art and writing code is not business expect for those employed to do so.

If you will excuse my arrogance, I have a few observations on the "entrepreneurs" posting to this forum:

1. Just because you think that that you have a brilliant idea does not mean that everyone has to agree;
2. If you have never experienced a moment when it occurred to you that you do not have the solution to everything you are too immature to run a lemonade stand; and
3. Just because it is your idea does not confer the CEO title. If you have never run a real business drop the vanity plate.

I agree with Water. Alternatives are starting to formulate in the Angel Investing community. Different Angel groups are beginning to cross network, share deals, and syndicate deals to raise bigger rounds (like $1m to $4m). If you have a business model that allows to you get customers/revenue with that money, Private Equity is beginning to look at deals like that.
The VCs are so bloody arrogant with so little value add, alternatives will end up being better than them.

First "If you are so smart? How come you aren't running a company?"\

Amen!

In my experience, most all the VC's who have started and run companies are way more professional than those who have not ... except the few who just lucked out once and now think the Sun shines out of their ass ... we know who they are ...

Second "In the meantime, I am working really hard at creating a company with a cost structure that means VCs will not get a piece of the pie."

This is an interesting comment. So am I. And in the last few months I have talked to a whole bunch of repeat entrepreneurs who are working hard to do the same. This is especially true in the SaaS space where PaaS environments and associated development tools are making it possible.

With all the hosting issues taken care of by the PaaS vendor and with the kind of high level application development tools that are available today it is now possible to deliver serious business applications via the cloud in just a few months at costs (other than your time) ranging from free to $49/mo per developer. No funding required here.

Once that is done you can take a fully working app to early customers and get them on board. This is much easier than signing customers up based on a .ppt andyour good looks :)

Once you get some traction with customers (not to mention cash flow positive from day one) the VC's will be calling you not the other way around.

And if the idea does not take off, no big deal. All you lost is a month or two of work. Move onto your next great idea.

Cheers.

News flash the funded! 90% of the complaints on this website can be summarized as :

1. "pretended to be interested and then blew us off."
2. "was more interested in the blackberry than what I had to say."
3. "wanted to prove how smart he was, and how dumb I was"
4. "was late and inconsiderate"
5. "strung us along forever and then invested in competitor"

which are very petty and useless criticisms. What is the point of this website if it degrades into a never ending bitch session about how VCs did not fund your company. I have raised money from VCs for multiple companies and am very familiar with the painful shortcomings of the VCs, but would like to offer some practical advice about how to deal with these rather than whining all the time.

The VC model is certainly in trouble and 50 to 70% of VCs will probably be out of the industry, but this is not because they are rude, it is because they don't make money on their investments.

If you can start a company without raising VC you should. The drawbacks associated with VC; loss of ownership, ceding control of your company to someone who probably does not know what they are doing, forced friends and family hires, etc. are substantial. Owning 100% of your startup and bootlegging is probably the future of entrepreneurship and should be the first goal of any entrepreneur.

VCs often have huge, but fragile egos. The huge ego comes from the fact that they are used to having entrepreneurs come beg them for money. The fragile/insecure ego comes from the fact that they haven't done much, are afraid of loosing their(highly paid) job and have no transferable skills and they know that the industry is going to have a shakeout.

If a VC does not say "no" and are not in communication at least every other day they are not going to fund you. Look at what they do, not what they say. If you are not one of the top three deals in their stack and they aren't actively working on diligence, just assume it is a "no" and move on. I'm not trying to defend this behavior but dealing with difficult people is part of being an entrepreneur. Imagine how much worse it would be if one of these bad VCs actually funded you and ended up controlling your company.

I was at the panel, and the VC community has an awful PR problem. There were a lot of things that bothered me about the VC responses...

Funding your friends: When the panel was pressed about secrets to cut through the clutter, they said don't bother emailing in plans and get introduced by a trusted source, essentially a friend. They went on to say that VC is a 'hits based business.' Well, a 'hits based business' where you fund stuff from your friends seems pretty dumb.

No repeat business: Adeo pressed the panel to tell stories about repeat business with good entrepreneurs that they had funded previously, stating that successful entrepreneurs try to avoid venture capital, and nobody had any stories. They all mentioned, on the other hand, that thousands of entrepreneurs come through the door every year, and some of these were great entrepreneurs because they 'once worked at Google.' Adeo said, '10,000 people show up in an african village when the rice truck comes, but that does not mean that anyone likes the men with guns on the truck.'

Get ready to be fired: Adeo asked the panel what a founder could do to avoid being fired, and the best advice was to 'prepare to accept a different role,' which Adeo clarified with the panel to mean being demoted. Every VC on the panel admitted that they start preparing founders to be fired during the term sheet negotiation, so it does not come as a surprise later.

Does any of this bother anyone else? And, this was the tip of the iceberg...

#8 @nomer makes great points.

(1) If a VC is not focusing on your deal with follow-up and diligence requests, then the deal is dead. Assume VCs are going to engage in bad behavior, and hope for the moment while pitching when one does not... Then, you may have a deal.

(2) Everyone who closes a round should write a detailed review of their funding partner a few months or a year after the deal is done. Pitching can be bad, but working with certain VCs can actually be worse (believe it or not).

@nomer --

These are not petty criticisms because:

First, rude behavior is uncalled for. Period. Rude behavior is unprofessional. Even if the other person is rude, professionals should behave professionally.

Second, wasting the entrepreneurs time cost him/her time and money. This is rude and detrimental to their effort.

Third, this has nothing to do with "never ending bitch session about how VCs did not fund your company". Anyone who has ever dated has gotten a "no, not interested." Sometimes that "no" can be changed, sometimes not. No sane entrepreneur should assume just because they print up business cards with the "CEO" title that they are entitled to cash. VCs are not a charity. Nor are they giving out no-strings-attached grants.

Fourth, the entrepreneur respected the VC enough to ask for the VC to be part of the company. The VC should accept the complement and spend the 15-60 seconds needed to send a reply with at least one sentence of feedback.

I personally have no sympathy for anyone that whines about not getting funded. Hell, I am not getting funded at this point and I am not going to whine about anyone who has turned me down.

If the VCs want to only fund their close friends, I don't mind that either! Just tell me that so I don't waste my time or theirs. If this means they miss out on great deals, only the LPs have a right to complain about this.

Bottom line: empathy and clarity will go a long, long way. A "no" should be delivered quickly, clearly, in writing, with meaningful feedback, and without being a dick.

I still think most of this comes down to basic courtesy (the polar opposite of arrogance). And founders and CEOs can be arrogant, too... although it would be hard to perfect the arrogance of a young VC.

After developing an idea and figuring out how to make it into a product, we work hard to develop our busines plans and refine our presentations. We don't necessarily deserve funding but we I do think we deserve a fair hearing - after all, it's the VC's job to write checks. They need our good ideas just as much as we need their money. Today, perhaps they need us even more.

I think giving an entrepreneur 30 or 40 uninterrupted minutes to hear their story without having to text your girlfriend or leave the conference room is a basic courtesy. I wouldn't do that to a vendor or a job candidate, a VC can do the same.

After reading the comments the word that keeps coming to my mind is integrity. This is not to imply VCs lack integrity. It means I expect VCs to communicate in a direct and timely manner. I do not expect anything more - particularly at the startup stage. From the entrepreneurs perspective, for the relationship to work, it must be a win-win. The vast majority of VCs do not view that way and that is where the issue of integrity comes into play for me. Are both parties being clear, direct and honest in communication?

This is important for startup entrepreneurs because, lets face it, if your company needs more than Series B you will not be around and the likelihood that you will receive any significant returns should the company succeed in the future drops significantly. I do not expect to be given anything but there continues to be a huge disconnect in expectations by both parties that can begin to be addressed by both sides discussing the reality from the beginning.

My second addendum.

Most of the positive ratings come for entrepreneurs reporting a quick considerate "no".

There are also many (and thus worse!) negative ratings from entrepreneurs who were funded, who only discovered later how bad an investor was as a board member. And (drum roll please)... those bad board members turned out to be rude, arrogant, etc.......

And this is where it really hurts VCs. Even if the VC is offering the only term sheet, any entrepreneur worth her salt will check here and walk away from a VC with a bad ranking.

90% of the *praise* is when the entrepreneur is treated well, but not funded!

Once again, as a group we are not demanding that you fund our anti-gravity, perpetual motion, warp drive. Just politely send us a note explaining that you are not interested but will be happy to fund us after research has discover a error in thermodynamics and relativity theories.

Will there be the stalker-types who are adamant and persistent? Of course there are -- but would you fund a CEO who wasn't? Take this as a sign of praise and don't piss on the fanboy. Watch "Incredibles" sometime - the fanboy turned villain had a bunch of fundable ideas didn't he :-) ?

Bottom line:
-------------------------------------------
A positive feedback cannot be purchased.

This is a solvable problem without demanding charity only humanity.
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It would be great for people here to share some ideas/suggestions for alternative funding sources. One of my points is that the guys who did not take VC and ended up building a company are the ones to listen to.

A more passive approach might make some more sense for lots of VCs. They tend to get into trouble when they try to add value. Remember the primary value add of VCs is money, everything else is a bonus. I have often seen a very active board member inadvertently destroy lots of value.

One of the most fun ways to test if someone is respectful is to go to a restaurant and see how they treat the wait staff. If they are a dick to the busboy then they will be a dick to you.

In business what goes around comes around. I am a serial entrepreneur and a limited partner. So, I see the issue from both sides. I think that many VCs tend to operate by their own rules and the quick kill mentality makes for arrogance and rudeness. Some of the luminaries in the business happen to be some of the most personable people that you would ever meet. It is unfortunate that it is not the rule.

For my part, if I feel that a VC has not treated me in a professional fashion, I will not do business with that VC again. That means that I might be the person that you approach for the M&A of your favorite company and I may not take your call.

In the VC game, the entrepreneur is likely to end up representing an outcome for a portfolio company. As such, everything cuts both ways. Sometimes it just takes a while

My only addition to the list would be:

6. "Can you look at the b-u-s-i-n-e-s-s I'm showing you even if it isn't the 15th version of the hot trend you heard about last night over drinks?".

I love being right. I was just asked to look at a company for M&A that has funding from a VC that dissed me. This one is going to be very interesting. Wonder whether I should spend the whole meeting typing on my Blackberry. :-)

The fundamental problem is that "VC doesn't scale." The reason it doesn't scale is because there aren't enough good companies to invest in. That means there is more capital than quality entrepreneurs.

You could argue that this is an indictment of entrepreneurs (for not providing sufficient quality companies) more so than VCs. Maybe it's time we stop pointing the (middle) finger and take a look in the mirror?

@1. You must be joking. There is no dearth of talent. Nor talented opportunity. What I've witnessed firsthand is that talent does not always get funded, and what does get funding often leaves me shaking my head.

I 100% agree with #2. VCs are "clubby" investors, many times picking random newbies from top schools that they themselves attended or old friends to back.

I think fnazeeri is wrong here. The problem with the VC model and even the stock market for that matter is that the laws of supply and demand are not efficiently applied. Basically, the information that separates good companies from bad companies and good ideas from bad ones is not clear. This means that we expect both VCs and stock market investors to make decisions based on some clear criteria to choose good companies but what they do is pick firms that are represented by people with good networks, good connections or just lucky. As you all know, one of the laws of sales is "It's not who you know, it's who knows you". You can say that the stock market model is broken just as the VC model is broken. The pattern is the same: a crowd of "smart" investors chase few chosen or well known companies until everyone crashes and burns. A lesson here can be for a lot of us to play this market the way it is and profit from its inefficiencies. The VC model will not disappear just as the stock market and real estate speculation will not disappear. They always come back.

Ok, now this is getting good. Fred's "math problem" posts argue that, based on exits (which has nothing to do w/ VCs) there is only the capacity for $10-12 billion per year in VC investments (which is about half the $25 billion historical number). The "exit" numbers are determined by the IPO and M&A market. That market in turn defines the size of the VC market. In order to double the VC market, you have to double the exits. @2-4, how does that happen?

Good question fnazeeri. I think Fred's problem is that he is being too rational. You can't. A 5B deal today, could be a 25B deal next year on the same company. The same way a house in the Inland Empire was worth 1MM 2 years ago and it is 300K now. The same way Facebook was worth 15B a couple of years ago. The VC model does not work right now because the exits are too cheap but they sure worked in the late nineties and mid 00. A lot will go out of business but they will come back. There will always be people or institutions with too much money to invest in professional money managers. VCs are just that, money managers. Basically, we as entrepreneurs think that the VC model is broken because they are just not good at picking companies. I say to that, the VC model is not more broken than the stock market is. Is the problem with the stock market that there are few good companies or is it that a lot of money moved to the side? I say it is the later. VCs are just not as smart as we think they are. They are just as stupid as the hedge fund guys turned out to be.

Bottom line. The VC model and the market model in general is not very efficient. It will keep being that way and I think we have to learn to profit from it.

@ #4/#6: I didn't follow the argument. Are you postulating that VCs are bad stock pickers and that if they picked better the exit market would double?

No. VCs are just market followers. Think of real estate speculators. 7-8 years ago everyone started borrowing money and "investing" in real estate. Some of the houses they bought were good and some were awful. So, builders started building a lot of crappy houses which the "investors" bought because everybody else was doing it. Then the crash happened and a lot went out of business. The same is happening with the VCs. A lot are going out of business but they will not go away altogether. All the talk about "no scale" etc is just over analyzing. Skype was valued at a lot more a few years back but is lower now. Facebook was valued at a lot more a few years back as well. Would we have said in 2005 that VCs business model can scale?

Fred is a VC. He is scared and I don't blame him. He can't raise money and the value of exits is lower.

Bottom line, it is not true that there is more money than talent. Most of the time there is more money than good judgment. When VCs were flush maybe they did not think hard enough where to put their money. After all, why would they be any different than all the people who made up reasons why house prices would go up forever? Are they smarter?

I am not going to cry that some MBAs playing with other people's money are going to go out of business now. Maybe their friends will find them another cushy job where they can pretend to know what they are doing.

Sorry Furqan, normally love your insight but I think you're wrong here. As VC's have gotten more "mature" in the way they pick companies, they have gotten worse at picking good companies.

I agree there is a lot of crap companies and entrepreneurs out there. But there are still more "good" people/startups than the # that are getting funded right now.

Follow on thought:

Those with the gold make the rules. Something that's happening more and more is entrepreneurs flexing to meet what a VC wants in order to put food on their table. The poor results of the last few years doesn't mean there are few good entrepreneurs - it means that what VCs looked for was wrong.

The problem isn't a VC's ability to recognize/"pick" a good company, the problem is that most VC's think they can dictate what will and won't be a good company. They need to get out of the way and let entrepreneurs do their jobs.

It definitely wouldn't be the first time I was wrong! But I'd like to get to the bottom on this... This is a huge point for entrepreneurs, VCs and the whole eco-system. The argument seems to be that VCs are bad stock pickers and that is the cause of the market "not scaling." I'm open to being convinced...can someone provide non-anecdotal evidence to support this argument?

I don't believe it is correct to look at the problem backwards and say that because the average exits were $X Billion per year, that is all the system can handle.

The current lack of exits is definitely recessionary. Many profitable companies can't go public now and M&A valuations are down. But that will come back in 2010, 2011 at the latest. Good companies will be able to go public or be acquired at healthy, fair valuations.

Looking at the pharmaceutical and medical device industries, there is a huge appetite for new and more effective drugs and devices - by both the end users (physicians and patients) and by big companies that need to fill their pipelines. I believe that big companies (the Pfizers, Boston Scientifics, and Strykers of the world) would acquire more products/companies every year if they were out there. There are so many unmet medical needs, I don't see how you can argue with that.

On the IT side, I'm not sure. But I do know that consumers and businesses are always looking for products that will save them money or will provide more entertainment or will (fill in the blank). There are no lack of critical needs in any industry.

An observations is that the VC community seems to be overloaded with VCs who don't have the experience to know what it means to be an entrepreneur, and there are too many 'fast-food' entrepreneurs who think that creating an iPhone app is all it takes. These two issues feed off of each other, IMHO.

@fnazeeri: I don't have the data to support the conclusion that VCs are bad stock pickers, but I believe it's easily derived if you buy into one basic assertion: good companies with solid value propositions don't have a problem finding exits. If you believe that, as I do, then the declining performance of VCs over the past few years can be plotted using the ratio of investments to exits.

As almost always, Furquan is right on the money (and so is Wilson.) The system IS broken, and what's needed here is innovative thinking about what innovation financing looks like in the 'new' world.

The problem (and one that unfortunately I see around here all too often) is that we hyperactive entrepreneurs have a 'kill the messenger' mindset, with completely unrealistic prescriptions based on completely unrealistic understandings of how the early stage funding market works. It would be much more productive if we could stop the VC-bashing (and angel-bashing, government bashing, indeed, everyone-bashing) and think through solutions that take into account the essential underlying fact:

STARTING UP AN ENTERPRISE AS AN ENTREPRENEUR IS UNBELIEVABLY RISKY, AND THE LARGE MAJORITY OF STARTUPS FAIL COMPLETELY, TAKING DOWN WITH THEM ALL THE CAPITAL IT TOOK TO FUND THEM!

That's why banks don't lend money to startups, and that's why you don't invest your grandmother's last nickel in funding your latest brainstorm. It's also why VCs (who are not horned, evil beings out to rape entrepreneurs) do the best job they can at trying (and usually failing) to invest the funds available to them in the long-shot-but-high-potential future rock stars.

If you have a better way to do it...then do it! But (a) don't assume bad faith on the part of investors who are trying to bet on supporting early stage entrepreneurs, and (b) when you come up with your better way, it had better take into account the fact that that ANY investment ANYONE makes in startups is more likely than not to evaporate. This means that your miracle solution has to work for us as entrepreneurs AND them as investors. Get both of those figured out, and you'll have a sustainable model that works for society and the economy as well.

The data doesn't actually show that there are too few good companies, only that too few good companies are funded and allowed to succeed. Two types of bias of ascertainment muddy the interpretation of the number of successful companies. First, there is the assumption that the funded companies are more likely to have made money than the companies that did not get funded. There would be more successful companies if the VCs were better at choosing companies. One simple example that demonstrates this problem is the fashion issue- every VC wants to finance the business model of the year and ends up over-funding that type of company and under-investing in other business models.

The second problem is poor management of their investments in well-chosen companies. Most long-term entrepreneurs or employees of venture-backed companies have a pretty clear idea of what I mean here. VCs destroy or limit the value of great companies in at least two significant ways: a) by demanding unrealistic growth plans and b) by putting in compliant/incompetent managers.

Many (but not all) VCs will only finance companies with unrealistic growth plans. They then demand specific milestones and drive the company's management to meet them. Sounds reasonable in principle, but for almost any interesting, tech- or science-driven company, plans in business are like those in battle- great to have but don't expect them to survive the first engagement with the enemy. It is easy to see if a company has met milestones, but it takes a true understanding of the technology and market to know if the company is actually progressing towards profitability. VCs who invest in a business they don't understand are in a real bind- they can't tell if it is succeeding so they fall back on milestones. Management often ends up pursuing milestones that sounded good six months ago when we didn't understand the problem but are at a best a distraction now and at worst end up sucking most of the company's resources. I have watched good companies devote a significant fraction of their technology development resources to meeting irrelevant goals simply because management was not willing or able to get the VCs to understand the actual progress.

A related problem is the VC tendency to pick their buddies to run their companies- the classic replace the founder when you get financing scenario. This is sometimes the right choice but often results in a company that is set up for problem 1), pandering to the limitations of the board. If the VC group doesn't understand the company/market/technology then they are unlikely to be able to tell if the CEO they choose understands it. Trying to build a technology company with a CEO that does not understand the technology is not a good way to optimize returns from an investment. You end up with an investment that looks OK or even good that is under-performing its potential returns by many-fold.

Summary: better VCs yield better returns and better companies to work for. As mentioned above, we need VCs that really understand what they invest in. It is the acme of arrogance to think that you can pick winners in a field where you don't understand and an extension of that arrogance to think that you can then choose and oversee the management of a company that you do not understand.

Furqan, I also have to admit that your posts are always insightful. You are wrong on this one though. So is BeenThere.

The VC model is not broken. It is just going through a difficult time. BeenThere, starting companies is hard and the risk of failure is high. That is true. What is also true is that VCs follow the crowd and there is data for this. How many social networks companies were funded? How many "internet" companies were funded? Time and time again VCs have shown themselves to lack imagination and fund dull ideas.

The VC model is not broken because, really, there is no better way to do this. There will always be more ideas than money and the money has to choose where to throw itself. Also, there is no clear rational way to evaluate if an idea and its execution will make money or not. This loosely resembles the stock market. No one yet has come with a sure way to make money in stocks and lots of people follow cheerleaders to their financial ruin. Basically, things will remain the same and we have to learn how to profit from the situation.

There's a lot of math in these posts (especially at Fred Wilson's link) and I think the issue is actually a lot simpler for two reasons. Unfortunately, it takes a bit of math - though easier math - to illustrate the point.

First, to address the issue of too much money chasing too few deals, I think the market is perfectly capable of working through that. If VC firms aren't investing or investing in crappy deals, their limiteds will become disenchanted, won't sign up for future funds and the funds will die natural deaths.

Second, I view the math in specific deal-focused terms, not global terms. You should note that I'm in the medical device space so our exits are scaled a bit differently but you can easily run this exercise for your own venture or space. Rich Ferrari at DeNovo ventures wrote an excellent paper about this subject late last year (link: http://www.denovovc.com/articles/Star...).

Rich essentially tries to "back in" the math to see how a deal will work out. Ventures are taking longer and exits are smaller than they used to be. If the $20 million Series D investors want to get 2 to 3x and the liquidity event is projected to be $200 million (perhaps an optimistic number these days), that implies a Series D pre-money of $50 to $80 million. Assuming there was an expected 50% mark up over the prior round, that implies a Series C post of $35 to $55 million. If the Series C raise was $15 million, then the pre was $20 to $40 million. Etc., etc., etc.

Run the numbers and you may end up with negative values for the Series A or even the Series B. This is not good for founders or any early investors who can look forward to the downstream squeeze from late investors.

So you don't have to look at it globally and use Gaussian curves, just look at your venture and your comparable liquidity events and back in the return expectations and amount of financing required for each round. This is the calculation I'm seeing VC firms doing. So if you can make a reasonable argument that the Series A can get 10x, the Series B 6x, etc., you have a story. If not, you don't.

In the absence of a major success (ie, $1 billion or more) - and those valuations are rare in our space - how are we to get funding at reasonable values? The venture expectations may just be unrealistic and that doesn't serve anyone well.

Great discussion, I'm still not convinced (call me hard headed). I'm a visual person, so here is my crack at trying to be specific with the "math problem."

VCs don't control the "exit" market (M&A and IPOs) nor do entrepreneurs for that matter. In order to double the size of the VC (and thus startup) market, there needs to be a doubling of the "exit" market. Using numbers (and not words) can someone explain to me how that works if VCs are "better stock pickers?"

I don't see the problem.

1) Even if the VC model doesn't scale for the average VC, it doesn't matter because all you need is to beat the other guys to win (you don't need to swim faster than the shark, you need to swim faster than the other diver - Scott Adams). So be a good VC and everything will be fine.

2) I actually think the exits can scale significantly (say 2X current situation). There is no much innovation possible out there. Think of it this way: could we pull two years' worth of exits into one year? Why not? Is there an inherent reason that the rythmn of innovation is capped? There are some tactical improvements that can be made (not investing in 15 different social networks, etc.). That may not give you 2X on exits, but in theory at least, I can't find a reason for a cap.

So everything is fine.

I agree.

The core argument that fnazeeri is making is (based on what I see and understand) is that too much money is chasing not enough deals that can go to M&A or IPO (would go IPO or M&A).

I think we all can agree to that assumption based on what has been going on for the past few years.

At the same time, I think we all agree that generally the VC community has not been able to be good "stock picker" for the past few years either. I think that is the result of lack of knowledge, vision, and operational experience and maybe too much money on hand that often creates a sloppy behavior (which all of them advise others not to do). Being ignorant and arrogant is totally different problem.

alain94040 - I disagree strongly with your point #1 in the 19th post. VCs don't just need to beat other VCs. VCs are competing with many different kinds of investment classes for LPs attention - from later stage private equity to timber deals to who knows what. LPs don't have to invest in venture capital. And some are reducing their allocation or dropping out of that class of investments entirely. LPs need to get a specific minimum return and if they don't get it, they will put their money someplace else.

I would argue something quite different:

Fred's numbers don't imply the VC market is broken, they imply the internet business model is broken.

As soon as the potential purchasers realized that just buying eyeballs was a risky bsuiness, the IPO and M&A markets began to dry up.

There is too much free stuff on the net. Users now expect everything to be free. Ad funded business models play straight into GOOG's hands.

When entrepreneurs figure out how to generate proper cash flows from the net then purchasers will return to the market and buy those cash flows.

Ah... now this is good. So, if the M&A and IPO deals are only for social networking companies and net based business, then the argument changes.

We all know that there are not that much money available for non-net based companies, according to experts those companies take too long to build and take too much $$.

So, how many net companies can or need to go public anyway!?

There are still unfunded quality deals that VC's are not sophisticated enough in those relevant technologies or that vertical marketplace to understand, then too much money chases only the more obvious and trendy opportunities. This is NOT a slam against VC's as a group, but against the limitations of any outsider (relative to the entrepreneur) of knowledge, understanding, and crystal ball vision of the outcome in taking all sorts of risks (on technology, market acceptance, team, etc.)

The question is whether this means the VC model is broken? Perhaps it is semantics to say it is or isn't. Can you say it is the model that is broken when the limitations are a function of the fundamental limitations and knowledge of those who own and run the process, and perhaps not a fundamental flaw of the basic structure of the process itself? That is not to say that the process does not have room for improvement, however the VC model may just unfortunately be (in its basic form) the best humans can do. The VC model does not scale beyond those opportunities that are easily understood by industry/technology outsiders (investors), or opportunities caught in a popular trend.

So the model may not be broken, but just inherently limited by its human inputs, and "broken" is just an argument of semantics.

On a separate front, if the math is right, then the model is out of equilibrium and investment will shrink or IPO/M&A prospects will need to get a lot brighter in order to re-balance. And while as an entrepreneur it pains me to suggest that, my hope is for the pickup in M&A. But out of balance is not the same as broken.

-Gary

This blog post may be of interest. http://www.pensionriskmatters.com/200...

The discussion is vectoring a little to the lemming problem being part of the cause as to why the math looks so bad. The majority of companies that are being funded seem to be in the internet space, leaving all those companies and ideas outside of that space not available to build value and exit. How many social networks do we really need that have weak business plans with respect to revenue growth. A $250M valuation of twitter with zero revenue is just not A Good Thing.

@26: Great article. Summarizes a lot of the recent discussions here and elsewhere from the perspective of an LP on the VC eco-system as a whole.

@27: I don't think the "majority of VC" investments (or even close) are going into internet businesses. According to this announcement from the NVCA, internet specific investments accounted for 1/6 of total VC invested in Q1 2009. I haven't seen the data over the last several years, but I don't think that the internet deals are crowding out other good investments in the way they were in 1999/2000. I could be wrong tho...

twitter may have zero revenues, but many companies would line up to buy it for $250M.

Here's the MoneyTree report presented in a tabular form. It's good to see there is a spread between sectors, that's not what I've been hearing.

Sector_____Funded___Deals__%Funded__%Deals
software___$614.00___138_____20%______25%
life science_$133.00___133_____4%_______24%
clean tech__$154.00___33______5%_______6%
internet____$556.00___123_____19%______22%
financials__ $108.00 ___17______4%_______3%
other______$1,435.00 _105_____48%______19%
TOTAL_____$3,000.00__549____100%_____100%

Sounds like good way to make a quick buck.... Make money online!

I agree that "pay to pitch" is a Bad Thing, but I'm not sure this qualifies. They're only charging $150 (max) with a limit of ten selected presentations. Nobody's making a profit at that rate....it's not even enough to cover the shrimp dip at the buffet.

"Pay to Pitch" is seldom worth it. But this event costs less than some "dinner with the VC" events. Nobody is making money on this one. The sponsor is just covering costs. BTW, the pitch fee is $135, not $150.

well, for this event, I'll bet a dollar that NONE of the VCs you'd meet have any money to invest. And Pasadena Angels? C'mon, run, don't walk, away from those guys. I know first hand (some are invested in our co.).

If you want feedback, go for it. The investors that are there are more for their own brand exposure, much like real estate agents who have their name and glamour shot larger than the house they are listing and supposed to be selling.

Never seen it work out well for the entrepreneur. Not once.

The panel will gladly explain why angels need 20x return and why the founder should really be happy to be having a moment in the presence of the speakers.

Unfortunately, there are rarely any real investor/angels in attendance.

I have often tried to help startups find funding and I can say that any scheme (gatherings, individual consultants, etc.) that charges money up front is, almost always, a waste of time.

Interesting article, but I am not sure that I agree with the conclusion. As an LP, I am loathe to put more money in funds, as I would expect others are also. Investments in the public markets are not back to where they were and most LPs are still reeling from extremely poor performance of their investments in venture funds. In addition, institutional money has become much more conservatively focused. The M&A market has not opened to cause excitement (nor the IPO market); clearly, investment now is toward the future, but psychology is psychology. I don't see this one becoming more active for a while. It would be helpful if the government targeted some stimulus money in this direction as innovation is not being funded.

I was comparing the numbers from the NVCA (how much VCs invested in startups) to some numbers TechCrunch posted on how much money VCs themselves raised. The comparision is interesting in that it looks like there is too *much* money going into VC, not too little.

I agree with the ideas and the conclusion. Sparked thinking for me about how venture industry might adjust over coming years.

Some big changes, some areas where shifts are already apparent.

http://bit.ly/SF1eq

I agree with with the conclusion. Recession or not, trust in venture funding has been on the decline for years, as are the returns on these investments according to the NVCA. Couple that with the inflated valuations on public companies, and you have a real problem on your hands.

This issue goes far beyond complaining about a GP treating you like crap, it is a systemic issue that requires dramatic changes to succeed. FAS 157 will be the poster child for why funding cannot be raised, but really is the start of some much needed accountability. Over valuations in the stock market is what triggered the 1929 collapse and depression, and it again played a very large role in the recession we face today.

I am not a big fan of regulations, but if people cannot play fair then screw them, it is now time to start making them accountable. Over valuations and false hope are what has driven venture funding for years, not realistic sustainable businesses.

I am working on funds in all parts of the country right now, and the issues are all the same. Most have no money. Most have lost many of their LP's as they have no money. Broke is broke, and it causes a lot of fear.

Many of the high wealth people that I know look like scared children right now. These are people that thought they had a net worth of 20 to 50 million dollars a year ago. What assets they had took a major haircut, then the banks called notes due, cancelled line of credit used to operate their business and then to add to the misery, sales dropped off a cliff.

It is hard to believe that business owners could get hit in that many directions all at one time. Now take that same person and try to guess where they are going to put their money once they begin to earn it back. Mattress or venture fund? Who knows.

Lots of good points raised, but two that jump out:
1) What's Wrong - Well, a lot with a lot. Most of all valuation and expectations. You point to 157's impact. IMHO, the big issue is what these long term investments are worth to the investors vs. to anyone right now. For now, well, the secondary market is best indication. Also see Fred Wilson's view on this:
http://bit.ly/169gVM
2) Spin - asset classes are about return to investors net fees and relative risk/return performance. While some venture funds have no doubt "added campuses not just buildings" to universities, venture returns need to be substantiated to avoid a lot of problems.

To the VCs: "do not follow where the path may lead go instead where there is no path and leave a trail." I hope you learned your lesson - this time. To the institutional players: time to reinvent yourselves, or get lost! To the private investors that used to support the "asset class:" You are entrepreneurs; self made, tough, energetic, creative, and tolerant. You relate to other entrepreneurs. When it comes to funding companies your experience is imperative (directly and indirectly). I look forward to your return.

VCs do not invest in "startups" or "seeds". VCs invest in growth companies that already have certain levels of traction (# users, revenue, strong validation partners) or they invest in the hot entrepreneurs of the day.

Having LPs slow down the money flow and having the VCs need to triage current portfolios is nothing more than the credit crunch / cash crunch that is rocking the rest of the world.

So - some banks fail and some recover.

But - please, no bailouts or people's money to the VC level of Risk investing.

It is not good news for those who want VC. For those who have been reading TheFunded for awhile, this is more like confirmation of what we have learned, which is that taking VC is a bad idea in the first place.

If the VC market here in the US isn't working then we don't really have a competitive advantage compared to EU, India, or China. I do feel strongly that we do need a professional investment industry for early stage because there are plenty of business innovations that need more money than an angel or strategic partner can provide to get done.

My beef with the VCs is that they forewent the entrepreneurial evaluation and nurturing charter and instead started to emulate private equity and rolled in fresh MBAs that can't be delegated the task to figure out how good an idea is in the context of the market. The skill to evaluate ideas and how to make businesses out of them seems to have disappeared. With the essence of their skill decimated of course they are having trouble investing their funds.

Anonymous #2 - Funny you should mention, "I do feel strongly that we do need a professional investment industry for early stage because there are plenty of business innovations that need more money than an angel or strategic partner can provide to get done."

Please review - http://www.slideshare.net/ElliottDaha...

The other side of this coin is that pretty much all of the stimulus monies are benefiting established companies. It was my hope that Obama would realize that real economic growth will only come from creating new disruptive technologies and growth companies. We are at risk of missing an entrepreneurial cycle and that will have a dire impact on the overall economy. I don't see the VC and Angel money coming back any time soon.

Absolutely, the capital gains tax preference is there to reward putting capital at risk. However, we all know that the issue is not that big, since for years there has hardly been much gains to talk about...

I agree completely - your money - get capital gains tax . . . .other people's money - pay normal tax rates

Why would entrepreneurs want to increase the cost of capital?

Any tax is an inefficiency but sometimes it is worth it to disincent behavior, for example there is a tax on NO2 and SO2 emissions in the US which is what eliminated the "acid rain" problem of the 70s and 80s. I'm not sure what benefit would become form taxing carried interest at ordinary income rates. It would likely mean less money invested in private equity and hedge funds (which in turn means higher cost of capital for entrepreneurs).

I agree with fnazeeri. Higher capital gains tax on anything is not good for entrepreneurs.

I wish all capital gains taxes on startup company investments would be eliminated. That would definitely increase both angel and VC investments in companies.

I completely disagree with the post. Raising taxes on capital, even whilst chanting "fairness" will result in reduced funding for entrepreneurs. But I fully expect that within a year or two BHO and his communist friends will do far worse. Venture funding as we have known it will be largely gone from the US. Sad that so many deluded valley types supported the dems.

Taxing carried interest will raise the cost of capital and reduce the pool of money available for start-ups - already only a tiny percent of tech companies get funded. We should be sending a message to regulators against this. Don't worry the worst VC will be going out of business soon anyway ;-).

Out of curiosity, I don't see how taxing the carry will raise the cost of capital? I get that it makes being a VC less attractive, but...

Will VCs go out of business? Will less new VCs enter the market? Will more LPs cut back their VC investments?

Taxing carry is simply eliminating a stimilus. The question is whether the stimulus was productive or counter-productive. I'm not convinced that it hurts entrepreneurs. If the government passed a law rewarding venture capitalists by forgiving them all taxes, you'd have a stimulus that would create a horde of newly-minted VCs who wouldn't know a server from a waiter. Such stimulus could then tilt the landscape against efficiency, since newbie VCs would potentially suck funds from more qualified VCs, and also cloud the entrepreneur's outlook by over-funding competitors willy-nilly. If we let the professionals stay in the game for the right reasons, I think all parties benefit in the long run. In fact, the VCs faced with a lower take-home on carry, would now have to produce real capital gains, i.e., choose/incubate winners, versus sitting and collecting a paycheck.

You make valid points, but the big problem is that (1) there are more bad bankers than good bankers, (2) investors often prefer to deal with the management directly, and (3) most investors refuse to pay the fees.

So, if you managed to find a great banker, which is like funding a needle in the haystack, you still have to do a lot of work, you may hurt your chances, and it will cost you real money, potentially from your pocket.

A better idea would be to study up on tactics and then at least try to do it on your own...

I strongly recommend not using bankers for your fundraising, especially for seed, Series A or most Series B deals. If you're raising a $50M later stage round, then you probably need bankers. If you're at that level, you're probably already talking to bankers about M&A and other options.

I've worked on both sides of the fence - evaluating deals for a venture capital firm and angel groups and raising capital (over $10 million) for 2 companies that I ran as CEO.

From these experiences I've observed that most VCs like their screening system the way that it is. Many believe that if the entrepreneur can't network or maneuver their way to get a "warm" introduction to a VC, then they are probably not worth investing in.

Being a CEO (whose chief job is fundraising) of a high tech or life science startup takes a ton of intelligence, creativity, networking ability, and guts. If a CEO can't network their way to a VC (who, in my experience, usually want to see good deals), then how can they network their way to see customers and partners?

Is the fundraising process hard? You bet. If it was easy, then everyone would do it and venture returns would be even worse than they are now.

I think bankers are helpful in selling companies but for Series A rounds there is no company it's just a few people and an idea. If the team is good, the bankers get in the way. If the team is bad, bankers can't make up for that.

I don't know about the preferred stock idea, but you're right that there's a perverse incentive against being capital efficient if you raise venture investment.

If you get money, your board will expect you to spend it--even if you don't have a good business reason to do so. Taken to an extreme, this leads to nonsense like shooting gerbils out of cannons during the Superbowl.

Ironically, with the bad economy right now you can get away with hoarding cash--but this is exactly the time a cash-rich company should be out there locking up talent and resources at a really attractive price.

If the preferred stock has a pay-to-play provision you may want to consider now the common conversion ratio. Since the board can change the charter with (typically) all classes voting separately, it may be more beneficial to be the controlling interest in common stock (versus a very minor holder of preferred).

Consult with a tax attorney, but...

Be careful of the tax effect. In theory, the primary reward you get is that your existing stock - common, preferred or otherwise - is now increased in value. There is nothing wrong with getting compensated for your labour, in addition to the increase in the value of your equity. But any valuable compensation is subject to tax effects. In other words, the fact that your pre-existing equity went up should be subject to tax only when you sell it for capital gains. But if you are rewarded with stock (of any kind: common shares, preferred, etc.), you should be taxed immediately on the value of that equity as compensation for services rendered.

Separately, the VC might disagree, and say, "your increased common equity (founders/cheap stock) value is your reward," but that is always subject to negotiation.

I agree with comment #2. If you have a "pay-to-play" provision and you don't participate your prorata in future preferred financings (which can be VERY expensive!), your preferred stock will convert back to common. Not the worst thing, but you've been compensated with expensive stock that is now cheap stock.

If you do this, make absolutely sure that your preferred stock will always be exempt from pay-to-play.

First, congratulations. I am a venture lawyer, not the one-of- a-kind-cuff -link type. I think a VC would simply view that as going into the valuation equation and you would get a higher valuation because of your success. If you want preferred stock, you can convert your $5 k into it and pay like the VC at the negotiated valuation.

The fact that you were able to do it on $5K tells me a number of things. First, this is impressive. Second, you might want to reflect on taking VC money. It changes an organization and you will find yourself with a professional CEO burning cash.

If you are expecting preferred stock to be given to you, be careful of the consequences.

If you convert common to preferred, what is the point? There will be no common shareholders and everyone will hold preferred so there is nothing for it to be preferred to.

Again congrats.

Our Company did "Series 1" preferred for founders. It has no liquidiation preference - but all preferred votes as a class. I don't have a sense as to whether you want preferred for liquidation (or other) preferences, or if it is more of a control/voting issue. If it is the latter, a Series 1 Preferred might be something to think about...

I've been in a similar situation in the past where I started a company and did well with way less cash than other people in my space.
The main thing this tell investors is that you're frugal. Other than that, they don't care too much if you put $5000 or $5M into the business. They care about what the opportunity is, the quality of your team, etc.
In this environment your best reward will be to get funded. Most people don't usually, and in this environment, it's even worse. As far as the terms go, you want to negotiate, but I would advise against trying to do anything exotic. It'll be a turn off to the the investors.

Thanks, good pt. on tax, you can always go options over equity grant. Just feeding the discussion ...

PS. Bootstrapping is my DNA ( i just typed NDA by accident) ... am the proud founder of Bootstrapper.com

PS. I actually am looking to 'fire' myself and to find a professional CEO to bring in if it is someone who can operate more effectively than i can. I'd have no problem with that. In fact i'm always interviewing candidates from the top of the industry. The key is making sure if you remove yourself or are removed you keep your vesting and voting. If you lose those, well then you're fucked.

If you can get that deal, you're a blinkin' genius. Please report back to everyone here at TheFunded so we can share the fun.

Preferred Stock exists for one and only one reason. So the VCs get whole before anybody else gets anything.

I've seen founders get their cash contributions recognized as preferred stock, but only rarely, and only after a bruising battle.

As it stated in the pop-up message, I believe we'll learn more about the logic of this decision after April 1st is behind us.

I hope this is an early April Fools joke

I was at lunch with Adeo on Thursday, and he was telling me about an "off switch" for the site in case of a "legal emergency." I also know that he's out of town in Utah this weekend... TBD?

TheFunded.com has been a great resource for all of us, and I personally thank Adeo for his bold moves and willingness to take a personal risk at great cost to start and fund this site. I wish the VC's would be willing to take such risk...perhaps we would have more jobs and employment, and more commercial solutions to problems through carefully applied business skills and technology. Funny what happens when lawyers get involved. Adeo, thank you.

Adeo,
Please tell me it's a joke, April Fools, something like this?
Saw the notice and my heart sank.
I am note sure if our investors that committed to our second round just a few weeks ago will come through - so we are back in fund raising mode.
And I know that I will be like a babe in the woods without the valuable resources of the funded and the feedback of my fellow founders.
But just in case: A million Thanks! for all you have done so far. You rock!

Extremely useful for founding CEOs on all aspects of startup from operations to fund raising.

Fellow Members,

The Phoenix Will Rise From The Ashes!

This better be an April Fools joke...I'll miss this site way too much if it isn't.

A VC and an entrepreneur walk into a bar. The entrepreneur buys the first round. The VC drinks his share and orders a second round. When the bartender comes to collect the tab, the VC says... _______________________________ .

any person, company or institution that doesn't take constructive feedback isn't someone you want to deal with...period.

This might be a stupid post but why don't we as founders put contracts into place that forbid such firings? I get that founders may need to step aside but contracts can foresee such scenarios as can contracts foresee scenarios where firings are justified, morality clauses, 5 years of loss etc... If I break the law, by all means fire me!

Why do we as founders need to accept money with such strings attached that result in us losing our shirts, and our company? I need money for a bootstrap but I would honestly prefer to not take money than sign with a VC that will kick me out in a year. I'd rather toil away and have something than get millions only to have nothing.

In a distressed capital market as it is now VC's agendas diverge from that of the Founders and CEO. The latter want to survive and build the business through a creative re-engineering of the business model whereas the VCs want to retain their relationship with their LPs. VCs view their portfolio companies as a means to an end unlike the founders who want it to be the end.

Both of these agendas are clashing now that VCs are under stress to justify their existence by the LPs who have been patient for the most part. The trust is broken and a lot of VCs will have to fold shops or do unnatural acts like mergers of disparate portfolio companies for conserving cash to ride out the storm for themselves.

Both VCs and Founder/CEOs need each other to build a company. But many do not seem to understand this symbiosis well. Too bad. The result will be a lot of misery all around.

In the absence of better CEO contracts, avoid too much control ending up with one VC (sometimes easier said than done). One of the best weapons to use against an unethical VC is one or more additional VCs who get screwed if you get screwed.

"A number of mid-tier funds have already imploded when their LP's just said 'no.' "

Can you name them please?

make your own deal. Do not be dumb. after the dance, few are happy.

The point in reclaiming cash from existing investments is an attempt to reclaim virtue and use the soon to be prior investments as "Judas goats", to pack on them the sins of past, and to encourage a last ditch gamble by LP's to attempt to recover losses - won't happen.

As to T&C's, employment contracts, ... they only go so far to defend - anyone that thinks they can attempt to salvage an investment this rudely won't be put off by breaking *any* contracts - like weasels, they just "want the money" and will do anything to get it. After all, they can always eventually settle out of court using new money in the case they don't win the bet - assuming you survive.

nkannan wrote:
"In a distressed capital market as it is now VC's agendas diverge from that of the Founders and CEO."

Um, can you name any scenario, ever, in which the VC's agenda and incentives are aligned with that of the Founders and CEO? I can't.

yet another reason for me to stay away from VCs

Around 2 days ago someone here posted a message saying that VC had become soft and were willing to make a deal even with people they had rejected in the past.

Now this, which is the real situation here?

Does anyone see a madoff/ponzi thing going on with the VCs? Like they may want to reclaiming cash to pay off some of the initial investors, in order to get more money for new funds.

I am not hearing about increased deal flow out there. There is some potential ferver around energy these day; personally I view that as another bubble.

I will try to speak as both a founder and an LP. A number of the VCs have crossover LPs in both old funds and new funds. Fund raising is extremely difficult these days given the losses that the LPs and institutional funds have suffered. When a VC is looking for investment in a new fund and the LP has a position in the old fund, then clearly the LP looks at the returns. I have investment in one fund that has been absolutely awful; I would not put any money in a new offering based upon past performance.

Right now any exit is considered a win for the VCs. I know of one company that was sold for $1. This was done to limit the investment and the founding team was pretty much over ruled.

So, if you are in a closed fund, beware. If not, manage your money carefully and try to create buzz...greed is good (if you are a VC).

Hope this helps

2 you are so right. I have started two companies and both have been acquired... not home runs financially but at least base hits and the product went on to success in the market. But what has amazed me as the engineer/techno-guy who is focused on building a company and a product is how even small liquidity events cause VCs these days to just forego any long-term upside potential and bail for a few nickels. I finally figured out that this behavior is driven by their need to show LPs that something positive is happening. My first company's Series B VC lead had something like 20 portfolio companies and not a single liquidity event in almost four years, so when we got an acquisition offer (3X return on series B investment after 10 months) they took it almost instantly.

Everyone

I have read the posts to this thread.

forget about writing a contract that protects you as CEO. (or as a founder)

VCs must put a deal in place where they "make their money from you, and not from the success of the project".

If they can't put in that deal, they won't give you any money.

PERIOD, full stop.

There is no way that you can get a decent deal from a VC because they can't do them.

So, if you take the money, you have to take the deal.

VCs aren't supposed to me your mother - they just want to make money. If CEO is too dumb to have an exit strategy &/or alternate funding lined up perhaps he deserves to be fired.

This is exactly why we have not taken VC money to date. One of the key reasons I got into my own business was to be rid of the idiocy of the Politically motivated boss. Had more than enough of those at Cisco. Why hire another idiot boss?

Right on! Totally agree.

Eric Hippeau is not the brightest tool in the shed. He has ruined dozens of investments, one of which I was involved with, and his handling of Yahoo is clearly abysmal. If he is a spokesperson, then the VC community could do a lot better than the bumbling editorial he wrote linked to above.

Well, at least they have John Doerr involved - not! Isn't he the one who broke the law with the HP spying scandal, forcing him to resign from the board, and then he is quoted that white male Harvard and Stanford students make the best investments???

Well, if this is the pick of the litter, then Mr. Smith is right. Time for change.

More venture capital available to entrepreneurs would be a good thing. Using the existing VCs for disbursement would be a bad idea on many levels.

Here here, couldn't agree more. Entrepreneurs should be a recipient of stimulus package funds. Startups are the creators of jobs.

Totally agree. VC is broken. Please let us all know how you get this into the Obamastration, and how it is received.

Count me in.

+1.

Thanks for bringing attention to this. Every minute spent snarfling at the trough for government dollars is one not spent creating innovation, jobs, wealth, etc. For the most part, government cannot create wealth, only redistribute it.