A lot of people have been asking lately if the venture model is broken. But it seems to me that it’s just decrepit. Like an aging, rotund former football star, the venture industry is scratching its head and realizing that its glory days are long past. The industry collectively doesn’t really know how to handle its new reality. In the heyday, top-quartile funds might have gotten away with treating their important stakeholders arrogantly, but given that even top-quartile firms have not provided great returns over the past 10 years, venture GPs will need to make herculean efforts and adhere to a strict regimen in order to make the upcoming cut. With almost the entire industry needing to raise new funds over the next two years, there may be few survivors. I propose a three-step makeover plan for those paunchy firms that are on the edge.

Step one: Stop devouring entrepreneurs. These tasty morsels can be irresistible, to be sure. They work for years to create a business, innovate, and execute, and they bring the fruits of their labors to you. GPs, you must learn to control your appetite and realize that these individuals are not going to continue to feed you if you chew them up and spit them out.

A case in point was hinted at in an earlier post about “down” being “the new up” by Michael Greeley of Flybridge Capital Partners, chairman of the New England Venture Capital Association and a board member of the National Venture Capital Association. Greeley made the argument that venture-backed companies “should be considered fortunate to just raise capital, at any price, in this environment.” I don’t mean to pick on Michael, as he is only reporting on the current prevalence of this kind of thinking among VCs, but why should a company be lucky to take in financing that wipes out the ownership of everyone but the venture funds who participate, just because we are now in a tough economy? Venture capital is a long-term game that is meant to take companies to an exit years from now when the economy will probably be completely different.

One could argue that it’s only reasonable and good business to protect the venture firm’s downside at the founding team’s expense, but is that really true? Usually the founders are only left with a small percentage of the company after a few rounds of funding even in the best-case scenarios, so for an additional 5 to 15 percent of the equity is it really worth …Next Page »

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Am interested to hear what people think about this website (www.thefunded.com) where entrepreneurs rank venture funds. I like the concept of shifting the power dynamic and keeping venture funds on their toes but I have a few issues with the execution. My biggest problem is that there doesn’t appear to be any objective quality-control mechanism. There’s an anonymous individual who runs it and there’s no way to check if he has issues with specific funds or if the thousands of entrepreneur-members even exist. He could also choose to selectively post comments/scores or delete others and nobody would be the wiser.

On the other hand, assuming that these are all real individual entrepreneurs and that this guy is above board, the concept is intriguing and has the potential to be powerful. I found it interesting to read some of the comments while others were so biased (to one side or the other) that their value was limited. There’s a clear delineation between the endorsements that are coming from funded companies at the urging of their backers and the comments from disgruntled entrepreneurs who were poorly treated (mostly during the pitch/diligence process). The most interesting potential comments would be those that can serve as due diligence for entrepreneurs. For example the post-term-sheet and post-funding interactions with specific funds. I didn’t see too many of those yet.

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I believe the proposed patent reform act would stifle innovation, which already has many hurdles to overcome, particularly in the earliest stages (when foundational patents are filed). To arbitrarily limit damages and to make it easier to challenge patents shifts the balance further in favor of large companies and lowers the incentive of innovators and technology licensing offices at universities to file and support patents that could have an impact on healthcare, the environment and quality of life. I have heard that there are different views between biotech and information technology “innovators” on this subject and am curious if anyone from the technology (start-up or academic innovator) side can give his/her perspective. I understand how this could be helpful to large companies but how is this helpful to innovation?

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is coming soon

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