Venture Model Makeover & Diet Plan—Step One
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 »