VCs Are Not Evil: What Entrepreneurs Need To Know
Jasper Kuria1/25/10Comments (7)
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received their first financings. “Over the last 10 years the entire venture capital industry taken as a whole has had negative returns. If VCs have lost money collectively, that means that entrepreneurs (of VC backed companies) have also not made any money since VCs have liquidation preferences and usually get paid first in the event of an exit.” To be fair, he also noted that the S&P 500 has had negative returns over the same period as well as all real estate purchased after 2003. This prediction of a bleak future for tech entrepreneurs reminded me of the famous Larry Ellison statement about the foolish notion among techies that somehow our industry will never mature and that we will continue to see the kind of successes from the dot-com and Web 2.0 eras.
As for predicting technology trends, Bryant believes cloud computing is a hot area with lots of opportunity. “To me, cloud computing represents an important paradigm shift in how computing takes place. When you look at the history of computing, it is defined by successive paradigm shifts. From mainframes to the mini, then from mini computers to desktops. From desktops to the client-server architectures and then to the Internet. I think cloud computing is such a shift and every enterprise technology needs to be thinking about the cloud aspect to whatever they are doing.”
Schutzler doesn’t think so. In fact, on one of his slides he had a large red X superimposed on top of the cloud computing icon. “Talking to investors about cloud computing is like saying, ‘I stink really badly. Run away from me.’” He instead feels that mobility is that paradigm shift, especially with the launch of the new Nexus One Google phone. “In the past if you wanted to port a popular game or application to the mobile platform, you needed to develop a SKU [stock-keeping unit] for each carrier, each handset, and each platform. In some cases you might end up with 18,000 SKUs. Not anymore, with the launch of the new Google phone and the open platform.”
Bryant, again, differed. “Mobile does not scale. I don’t know why people think mobile scales. There will never be anything that even approximates the Wintel [Windows operating systems and Intel architecture] write once-run everywhere platform.” Drawing on his background with Qpass, he noted that a mobile developer has to be concerned with supporting Symbian, Windows Mobile, J2ME, Linux, Android, BREW, iPhone, Palm, and other phone OS to reach scale.
While Bryant thinks cloud computing is a fertile area ripe with opportunity, he does not believe in “theme” investing where investors pursue a strategy in specific trendy sectors. “Thematic investing is like chasing last year’s hemline. One year it’s the mini skirt, the next the maxi. Likewise, incremental improvements and features are not interesting as investments.” He posits that investors are not well suited for predicting trends because they know just a little about a lot of things.
He prefers to fund entrepreneurs who have spent a lot of time in a given area, have deep domain expertise, and are intimately familiar with the challenges customers are facing. As an illustration, he told the story of Sujal Patel the founder of Isilon Systems. In the late 1990s while at RealNetworks, Patel had worked on rich media serving for Real’s largest media customers and came to the realization that they didn’t have a serving problem, but rather a storage problem that related to large files. The file systems of the day had been designed for much smaller files and were inherently inefficient for storing and making available large rich media files. A storage file system designed just for large files would solve most of the challenges. Sujal went on to found Isilon Systems which had a successful IPO in 2007, winning against EMC and Network Appliance, the two giant gorillas in the storage market. They excelled by focusing on only digital media storage and creating a product 10 times more compelling than the general purpose storage systems offered by their competitors. Bryant recounted, “I made one reference call about Sujal and his boss told me, ‘He represents about 15 percent of the intellectual property of the entire company [Real Networks], which had over 300 engineers at the time.’ That sealed the deal for me.” Incidentally, this story was also told to us by Matt McIlwain when we pitched our product Meosic to the partners at Madrona.
Bryant also noted that DFJ prefers “change the world” types of ideas. Examples of this … Next Page »
Jasper Kuria is one of the founders of Meosic (widgets for social e-commerce). He was previously a product manager at Xenocode and a software design engineer at Microsoft.
Chris DeVore
1/25/10 7:31 pm
Thanks for the analysis, Jasper. Another issue worth noting is that “VC” is not a monolithic asset class – there is huge variation in fund size and investment approach across the industry, and it does entrepreneurs and VCs a disservice to treat the industry in bulk. There definitely are “VC” firms that are better aligned with early stage web companies, but they aren’t (currently) the household names in the business.
I have a related blog post up for anyone who wants to drill into this: http://crashdev.blogspot.com/2010/01/vc-is-dead-long-live-vc.html
Bob Crimmins
1/26/10 3:39 pm
Interesting piece but I must say that, rather than showing that VCs are not really evil, I think Mr. Bryant has only offered an explanation of why (some) VCs behave in an evil manner toward entrepreneurs. If it is a feature of some VCs models that they must hit an out-of-the-park home run one out of ten times and this is just not in alignment with the interests of the other 9… especially given how notoriously poor VCs are at picking the right pitch to swing at.
Krassen Dimitrov
1/31/10 10:33 pm
Shorter Bill Bryant:
“we are not evil, we are just stupid”
which is a paraphrase of Hanlon’s Razor:
“Never attribute to malice that which can be adequately explained by stupidity.”
Of course, anyone with a little bit of brain could have picked which investments by DFJ had a chance and which would bomb out. In the case of GreenFuel Technologies, I sent my study to all their partners in 2007, yet they continued pouring money into it, until May of 2009, when it went bust…
Blue Swan
2/7/10 3:36 pm
VC firms were part of the 90s/00s bubble where a rising stock market was confused with accurate picks.
Having been around the industry, the process of applying for and getting VC funding still remains obscure and arcane. My guess is that in 90 percent of cases, its simply insiders loaning each other money to put out something they can prop up to the small investors.
VC will have to be far more open and accessible to be part of the 21st century economy. The farmer in the field, or homemaker in the kitchen may have as valid a business idea as the cubicle worker who wants to make yet another Outlook plugin.