TheFunded - Canarie
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TheFunded.com presentation on the state of venture capital delivered to Harvard Business School faculty in October 2008. See:

TheFunded.com presentation on the state of venture capital delivered to Harvard Business School faculty in October 2008. See: here.

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  • Full Name Full Name Comment goes here.
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  • This is great presentation. I agree with the whole issue. At www.growvc.com we will be tackling this issue.... and launch a whole new way to get be funded.

    <br /><object type="application/x-shockwave-flash" data="http://www.youtube.com/v/q1Cy723GqAs&hl=en&fs=1" width="350" height="288"><param name="movie" value="http://www.youtube.com/v/q1Cy723GqAs&hl=en&fs=1"></param><embed src="http://www.youtube.com/v/q1Cy723GqAs&hl=en&fs=1" width="350" height="288" type="application/x-shockwave-flash"></embed></object>
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  • I agree 100% that the VC model is broken.

    But, fixing the VC model won't solve the needs (& opportunities) of the total industry - Venture Risk Investing.

    Venture Risk investing has 3 distinctly different parts through which a company, hopefully, travels:
    1) Seed Investing
    2) Traditional VC investing
    3) Exit investing (M&A and IPO)

    The Seed investor does not demand 'traction' - the VC investor does.

    The Seed investor does not demand a full/almost complete team - a VC investor knows that assembling such a team is what he/she will have to do.

    The VC investor is directed by financial returns - the Exit investor can either be directed by financial returns (IPO) or achieving corporate objectives (M&A).

    I could go on, but you get the idea.

    The VC model is broken and the invisible hand of the market will eliminate some of the ills. Hopefully, good form, grace, a sense of common decency and a strong dose of humility will eliminate the other ills.

    But, let us realize that by fixing the Seed level of the Risk Venture industry, you fix many of the ills of the VC level. By strengthening the Seed level you will bring more valuable companies to the VC level - a more level playing field. By strengthening the Seed level you give a greater opportunity for funding to worthy companies than that which is delivered by the current system of friends&family and angels.

    By working with the Seed Infrastrucuture (incubators, tech transfers and economic development agencies) you are eliminating geographic constraint on the sourcing, screening and oversight of seed companies.

    By working with the Seed infrastructure you eliminate the economic inefficiencies of small bets being placed by very high priced investors.

    Anyway - all I am trying to say is - please think about the Risk Venture Industry as 3 systemically and operationally different parts.

    And, please realize that the first and most important part to fix is the Seed level.

    Thanks,

    Elliott
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  • Mostly very good points. Though I don't agree with reducing vc firms. Basically the vc business is a commodity business now. Most of the people in it are average and not anything to write home about. A few good people and also a good share of idiots. Most are lazy, sheep-like MBAs and spreadsheet toting pontificators. The interesting conversations are when lawyer vcs act like they are engineers. I have no idea why lawyers become vcs - etc. the nokia fund blue.... sort of a joke of a fund.

    The presentation is also right in that most LP returns are (i) due to one or two deals that are hits out of the park and (ii) these don't come from your so called people with a track record or so called experienced entrepreuners. In fact I will postulate a thesis that radical ideas do not get funded, simply because of some of the points made in the presentation.
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  • Mostly very good points. Though I don't agree with reducing vc firms. Basically the vc business is a commodity business now. Most of the people in it are average and pretty lazy and not anything to write home about. A few good people and also a good share of idiots. Most are sheep-like MBAs simply motivated by money and are spreadsheet toting pontificators. The interesting conversations are when lawyer vcs act like they are engineers. I have no idea why lawyers become vcs - etc. the nokia fund blue.... sort of a joke of a fund.

    The presentation is also right in that most LP returns are (i) due to one or two deals that are hits out of the park and (ii) these don't come from your so called people with a track record or so called experienced entrepreuners. In fact I will postulate a thesis that radical ideas do not get funded, simply because of some of the points made in the presentation.
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TheFunded - Canarie Presentation Transcript

  • 1. The Canarie is Dead Something is Wrong in Venture Capital -Q3 2008-
  • 2. The Lofty Goals of Venture Capital
    • Economic Development
      • “fund growing companies”
    • Technology Development
      • “in innovative technology sectors”
    • Shareholder Returns
      • “that generate significant shareholder returns”
    These are all positive goals, but are they being achieved?
  • 3. Face the Gritty Reality of Operations
    • Successful business people raise or join a VC firm
    • Leverage regional and experience networks
    • Fund top companies within their networks
    • Support the companies with their experience
    • Successful business people often tire of the VC model
    • The relevancy of networks diminishes over time
    • Top companies often come from “outsiders”
    • Relevant experience is highly situational
    Theory Flaw
  • 4. In a Model of “One Hit Wonders” “ The story told by Bon French, CEO of Adams Street [a fund of funds] , is that a full 5-points of the 20-points of return over that 20-year period is attributable to a single company exit within a single VC firm portfolio: Benchmark Capital's investment in eBay.” SOURCE: Startup Conversations VC Blog, April 2008 Investing billions over 20 years boils down to getting one hit?
  • 5. The Presentation Thesis
    • Venture Capital is Broken
    • True Innovation is Undercapitalized
    • The Inflection Point has Arrived
    • It’s Time for Change
  • 6. 1. Venture Capital is Broken
    • Money does not flow where needed
      • <10% of companies that require capital get funded
    • The fundraising process hurts momentum
      • Complicated, time consuming, distracting
    • The VC industry does not generate returns
      • Just 13% of VC companies exit in recent NVCA data
      • Hundreds of VC firms have funds that return nothing
  • 7. Let’s Fund our Friends companies in VC networks meet strict VC guidelines other companies that need capital unfunded funded <10% SOURCE: TheFunded.com Membership Applications Google and eBay are in the small number of “other” deals.
  • 8. So our Friends can save Us How many of these M&A buyers were also VC backed? “ Will you buy my other company, please… at a premium?” SOURCE: NVCA / Thompson Reuters Exit Poll M&A IPO M&A IPO Similar number of M&A deals, yet the prices skyrocketed.
  • 9. When the Going gets Tough… 2008 YTD IPO valuations are one third less than in 1998. SOURCE: NVCA / PwC MoneyTree Reports
  • 10. 2. True Innovation is Undercapitalized
    • VC investments are highly concentrated
      • 6 of 17 industries receive >73% of investment
      • “Me too” company investments are common
    • Sectors are selected with inexperience
      • Example: $ Billions invested into biofuels
    • Investments have unrealistic expectations
      • > $100 MM in annual revenue targets
      • Ignoring advances and “foundation technologies”
  • 11. Not a lot of Portfolio Diversity
    • Q3 2008 Investment by Sector
    • Software
    • Biotechnology
    • Industrial/Energy
    • Medical Devices and Equipment
    • Media and Entertainment
    • IT Services
    • Semiconductors
    • Telecommunications
    • Business Products and Services
    • Networking and Equipment
    • Consumer Products and Services
    • Financial Services
    • Electronics/Instrumentation
    • Computers and Peripherals
    • Healthcare Services
    • Retailing/Distribution
    • Other
    SOURCE: NVCA / PwC MoneyTree Reports Where is Material Sciences? How many of these are really just Web 2.0 deals?
  • 12. 3. The Inflection Point is Here
    • Second downturn in eight years
      • Returns never recovered from peak highs
    • The same VC firms are getting funded
      • < 50 new VC firms get funded per year
    • The outlook for VC returns is worsening
  • 13. A Line has been Crossed Fundraising Exits SOURCE: NVCA / Thompson Reuters Exit Poll SOURCE: NVCA / Thompson Reuters VC Fundraising Q3 Is more money going into the VC model than coming out? Blue is the total economic value created by VCs. Green is the total amount of money raised by VCs.
  • 14. and Nothing Changed… SOURCE: NVCA / Thompson Reuters VC Fundraising Q3 1 new VC firm is funded for every 4 existing firms funded. How many “new” firms are started by existing VCs? New Funds Follow-on into existing Funds
  • 15. 4. It’s Time for Change
    • Less Funds + Better Funds
      • LPs scrutinize VC investments
      • LPs invest more money into better VC firms
      • Target: 1,000 great VC firms versus >4,800 today
    • More Deals + Equal Treatment
      • Structured and published investment process
      • Stage-specific investors
      • Target: Fund 25% of companies versus 10% today
  • 16. in the Deal Terms, too…
    • Simplified Terms + Standard Structures
      • Correlate ownership to exit values
      • Close the “Preferred Equity” tax loopholes
      • Target: 1 Page Term Sheet
      • Target: Boilerplate Investment Agreements
      • Target: Closing costs below $10,000
        • (especially in the early stages)
  • 17. and, while you’re at it…
    • Introduce Fund Governance + Oversight
      • VC Firm Board of Directors
      • Formal Performance Feedback Solicitation
    • Restructure the Fund Incentives
      • Introduce “Contingent” Management fees
  • 18. Why change? because VC firms have little to lose, and a lot to gain by doing things better…