This post is for the VC guys and the entrepreneurs, so if your only interest is banking feel free to skip it. Stuart Ellman and Jim Robinson, founding partners of New York venture capital firm RRE Ventures, recently wrote a piece entitled, "Everyone Deserves a Trophy?" that was later picked up by Business Insider and renamed,"Sorry. Just Because You Tried Hard Doesn't Mean You Deserve a Prize."
The piece laments the effect that political correctness is having on the venture capital business, and how people in that business have to avoid hurting an entrepreneur's feelings these days. The analogy is made to a children's tee-ball league (I recently made the same analogy in this post), in which effort matters more than results and everyone gets a trophy regardless of measurable success.
First, I have to say I thought it was pretty funny how VC's have to handle entrepreneurs with kid gloves these days, if for no other reason than if you won't another VC will. That probably speaks volumes to the fact that there are too many venture capitalists chasing too few deals these days. But I was more struck by the expectations of the entrepreneurs than I was by how the VC's deal with them today.
For example: venture capital companies are expected to pay an entrepreneur a performance bonus even if the company didn't hit the pre-determined milestone? In days gone by, a CEO would've been put on notice. Now Ellman is saying that the common practice is to "work something out". I was pretty surprised by that. Also, disagreements on when to sell the company now seem to favor the entrepreneur, where before it was usually up to the VC.
I just found the changes curious. I'd love to hear from anyone in the business (on either side of the table - VC or entrepreneur) to find out if this kinder, gentler venture capital environment is for the best. Obviously, I'm a tough love kinda guy and I believe in accountability. But I can see some benefit to the other way of doing business as well, in that it probably fosters more teamwork between entrepreneurs and the VC's that stake them.
Or is it just another example of how we're growing soft?
Guess I answered my own question; it's all about deal scarcity:
http://www.businessinsider.com/why-vcs-think-foursquare-is-worth-100-mi…
Foursquare worth $100 million? In what universe?
Deal scarity is a big problem with VC right now:
During the 2004-2007 boom, too many VC funds got too much money that they now don't know what to do with. There aren't enough good investments these days, pushing valuations even higher. ROI is poor and with the remaining companies on their portfolio, few, if any, have the potential for IPO, so they just burn through cash hoping that the economy will recover quickly so they can cash out. Good luck.
You have to admire these VC guys though. They that did everything textbook right in the late nineties. Went to the best schools, did McK/IBD TMT, etc. Probably add in a quick jaunt at a horribly managed start-up. Then went to business school to land in the top VC funds only to miss the train on the entire "hedge-fund/private equity" craze.
In my opinion, what is happening to VC is going to happen to private equity in the next few years.
This is the beginning, middle and end of this story. With the only addendum being it's not a shortage of entrepreneurialism, but a glut of capital. If all those VC investors just used that money to start their own business or even just gave it away to a charitable organization we'd probably be a lot better off.
Wow, jhoratio. Hadn't thought about it that way, but you're probably right.
A decade and a half of loose money policy, and we overdosed.
this shirt goes well with the topic:
http://www.vcwear.com/my-toilet-manners/
Oh my God, some of those are EPIC.
Couple of my favorites: "Let's get your first no out of the way. No." "My ham sandwich has a better shot at market share."
But my favorite of all:
Thanks for the laugh.
I am buying every single one of those shirts.
I do agree that VC's are pussy footing around w/ entrepreneurs to much as of late. But the reality is until there's a new gen of web, mobile, and hard technology; there just isn't the big break out innovation to justify these huge seed rounds.
The funds that are doing well are leaner & have MD's that legitimately live and breathe what's going on in the tech space. I think Brad Feld & Josh Kopelman are two great examples of VC's who get it; they've got their finger on the pulse & can pull the trigger on a relevant investments weeks before some associate gives their MD the heads up about it while he's playing golf. For example, unless Brad knows you or has a direct referral, he'll only take pitch's via Twitter.
Wow. That's sounds like it's begging to be made a WSO contest.
Put together your best VC pitch in 140 characters or less...
Probably it's already happening. I remember during 05'-07' some of these guys' AUMs growing like mushrooms and filling their portfolios with what is now pure junk. I even know a few funds tried to unload some of these companies in the boom market only to be still stuck with them today. Still I think the US is in a better condition, considering what is happening in some/most of the emerging markets where the relatively few VC's and PE's are closing shop by the day. However, there is a difference that while in the US it's mostly caused by too much money chasing too few good opportunities, in the emerging markets it's: most of the money in the hands of poor management or telecommuting management (no you cannot successfully run a portfolio of companies from 5000 miles and a couple of tourist expeditions a year).
It will be interesting to see how things unfold now that fund-raising has been pretty much dead since 09' , obtaining leverage has been like winning the lotto, secondaries pretty inexistent, smaller stock markets illiquid, private investors putting cash in the stock market and staying away from investments with minimum 3 to 10 year lock-up periods.
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