IP: re: IEEE SPectrum Opinion: Speakout: An Engineer's view of VCs

[David Farber <dave@farber.net>]

>Reply-To: <revers@evers.org>
>From: "Ridgely C. Evers" <revers@evers.org>
>To: <farber@cis.upenn.edu>
>
>
>Dave,
>
>Sorry to innundate you, but this one caught my eye as well.
>
>I've worked with venture capitalists for almost 20 years, and have come to
>believe that the traditional venture capital industry is profoundly broken.
>
>There's always been a structural problem, to wit, the *customer* of the
>venture industry is the investor, not the entrepreneur (despite all the
>assertions to the contrary on every VC's web site).  Entrepreneurs are
>suppliers to the venture firms, and we all know how well companies tend to
>treat their suppliers!
>
>VCs make money in two ways: on the "carry" -- their share of their
>investors' profits -- and on the management fee -- an amount they get for
>simply having a pulse.  In recent years, the fund sizes have gotten larger
>and larger, to the point where, according to an article in the WSJ about 18
>months ago, the average partner in a Sand Hill Road venture capital firm was
>taking home $3 million a year just in management fees.
>
>That, per se, is not a problem.  What *is* a problem is the ability of
>venture capitalists to actually help in building a business; the people
>involved have less and less real-world business-building experience.  It
>reminds me of a sign that used to hang in H+E German Cars, the original BMW
>dealer in Palo Alto, back in the 60's:
>    Shop Rate:     $25/hr
>    If you watch:  $35/hr
>    If you help:   $50/hr
>
>What's starting to happen, though, is a classic example of the free market
>at work.  New, smaller venture firms are cropping up, started and run by
>people who have had career experience that is of real value to their
>portfolio companies.
>
>Here's an analogy that may help explain why this is so important.  Think of
>a young company as an airplane, with the management sitting in the pilot's
>seat and the investors sitting in the copilot's seat.  As long as the plane
>is "straight and level" everything is fine.  But if the plane runs into
>trouble, whether mechanical (internal) or weather (external), the copilot is
>likely to try to grab the wheel and "help."  If the copilot knows how to
>fly, great.  But if not, then the pilot's problem is compounded --
>potentially fatally.  Similar problems can arise if the pilot and copilot
>have different opinions as to the destination.
>
>To be sure, there are some great VCs out there who have been adding real
>value for years.  (I've had the privilege of working with several.)  But my
>advice to entrepreneurs is to be as thoughtful about where they get their
>capital as they are about every other aspect of their business.
>
>Best,
>
>--Ridge
>___________________________________________________
>
>  Ridgely C. Evers               revers@ncircle.com
>  nCircle Network Security          www.ncircle.com
>___________________________________________________
>
>
>--Ridge
>
>
>-----Original Message-----
>From: owner-ip-sub-1@admin.listbox.com
>[mailto:owner-ip-sub-1@admin.listbox.com]On Behalf Of David Farber
>Sent: Saturday, September 01, 2001 2:50 PM
>To: ip-sub-1@majordomo.pobox.com
>Subject: IP: re: IEEE SPectrum Opinion: Speakout: An Engineer's view of
>VCs
>
>
>
> >Date: Sat, 1 Sep 2001 14:47:10 -0700 (PDT)
> >From: Marc Hedlund <marc@precipice.org>
> >
> >Dave,
> >
> >[Feel free to forward to IP if you want.]
> >
> > > >An Engineer's View of Venture Capitalists
> > > >http://www.spectrum.ieee.org/WEBONLY/resource/sep01/speak.html
> >
> >The remedies this article proposes seem to me not to change anything.
> >Angel investing, while obviously excellent for getting a company started,
> >is simply a step on the road to venture investment (as the article says
> >itself).  A public VC fund would be obligated to maximize return for its
> >investors, so it would *have* to use all the same tactics VC's use today
> >or face shareholder lawsuits.  This is like saying, the buyers of our
> >product aren't agreeing to prices we like, so let's create fake buyers
> >that will pay more.  This makes no sense economically, and does nothing to
> >change the long-term efficiency of the market.
> >
> >It seems to me that there are better ways to change the power balance than
> >trying to match the VC's dollar for dollar, which is not realistic.  The
> >most obvious possibility to me would be to try to create a engineer's
> >information network that allows engineers to share deal information in the
> >same way VC's do (a process the article describes under the heading "VCs
> >collude").  If engineers want to effect change, they should instead try to
> >create a more efficient marketplace for engineering effort by ameliorating
> >the imbalance of information sharing.  A VentureWire for nerds.
> >
> >Marc Hedlund
> >e: marc at precipice dot org
>
>
>
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