A VC - Latest Comments in What VCs Are Worrying About

Re: What VCs Are Worrying About

jahven — Sun, 05 Jul 2009 12:13:56 -0000

This is excellent article. And these problems have several aspects. One is that many good companies and entrepreneurs are without funding. Another problem is that many investors who put many into VC funds are not happy, because ROI is zero or very low and the costs of VC are high. This indicates that the market is not effective.

When we decided to set up Grow VC (www.growvc.com) we talked a lot, how it is possible that VC's always look for new innovative business models, but they still have the same model in VC business as 20 years ago. We came outside VC industry, so it was natural for us to challenge the models. But it has been surprising that several experienced VC partners have now said that same to me in private discussions. They also think that new models for VC business are really needed.

I see we really need more effective and transparent market for early phase funding, i.e. how different kind of investors and companies can find each other, and also make it much more cost effective. VC's have invested a lot of money in companies that bring openness, communities and transparency to their industries. But do we need the same in VC industry? Can it be so that a few VC managers can really make all decisions, which companies can make a significant breakthrough?

Re: What VCs Are Worrying About

paramendra — Sat, 04 Jul 2009 16:30:52 -0000

I like it when I hear bold talk in this tough economy: "Nothing is wrong with the VC business and the startup ecosystem that a few years of weak fundraising can't fix."

Re: What VCs Are Worrying About

Steve Kane — Fri, 03 Jul 2009 16:08:30 -0000

Sure I am aware of much discussion about the trade. But besides you and a select few others (thank you) I never hear anyone in the trade talk about changing fees and carry and comp (other than to raise them) so pls send me links anytime you run across this discussion

Re: What VCs Are Worrying About

fredwilson — Fri, 03 Jul 2009 16:03:29 -0000

Of course it does steve. Were just debating what the new model is. Its like the auto business or the mortgage business. Ppl are still going to need cars and homes, but the way they are developed and sold will change. Same with VC

Re: What VCs Are Worrying About

Steve Kane — Fri, 03 Jul 2009 12:23:52 -0000

Btw, I think it is highly amusing and ironic to watch the VC industry twist into a pretzel to explain why the Internet and new technologies are disrupting - nay demolishing -- every business model and industry... except their own

Its as if VC industry is saying, Creative destruction? By all means, its the lifeblood of our modern society... just not in my own office and business. The exact same model we have always used, for generations now, need never change; historical and existing power structures and financial models never become obsolete in our business

The "innovators dilemma" attitude that VCs view with disdain in every other industry (eg news publishing, music and video distribution, office automation, travel and hospitality etc etc) somehow doesn't apply to their own.......?

Re: What VCs Are Worrying About

Steve Kane — Fri, 03 Jul 2009 12:15:22 -0000

That sounds good -- caveat, I need to see what the average is, and how
skewed it is etc, but I like your thinking

Re: What VCs Are Worrying About

Steve Kane — Fri, 03 Jul 2009 12:14:14 -0000

I do that every day, Fred -- its called angel investing

Zero management fees. My own capital at risk. Sometimes its 80/20, most of
the times its not remotely that good.

The business need not go withoiut management fees. The business hsould drop
management fees to 1% -- or even better submit operating budgets (gasp!) --
and management fees should only get paid for first 3 years of the fund,
maybe first 5. Increase carry to 25%.

Imagine what the typical VC would say if an entrepreneur or CEO suggested
that they get guaranteed high salary for 7 years minimum, with no penalty
for failing to ever achieve bonus.

Re: What VCs Are Worrying About

fredwilson — Fri, 03 Jul 2009 12:01:22 -0000

Why don't you get into the business steve and start a fund where there is no mgmt fee, all carry, you've got your own capital at risk, and you do 80/20 deals with entrepreneurs

You could single handedly save the business. I don't quite have the guts for it myself and I also have partners who aren't as "out there' as I am

I think it could work

Re: What VCs Are Worrying About

fredwilson — Fri, 03 Jul 2009 12:01:21 -0000

Yes. But it will make a difference. There are some good firms with good portfolios out there that would be well served with a return of the IPO market

As for our bet, I'd prefer something simple. Let's go back over the past 20 years and calculate the avg number of VC backed IPOs per year

My bet is we'll see that number or more in 2010

Re: What VCs Are Worrying About

Steve Kane — Fri, 03 Jul 2009 11:55:11 -0000

Yes indeed. And that way way way too many of them are unsuccessful but
there's seemingly no penalty. Bad - tragic - for entrepreneurs and
innovation - sucking all the oxygen out of the atmosphere

Re: What VCs Are Worrying About

fredwilson — Fri, 03 Jul 2009 11:51:24 -0000

Actually it does steve. When a VC fund works, the majority of the comp is success based

What pisses you off is the compensation for the unsuccessful investors!

Re: What VCs Are Worrying About

fredwilson — Fri, 03 Jul 2009 11:51:22 -0000

I am a big fan of secondary private markets. Google AVC secondary markets and you'll find a bunch of posts I've written (hopefully)

I don't think IPOs are appropriate exits for the vast majority of venture backed companies. Maybe the top ten or twenty percent of our investments will make good public companies

Re: What VCs Are Worrying About

fredwilson — Fri, 03 Jul 2009 11:51:20 -0000

I like your attitude but that rat dropping comment was tough to take!

Re: What VCs Are Worrying About

Steve Kane — Fri, 03 Jul 2009 11:45:27 -0000

Ok, what's the threshold or definition? (Btw I guess you are agreeing that the IPO market can come back but that VC asset class may still not produce carried interest?)

Re: What VCs Are Worrying About

fredwilson — Fri, 03 Jul 2009 10:26:22 -0000

I agree with you both. But its a market. Somehow the terms you are railing about (rightfully) are getting set by the market

Re: What VCs Are Worrying About

fredwilson — Fri, 03 Jul 2009 10:16:14 -0000

I'm not interested in that. It won't earn its bonus anyway. My bet is about the IPO market coming back, plain and simple

Re: What VCs Are Worrying About

Steve Kane — Thu, 02 Jul 2009 21:51:15 -0000

You completely miss the point

Professional investors should be compensated mostly based on successful investing. That does not happen in VC.

Re: What VCs Are Worrying About

Phanio — Thu, 02 Jul 2009 21:41:53 -0000

Don't agree. It is inherit in the industry that 80% of venture backed firms will not return a dime to their investors. It is built into the model (risk) – much like stock out costs or the OK level of rat droppings in our food supply. Markets, investors and consumers are fickle – they change daily and thus, the shoot gun approach to venture investing.

I would like to see more exit avenues. I want to see these companies succeed. Most IPOs or M&A infuse these companies with the capital they need to fully commercialize and enter the main stream – forget about who makes money off of them. We need these products and we need companies that create jobs and build wealth. And, as I see it, the exit is the only real way to make it happen. How much has Google improved and grown since its IPO? Would it be the company it is today with venture backing and its IPO?

Try not to focus on what people make (I am sure that there are people who think you make too much for what you do) – but try to focus more on the greater good. Without venture capital – I truly believe that many of the products and services we take for granted in our daily lives would not be possible – and those people who make it happen should be compensated.

Just my thoughts

Re: What VCs Are Worrying About

Phanio — Thu, 02 Jul 2009 21:30:37 -0000

Still would not work without exit opportunities. Getting in to the deal is easy. VC getting paid what they do - is between them and their investors - we just need more exit vechiles - then let the market sort out the real winners.

Re: What VCs Are Worrying About

Phanio — Thu, 02 Jul 2009 21:27:25 -0000

These seem to be real concerns - but, what is the VC industry going to do about it? Are they to watch other firms fail? Are they looking for new ways to exit? Would love to hear your opinions on alternative exit strategies.

Nearly a decade ago while I was in Grad school, I had the privilege to meet and hear Ralph Shaw (from Shaw Ventures in Portland, OR). I asked him a similar question as the IPO window seemed closed at the time. I figure he would give some comments on M&A. No, he got mad and stated that IPOs are they look for.

It seems that everything in this world goes in cycles. IPO windows open and close – M&A gets strong then declines. But, there must be some way to exit when the traditional methods are non-existent?

Would love to hear your opinions on what could constitute as alternative exits.

Re: What VCs Are Worrying About

Mark Zohar — Thu, 02 Jul 2009 09:28:37 -0000

Amen, Steve. Thou speakest truth to power. Want to see the VC industry right size quickly? Reset the compensation structure for VC partners. Eliminate management fees and move to a comp model that mirrors the start up model; ie., base salary plus equity bonus for overperformance (where LPs determine bonus milestones, thresholds and payouts).

Adopt this compensation structure and I guarantee you half of VC partners would leave industry within 3 months. It's truly appalling that VC partners continue to live the life of Riley with no risk and only upside while their "industry" burns to the ground right in front of their eyes. Maybe we should hand out violins to all these Nero inspired VCs.

Re: What VCs Are Worrying About

fredwilson — Thu, 02 Jul 2009 08:02:52 -0000

i agree with Vivek's article and have written most of what he says at one time or another here at AVC. the last thing the VC industry needs is government assistance.

Re: What VCs Are Worrying About

Steve Kane — Thu, 02 Jul 2009 07:51:35 -0000

hmm. maybe. but only as a relative number - time weighted and compared to invested dollars value of vc portfolios (e.g. IRR)?

maybe better to not distinguish between IPO and M&A - its the overall dearth of "exits" everyone is worried about. so how about we try to determine whether vc asset class earns its "bonus" in next 18 months- how many vc funds will generate carried interest pay for gp's? for the last decade nearly zero gp's have earned carried interest from funds invested at least 3-5 years (your own suggested time frame). how many businesses would continue to employ people who fail to earn their bonus year after year after yera?

Re: What VCs Are Worrying About

fredwilson — Thu, 02 Jul 2009 07:47:09 -0000

Got it. I thought the dippy comment was aimed at our investment strategy which is very much the free web

Re: What VCs Are Worrying About

fredwilson — Thu, 02 Jul 2009 07:43:10 -0000

Market value of IPOs between now and 12/31/10?