Proposal | reboot11 – 1 comment
Goodbye VCs, it's been a pleasure
or the case for a new type of funding for innovation and growth
New ventures, start ups, or whatever you call them, are unique and extremely important to us all: Every company, every commercial value-adder, the core of wealth creation, started up once. And as every successful investor would attest: much of the shareholder's wealth is created in the early-stage (explosive) growth phase. The rest is "just" sales & management...
This implies that start ups should have a central and unique position in the fabric of the world's economy.
Yet, every entrepreneur knows how difficult it is to meet his funding needs beyond friends, family and the occasional angel. Occasionally they are served by the Venture Capital firms, a niche in the financial services industry.
To quote Andy Grove as a lead-in:
``What really infuriates him is the concept of the "exit strategy." "Intel never had an exit strategy," Grove says. "These days, people cobble something together. No capital. No technology. They measure eyeballs and sell advertising. Then they get rid of it. You can't build an empire out of this kind of concoction. You don't even try."''
Did Microsoft, Google, Intel, Dell and Amazon spend time on "exit strategies"? Doubt it.'
But why this? In our humble view it's due to:
1. VCs are part of the financial industry
2. Financial industry focuses on serving the (short term) needs of investors
3. Use of the Financial measure as a good approximation of the Economic value (true over long term, speculative over the short term)
As a result we get:
1. A focus on what value the market would put on the investment in X (and X<10) years instead of real value creation by the activity of the company invested in. The folks who invested in dot coms early in the nineties come to mind and buzzwords and market sentiment becomes overly important.
2. Inefficient distribution of proceeds:
a) short investment horizon - (X-Y) years and y=time to raise money, chose investment, offload it, wait until date X is reached with cash on hands
b) biased time-value of money: during Y all this time money sleeps and no economic value is created with it whereas those funds could be redistributed towards more promising investments.
And as a combined result, one might argue, the returns have been less than stellar overall for the VC funds except for the short period aptly named the dot com era.
And this creates a huge opportunity.
"Turn" the focus towards the economic value creation , at the hand of the startup, disallow the time stamped "exit" restrictions and above all, involve the community who knows best (probably better than the VC investment committee?) with full transparency.
...and the financial benefits will follow.
Think Berkshire Hathaway run by a tribe of advisers, investors and entrepreneurs.
Create a new quoted entity where anybody can own shares while at the same time engage in discussions, funneling opportunities and even decision making.
Invest in a vibrant innovative ecosystem whose past successes feed the new ones.
Focus on economic growth, not exit strategies.
A short analysis of the situation, rough description of a practical solution followed by a heated discussion is suggested. With luck it might lead to a new type of VC.
Goodbye VCs, hello . . . who?
During the past 40 years VCs as an investor community have been born, they have evolved and now form part of a huge international industry. While they will not be replaced soon (too much money is at stake), there are niches of opportunity for a more creative type of start-up investor. Someone more interested in growing than counting and someone who probably doesn't lose too much sleep over the definition of the exit strategy during term sheet negotiations. As long as the creator of the big idea is really passionate about what they want to achieve, and that they can explain it in simple words to other mere mortals.