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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