What has happened to our “startup culture”? We are hearing about how greed and focus on short term profit brought world’s financial system into the verge of a complete collapse but heard nothing about other financial institutions misbehavior. Although large banks and their bosses blamed for the problem and punished; better to say singled out, we see same symptoms in all other sectors of investment and business related echo system like VCs. As I mentioned before, VC world is also about to change. From early 2000 until mid 2008, VC industry transformed from a real vibrant business into a fat and blind profit driven industry. VCs were just throwing money into “potential” companies/ideas and wait outside the ring to see what is going to happen. It was not 80s or 90s and they were not Kleiner or Moritz who build the company with entrepreneurs. VCs were the real force behind exploding job creation during 80s and 90s, by supporting real entrepreneurs and creating real companies. Time is passed for partners who use pre-IPO family and friends options and huge bonuses to milk their own baby. It is time for LPs to take a close look at the VCs and really vet them. Clearly something went wrong in the last ten year in the VC industry, let’s fix it for the next ten years.
Looks like there is no happy ending in sight for VC market! For the third quarter of 2010 forty five funds raised less than $3 billions. “With funds sizes getting smaller and fewer firms raising money, we are experiencing a period of time in which venture capital investment is consistently outpacing fundraising, creating an industry that will be considerably smaller in the next decade” said Mark Heesen, president of the NVCA. As I mentioned before; it is not necessary all bad news. Last quarter Institutional Venture Partners XIII, L.P. raised $750 million followed Boston, Massachusetts-based Third Rock Ventures II, L.P., which raised $426 million. These two funds account for 35% of the total! There will be less money out there, but at the same time there will be more focused and experienced VCs with larger funds. This will helps entrepreneurs to work with more mature and experienced VCs with enough money to support them all the way to the exit. There is no time and room for VCs which didn’t perform and just burn money without adding any value in the past decade.
There is a big difference between a good “idea” and a good “opportunity”. Most; if not all, of successful companies have been created based on a good opportunity rather than a good idea. I have seen university professors with fantastic ideas, but because of their lack of inside industry visions, there is no platform for their ideas to translate into a real business opportunity. Real opportunities are rather simple ideas with a very clear vision toward a real product. You need to create a team to translate a good idea into a good opportunity at the end!
Venture-capital finance has contracted sharply. Looking at the numbers shows an ugly picture for VCs and start-ups looking to raise money in the near future. Last year venture-capital funds raised just $15 billion, half the average of the preceding four years.
But it is not all bad news. Amount of money raised in 2009 by VCs have reduced by 55% compare to 2007. But at the same time number of funds raised money reduced from 250 to 120! It shows we are ending up with fewer VCs but more solid and real producers. The funds could not raised money and probably will shut down their operations have already showed that their existence do not bring any value into the start-up world. Their previous investments were all not successful because these guys were not VCs at the first place. Being a VC is not just about raising money; it is about building an operation and a successful company with entrepreneurs.
When your management team is underutilized in a start-up company, office politics will take over the whole operations. Like kids; they should be busy with good activities that couldn’t find time to think about bad stuff.
In a small company everyone should be utilized 110%; your VP of engineering is on the road with field engineers and your CEO is moving the furniture in the office and going to Staples to buy stationary to save some money. If your higher management sits in the office and you have directors who communicate with other employees, you have executive assistance for a 50 people company something is wrong. When people are not busy with real operations, they feel vulnerable and start justifies their presence by artificial activities. At this stage, the whole intent is to perceive employees, board and other investors just to drag the operations for couple of more months and receive the paychecks as far as you can. Do you watch Office; they don’t have anything to do!