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.
For me, product development is more of an external affair than an internal one. Defining a product can not happen in vacuum! I often come across companies with totally isolated verticals; R&D and Engineering groups. Although it may be OK for huge companies, for small and mid-size companies it will end up in total disaster. While the CTO and her/his group are dreaming about what is the real need out there, it is engineering and deployment groups really wrestling with customers, try to address their present and future needs. The usual line of defense; we bring R&D guys in the loop! Guys, it is not going to work. Product development is a constant struggle, it is a constant try and error procedure whether we like it or not. As I mentioned, in a small company, my product is my technology and my technology is my product. My VP of engineering is my CTO and my CTO is my VP of engineering. Split these and you will end up with a total disaster.
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.
During last couple of weeks, I received emails from my VC friends if I am aware of any job opportunity for them!!! Initially I thought it is joke or something; but no, they were serious. Venture capitalists are a breed in decline! Just 17 venture capital firms raised new funds in the third quarter of 2009, the smallest number of firms in any quarter since the third quarter of 1994, according to new data released by Thomson Reuters and the National Venture Capital Association (NVCA). While venture capital firms typically raise money every three or four years, and so a single quarter represents only a snapshot, the very small number of firms raising money (historically speaking) shows just how much of a crunch the industry is in right now.