Over the weekend, a discussion blossomed(thanks to Dave Winer) about the future of Venture Capital. Then everybody else jumped on board. Scoble, Doc, Ensight, CrunchNotes and Nolan just to name a few.
While they all make excellent points. I think they all missed an important idea. Every last one of them talks incessantly about new ideas. About how there are so many good ideas out here in the ether that never go anywhere because of the current structure of VC. They all make excellent suggestions for the future of VC and the changes that should be made.
So what did they miss?
A VC structure that I really wish existed… And I don’t think that I’m alone. Winer talked about the integration of users as shareholders in the VC firm, but why not take it a bit further and make the users the shareholders in the startup itself? Sure there is more risk, but if you are a user who wants more hands on control over where your money goes… Why not invest yourself. Of course, not everyone has a couple of million sitting around waiting for a venture to invest in, so we have to conglomerate. That has been the traditional role of the VC firm. Conglomeration of the money. Problem is that usually when the VC firm makes money off of their investment, the user doesn’t really see much of that money. Problem being that the profit usually goes to the staff of the VC firm and to research and other various pet projects.
So how do we accomplish this? I envision the Ebay/Craigslist of VC. A bulletin board where the the owners of the venture can post their venture with the investment opportunity and offers. Where the users can browse and can invest at will. Somewhere where a white collar joe schmoe like myself could go and invest $1000 in the next digg. The risk would be great for me, but there would be a lot of smaller ventures that would receive funding because their wasn’t a VC firm inbetween filtering what was worthy of investment. Sure they are the experts, but even experts mess up once in a while.
Perhaps a social rating system that would allow the users of the bulletin board to rate the venture? The better the rating, the better chance of not losing your money?
I don’t imagine that this would be something that is forthcoming. It takes Dave Winer‘s ideas a little further and would give the users he mentions the ability to share in some of the raw returns that traditionally, only VC firms have gotten.
Update: Even more conversation on the broken VC Model. Anne 2.0 , EarlyStageVC , Message , Techdirt, Kedrosky, Dodge, A VC Just to name a few more…
Update 2: I’ve posted a new post that more clearly explains the Ebay/Craigslist idea, read it here.
Technorati Tags: VC, Future of VC, Winer, Scoble, Doc Searls, Crunchnotes
About Shane Ede
With all due respect, I think you miss the point that there is nothing that prevents you from setting up such a investment scheme, except for the Securities Act of 1933 and probably the Investment Company Act of 1940. But you are free to lobby Congress and have those laws amended. The venture capital business doesn’t operate as a monopoly, if you have a better idea for funding startup ventures, then more power to you… go for it.
The bigger issue that I have with your logic on this matter is that you are presuming the bottleneck between good ideas and markets is capital when in fact the bottleneck is people and teams to execute on good ideas. It takes a lot more than some cool technology to build a business.
Correct me if I’m wrong Jeff, but private companies need not worry about those acts. Those acts were set up for public companies. Private companies raise capital through equity investors(like what I was suggesting) all the time and do not worry about the SEC. Another important thing is that the bottle neck is the VC firm itself. They pick and choose which company to invest in based on how big they think the return will be. They are constantly looking for the next Google. Sometimes we should look for companies that will take their time and grow at a more reasonable pace.
Those 2 laws were created to protect individual investors by governing how companies can attract and take investment (public or private) and how investment companies are regulated. If you setup your ebay/craigslist it would in fact be akin to an investment company and therefore subject to the same regulation that private equity firms are operate under.
A venture capitalist picks and choses deals based on the size of the market opportunity for the company, the technology or product, the valuation, the quality of the team, and the opportunity for exit. It’s not simply about how big the return will be, if any return at all.
Have you considered that perhaps the reason why there are so many startups that don’t get funding is because they aren’t deserving of investment? Seriously, do you invest your personal investment account based solely on how cool some product is, or rather on how sound the company is and the potential for future returns?
Actually, if set up in the Ebay/Craigslist way, it wouldn’t. It would be no more an investment company than Ebay is an Auctioneer. It would simply be an intermediary between the investor and the investment.
I have considered that the reason why there are so many startups that don’t get funding is because they aren’t deserving of investment. And I would agree with you if the point you are making is that a vast number of them fit into that category. I also think that for every one that gets funding, there are at least two more that are just as deserving of the same funding that don’t receive it because they didn’t pitch a VC in the right way.
I think that I should point out that I’m not talking about just DotComs either. There are still plenty of Brick and Mortor startups that go up in any given year that are just as deserving of funding.
Seriously, Jeff. I am assuming that your fairly experienced in the business. How many of the DotCom bust companies did you invest in? Because you convinced yourself of the “potential for future returns” because they were so cool? The point is, no matter how into the books you are, there will still be some factor of how cool the product or company is.
You might want to run that ebay/craigslist idea by a few lawyers first, I’m pretty confident that they will tell you that you would be subject to the same regulations that private equity firms are. Remember that these 2 laws predated venture capital by more than a few decades yet they still applied. The Securities Act in particular is something worth reading up on, it regulates how companies, public and private, raise capital and was a response to the Great Depression where no regulation existed and companies sold stock to retail investors unimpeded. Also keep in mind that Charles Schwab is merely an intermediary between buyers and sellers, and needless to say that they are subject to a boatload of regulation. I’m sorry to have to disagree with you on this point, but setting up a bulletin board for investments does not relieve you of the legal regulation that is in effect in this area just because you say it’s something different than everything else and is “just an intermediary”.
What is your fact base for suggesting that “for every one that gets funding, there are at least two more that are just as deserving of the same funding that don’t receive it because they didn’t pitch a VC in the right way.”? When you are evaluating startup investments there are thousands of variables that get considered, probably the least of which is the pitch. Venture investors are not automatons who run a pitch trough a Golden Ticket Machine to determine who gets funding and who doesn’t. The due diligence process evaluates every possible aspect of a deal, nobody really believes “the pitch”, which at it’s best is merely a device for creating interest in the other elements.
You are right that there are plenty of non-tech investments worth looking at, and there are firms that specialize in retail, consumer goods, food chains and so on. That’s the point of private equity, you specialize in one or more market spaces to optimize your investment process, and diversify your portfolio within one or more large sectors. Benchmark Capital did Ebay, but they also invested in Jamba Juice.
I’m glad you brought up your last point, because it actually makes my diversification point for me. We made money on dot-com investments, we lost money on some… but at the same time we were investing in supply chain, vertical software, infrastructure technology, and much more. The bottom line is that our investment returns over an 8 year period were significantly higher than the net margin for SAP as a whole, even through the dot-com bust. How many retail investors do you think could manage that level of sustained performance?
Jeff,
It has truly been a pleasure having this conversation with you. I appreciate that you’ve taken the time to partake as much as you have. Several of your points have rung true, and I know that coming from a pro, they should. Please read my follow up post to this post as I think I made a little better effort of fleshing out the idea.
It truly is just an idea. I have neither the resources or the know how to get it to go anywhere if I were to pursue it.
To touch on a few of your points in your latest comment, I have not done any research into legal regulations or the such. I merely was voicing an idea. Like many of the ideas that I have, it may be way off from the legal standpoint. I have no true fact base for my 1:2 ratio. And the bit about the pitch is merely a generalization. I do realize that there are many more inputs that are considered in each venture.
Thanks again for the continued wonderful conversation.
Enjoyed it myself. Thanks for engaging.
I want to make one last point about the regulation side of this debate. These laws predated modern finance by several decades but are still relevant today because they exist to protect individual investors like you and me. One of the side effects of disintermediating a marketplace, in effect deregulating it, is that you increase the potential for abuse by participants on either side of the fence. Investing in startups of any kind is a highly volatile and risky activity, which is why it has generally been left to those who do it professionally or are wealthy enough to not suffer consequences of losing their investment in a company. Investing in these companies will invariably result in you losing more often than winning, but when you win it is big enough to make up for the losses, however few individuals can embark on a sustained investment cycle.
As for me, I put my personal money in boring investments like insurance companies and bonds.
The interesting point about many laws when applied to newer forms of distribution like the internet is that there is no precedant set.
I have no doubt you are right that in the spirit of the law they included all forms of solicitation for investment. However I question if it wouldn’t be something that could be worked around in a legal way.
You might also want to take a look at my view on angel investing, at “On Being an Angel” http://www.lifewithalacrity.com/2006/01/on_being_an_ang.html
In it I discuss a lot of aspect of the economics and sociology behind why venture capital behaves the way it does, as well as issues of being an angel investor.
Wanted to thank you Ed and Jeff for that spirited conversation, I learned a few things but for the life of me can’t remember where I know your name from Jeff. Must’ve been from my stock crunching days a few years ago since you’re SAP Ventures. No matter now lol.
Micro investment had certainly a great potential for some start up. But if you raise around 1 million how will you manage with all the investors? Maybe some VC players must open their fund to small shareholder…