Venture Capital Industry – Needs overhaul?
June 28, 2007 Leave a comment
I am currently in Silicon Valley and as most other people, this time I am trying to “feel” it. I lived here in the past but did not try that. Certainly, you cant feel it if you dont want to. But to live the dream, you have to “feel” it. Open your eyes and look around. Almost 20 companies come out every single day. Almost 100 networking events take place every week. Total amount of VC money flowing into the Silicon Valley startups is more than anywhere else in the world. Possibly it is even more than the sum total of money elsewhere in the world.
With this much optimism, there comes the noise. Yes, a lot of good companies are coming up, but with them come up a full breed of companies which were never meant to be successful. Most of the companies fail to take off and die prematurely. Some of them are funded and some of them perish even before that. It is a common perception among VC community that 90% of startups fail. Seems that everyone has agreed to this rule. Looking closely, this rule says that even well seasoned VCs cant figure out which companies will succeed. They make their judgment based on some criteria and 90% of the times those criteria give wrong results.
Bottom line: There is 90% error in choosing the right company for investment.
Is it not a very high number given the fact that we live in this age where more and more focus is on accuracy and error-reduction? Imagine getting a fish-o-fillet sandwich 9 out of 10 times you order a hamburger at McDonald’s? Or imagine a calculation error 9 out of every 10 times you buy stocks online? Something is very wrong with the VC money now a days? Is it the lack of good foresight or is the market full of VC firms who make investments as if they are buying a lottery ticket? 90% failure rate can not be caused by just the incompetency of the entrepreneurs. It is a cyclic process; if incompetent entrepreneurs get money; then they run their company shabbily…only to go burst after 6 months. They know that the threshold of getting the money is low and therefore never try hard enough to reach the superior level which is required to execute a successful company. I do not intend to say that getting money is easy. Its not. Should it be made even harder? Maybe. Investors should try harder by tightening the monetary control to elevate the entrepreneur’s motivation for succesful exit from the venture. Simple question: Why is Private Equity more successful than Venture Capital industry? Answer: Superb financial control and execution.
Something needs to be done. I don’t know what that is, but something has to be done. We can be realistic and try to improve this result in incremental fashion (20%, 30%, 40% success rate), but at least a beginning has to be made so that we do not go back to the Dot com burst stage again. Some well reputed VC firms do invest in a very sophisticated way; and they get good ROI also. My question is about those VC firms who do not have enough experience or credibility for making good decisions. We saw one tech-burst not so long ago; should they be allowed to convert a tech-ride into a possible burst scenario again? Should there be some industry obligations? Or is it ok to accept them as they are…after all its the money of their private investors and they have the right to use it in any way they want?