Wednesday, August 27, 2008

World without VCs

Ever since I got plugged into the whole startup ecosystem both online and offline, it's amazing how much animosity exists in the entrepreneur community. This posting exemplifies one of the hatred for VC.

I understand where all the madness comes from, but let's take a pause and think about a world where VCs don't exist. Entrepreneurs should realize that money is a commodity in a world of perfectly capital efficient market... but it's just realistic. We'll leave rest of the discussion for finance academics to mull over. We live in a world somewhere between perfectly efficient and inefficient market where access to capital has different colors. Venture capital has its distinct color. VC firms have different color.

I've been talking pretty extensively about this venture capital color thing. So, the question now is... what if we live in a world without venture capital?

If I dare to oversymplify the definition of venture capital, it is a financing vehicle in which a company gets private equity capital infusion, mentorship, access, partnership, risk sharing in exchange for equity.

Yes, you can build a successful company without VCs. Yes, you can make a lot of money. Yes, you don't have to deal with all the "hassles" in dealing with mental liabilities to your investors.

BUT, how many Amazon, Google, eBay, Apple, HP, Cisco, etc. will exist without VCs. While money is a commodity, time is precious. If you have a great idea to change the world, would you rather make that happen at the end of 40 year time horizon? The biggest constraints that most of the fast-growing startups run into is the resource and time. The world without VCs, many of these startups just have very slim chance of winning in a short timeframe. That's the name of this game.

Can we live without venture capital? Yes, there can be many of these Tap Tap Tap that perhaps makes pretty good money for them. I don't know about your, but I'd rather build something much more significant than this even if it takes VC money. After all, who doesn't want to run a company with "other people's money"?

Wednesday, August 20, 2008

Time well-spent or better spent elsewhere?

If this is real... for real, I'd rather have the Target CEO creating shareholder value. I'm still amazed by the power of social media though.
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Monday, August 18, 2008

Small dream is a futile attempt in venture capital?

Long time, no post. I owe the audience some interesting insights... so here we go.

In a world of venture-backed companies, we talk a lot about billion dollar opportunities. To be honest, there ain't too many billion dollar companies out there, not that many hundreds of millions dollar companies either. This is one of the reasons that only about 1 out of 100 companies seeking venture capital ends up getting the "deal done". If I may use a little vulgar language, companies with "small" dreams are what some VCs call "crappy deals".

Having seen the financing from so-called top-tier firms and angel groups, it almost seems that the bigger pocket they have, small dreams are just futile attempts... at least in the eyes of beholder.

I'll say this now. Small dreams are NOT futile attempts. It's an issue more inherent within the venture capital community. I've just seen too many companies that solve big enough problems not addressing the billion dollar opportunities. Not only do I have a lot of respect for them, they just rock. The only problem is... they don't work well for venture economics. I'll dig into the whole venture economics in the future. Meanwhile, Fred Wilson has an awesome posting here.

Just as there are big dreams/small dreams in startups, there are big pocket/small pocket venture investors. If you look at the portfolio companies of Kleiner Perkins, Sequoia, Benchmarket and compare them with those of Band of Angels, not many overlaps there, if any. I'm not saying that angel groups invest in small dreams. I'm just saying that the financing strategies are just very, very different.

Early-stage VC firms typically put money to work in fast growing companies with a sufficiently large addressable market size, and expect additinoal financing to break cash flow positive. Angel groups are sort of different animals. There are angel groups with or without their own venture fund. Those without their own venture funds follow startegies to make the company become profitable without subsequent funding. This is very, very different financing strategy. Angel financing is not only WAY smaller than VC financing, but the dynamics of invested companies also need to be extremely capital efficient.

Case in point: If you are in the business of hearing from VC that you're not "big enough", consider different financing strategies. Talk to bankers, 3 F's (friends, family, and fools), revenue from customers/partners, sponsorship. You'll still make a lot of differences in this world and probably make some money for yourself as well.