A New Venture Capital Model…’Cause This One Is Busted
Venture investing is still broken. I guess when I said this a couple of years ago I was secretly hoping it would find its way home and repair itself. Nope. Wrong. But after all, I secretly hoped that Osama Bin Laden was just the name of a line of high-fashion women’s accessories!
Silicon Valley is in trouble. America’s system to spur innovation and growth is in grave jeopardy. Risk taking has become risk mitigation. Investors are looking for you to pay them for the privilege of helping them do the job their investors hired them to do. Is this good old fashioned American capitalism or what?
Silicon Valley is relatively robust compared to the rest of California and the country. Nonetheless, 9% unemployment is unacceptable for what has become known as “the world capital for technology innovation.” I fear greatly that that “capital” will relocate to China in my lifetime.
Silicon Valley began with a natural advantage: Stanford, Arthur Rock, Don Valentine, Larry Ellison, Sergey and Larry, Woz and Jobs. Then comes the rest of the VC pack and greed. We breed greed like no one outside of Wall Street—it is only appropriate that the sequel to Wall Street (the movie) titled Wall Street, Money Never Sleeps has been postponed for reasons that Gordon Gekko would support, to assure that the re-release of Avatar will reek in more profit for News Corp.
Smart Gen Y techies and savvy marketing folks gather here to invent, reinvent and hope for fame and fortune. When you are 22, your center of gravity for personal risk is very low. So, out here is where ideas are a dime a dozen, many still get funded for reasons other than their commercial value and promise. But, that’s the problem. Nothing that 2/3 of the venture funds have already died, the remaining VC Community (Atkinson view) is made up largely of two camps:
Camp 1: Of the remaining funds only about 20% are actually investing. Many are happy to waste an entrepreneur’s time, in the name of due diligence. These funds are protecting their portfolio, reserving most of the available cash for their portfolio; follow on investments, in the hope that a little tweak here or there might get them some of their money back later on. No real new investing so no real growth for Silicon Valley jobs and limited innovation.
Camp 2: These used to be called “seed funds” and also used to find a way to be included in ecosystem of venture investing. They would take early risk and reap greater reward when successful. These are now a mix of smaller funds and Super Angels—their investors are successful Tech execs with cash. These are the “flippers”, looking for “smoke” to invest, say $100,000, until there is “fire”. Then perhaps another $500,000 to support the non-business plan, no-revenue model “concept” until it can be sold to one of a few dozen companies as an R&D play, the cheaper of the “Buy or Make” decision. But do they buy what they (larger companies with public currency) truly planned to make? The hope is that since software has basically been invented and cloud-based APIs rule, mashing up tech-enabled ideas quickly will yield high returns. In some case it does. But what is really missing are the company builders. Where are the jobs? Where is the pride and passion for growth? Were is Arthur Rock? We need him and his spirit back, not a revisit to the world of Gordon Gekko.
The feeder VC’s and Super Angels are feeding deal flow to their larger VC counterparts, who in-turn, sit on the boards who buy these APIs – I can’t really call them companies. Seems like an insider game to me. So, let’s add this up:
1. No company building in Silicon Valley, so no real job growth. The result is talent creep. People move and because of the high cost of living here, they won’t [can't] come back. Because the economy is still shaky, the companies that are growing (long past the VC stage) prefer to hire contractors rather than full time employees or to outsource work to other countries. This breeds insecurity and no benefits. Imagine sitting next to a full time employee who is doing exactly what you are. They have security, health, dental, vision, vacation, options, etc. You don’t. How does that make you feel? Less valuable? Less committed? Less vested in the success of the company that doesn’t value you and your contribution enough to hire you?
The result is a scared, unsettled workforce with perhaps, if lucky, a 12-18 month contract, because after that the government might find that they truly are employees, charge them back taxes and penalties and where would these companies be with that kind of cost structure? Budding entrepreneurs are discouraged because they are less relevant, old and of course not forward-thinking. The American Way? Sure, according to Gordon Gekko.
2. Good promising companies have limited sources for capital. I was talking with a smaller VC the other day who said a company they looked at recently, had too much traction for its stage of investment and too little traction for the next level of players. WHAT? Too much market and concept validation? This is the kind of perverted thinking that many Sand Hill Road investors have these days. Some, not all of these funds reside in Camp 2. This is the company that is too big to “flip” and too little to grow. WHAT? HUH?
I believe that revenue traction is e -v -e- r- y- t- h- i -n- g. Without it, your company just has an idea. So here, in the Valley, “ideas” get funded but promising businesses WITH traction don’t? Aren’t these the types of company’s that use capital to grow and hire people? Isn’t this the way out of our current prolonged economic dilemma? Isn’t this the American Way? In the 60’s there was the concept of the “ugly American”, pretty soon, having adopted our methods, it will be the “Ugly Indian” or “Ugly Chinese”—no ethnic offense intended but these are countries who have used innovation to spur growth.
What’s the answer? Is it Arthur Rock? Longer-term investing perspectives? A new batch of VC’s that are truly interested in, well, venture investing?
In the interest of full disclosure I am the CEO of FohBoh, Inc., a promising young company that is generally not interested and generally unqualified for the venture investors. But I am also a father, a citizen and a patriot who fears for the future of America when those who hold access to capital see the best opportunities in effectively going to Vegas and betting on “00” or looking outside our borders.
