Matt Winn has been writing some great posts recently. Today he posed the question of whether or not venture capital (i.e. early stage investments) was likely to see the see the massive growth that has characterized private equity in recent years.
In his post, Matt draws attention to the recent debate over startups as “commodities.” Matt considers whether, with the barriers to entry falling, opportunities for VCs will diminish.
If it does, it’s the VCs fault. Here’s why.
A good VC knows an AMAZING idea when they hear it. Amazing ideas are distinguished from GOOD ideas, and there are infinite amounts of good ideas, but few amazing ones. Maybe a VC receives 10,000 business models a year, maybe only 100, it doesn’t matter. There are only 4-5 ideas out of ALL those submitted worldwide annually that really have the potential to be next killer company. If an idea is marginal then, why invest? Some people don’t know this but VCs are require under fund contract to make investments…
I am convinced that entrepreneurs can run successful companies without VCs. VCs – deal with it. However, for a company to be the upper echelon of good, requires deep pockets and VC insight. These are the good companies still worth investing in, but tempered with realistic, 2007 expectations. In this day and age a VC in the tech sector should be able to see a liquidity event with most of their companies, even if they are smallish.
Thus, VCs need to come to grips with the reality of investing in volume (like Charles River) anticipating lower returns. They need to play the game and become deal makers with these good companies while waiting patiently until they get the idea that is really amazing. When that amazing opportunity waltzes in, they need to jump on it.
Zuckerberg’s comment that media changes every 100 years was right on – but Facebook isn’t changing media, at least not yet. Consider Jakiu, Twitter, Utterz, Tumblr, Pownce and others. There isn’t a whole lot of difference among them except at a granular level. Ultimately they accomplish the same thing for the same demographics. When VC’s stop funding these “me too’sâ€� and look into really innovative stuff, like that from Bug Labs, or even something like We Feel Fine, it is clear that there is plenty of amazing opportunities but they are unconventional. Oh, so risky, innovative companies are the ones that produce the big-time returns? Duh. And the great VCs can find them.
“Killerâ€� startups follow the same number laws of most other industries. For example, there is no shortage of talented, athletic males who could be good professional baseball players. However, it takes 1) the right management team and 2) the personal drive among individuals to consistently win like the Red Sox and Yankees. The top 1%. Sure these teams have big payrolls, but they also have the best farm systems, scouts, and coaches. The guys who ‘know how to win’ do so because they have an eye for talent and leverage their experience and connections. It’s the VCs problem…entrepreneurs will do their part naturally.
In my opinion venture capital success has less to do with the number of opportunities, and everything to do with the innovation, talent and team chemistry. It is rare for a company to have all three and such combinations don’t come through the door often.