

People vs. Process: The Wrong Side of Venture Finance - jaf12duke
http://measuringmeasures.com/blog/2010/3/2/people-vs-process-the-wrong-side-of-venture-finance.html

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rjurney
Reposted from the blog itself: This is a very interesting idea, and a great
discussion of its merits.

There is something compelling about the idea that seed financing is such a
fundamental part of wealth creation in our new economy that it should follow a
process, on a scale, comparable to a small business loan. On the other hand,
'the network is the wealth,' and as you point out - their lack of active
participation in companies' outcomes limits their value. You would expect
quality entrepreneurs to expect better terms from these guys compared to an
investor with more value add. There is an extreme contrast between this method
and the model of more formalized networks currently in favor.

As you indicate, it would seem that those companies that would benefit most
from this model would need it the least. If all a team of entrepreneurs need
is a check, that implies they already have a strong network in place to help
them advance the business. If that is the case - they probably have lots of
options for funding. If Right Side is aware of this, then its methods for
selection would certainly involve social network analysis, selecting
prestigious founders, and offering trouble free and favorable terms. By
spending less time assisting companies - an expensive process - can Right Side
afford to give better terms to attract solid entrepreneurs to apply for what
amounts to the venture equivalent of a streamlined small business loan? It
will be interesting to see if this is the case.

This model might shine at picking out great teams from disadvantaged regions -
basically everywhere outside of the Bay Area and Boston. It may be that this
model can select strongly connected teams from cash poor regions whose
networks can sustain the business, even if they don't permit easy financing.

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bradfordcross
@rjurney - interesting points on finding great people in hard-to-find places,
as well as competing based on more favorable and simpler terms.

If they do want to address the market that way, I think that the message would
need to come across better to attract the right kinds of applicants. Right now
the message seems to come across very process-focused, which I think will tend
to turn a lot of folks off.

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DaniFong
That does sounds like a disaster waiting to happen. If you're more loose with
your cash than others, but don't have as many benefits or nice terms, you will
systematically fund people who couldn't get cash any other way, leaving the
really good prospects to people willing to commit more specifically.

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marshallp
The venture capital industry is such a vital part of modern society, it's
where robots and cancer cures will probably come from, yet it operates on the
level of alchemy. There needs to be a real shake up, on the level of a 100
more right side capital's. And God knows investors would welcome it, they're
literally throwing their money at gambling (derivatives) these days.

