
  What Have VCs Really Done for Innovation?  - jasonlbaptiste
http://www.techcrunch.com/2009/09/20/what-have-vcs-really-done-for-innovation/
======
fnid
The venture capital market is crumbling. It used to cost a lot of money to
build a company, but not anymore and VCs are no longer the gatekeepers to
success. Their exits are puny and most of them fail. They are hunting needles
in haystacks. The supply is greater than demand. Their 2+20 scheme is too
expensive. The wealthy don't need the VCs anymore and the returns they are
bringing in aren't worth the risk.

This crap from the NVCA is not an isolated event. This absurd notion of a
_founder visa_ is another data point in the trending decline of venture
capital.

VCs are losing their power. They are struggling to keep it. They are crying
out for help. They are being destroyed by scrappy startups and small funding
orgs like YCombinator.

VCs are going the way of universities and print publications and even
television. The barriers to entry are not what they used to be. The Internet,
and tech in general, is the revolution they claimed it was to their original
investors -- so revolutionary in fact that it is defeating even their own
industry.

Why did they think they were immune to Moore's law. As technology costs
decrease, supply increases. VCs operated on supply and demand just like every
other industry. They controlled access to the supply of capital to startups
and to the supply of startups for investors - but not anymore. The Founder
Visa is another effort on their part to regain control of that startup market.
If they can increase the supply of ventures only they can enable, then they
regain power over other startups. If they can get 50% of a startup from India
for $1M, why would they fund the same startup for the US that wants to give up
only 20%?

Technology is changing so quickly that similar ideas are popping up all over
the place. There are a multitude of ideas the vcs can fund. Look at TwitVid
here a couple months ago.

All the signs are there. The question is, are VCs going to be able to create
hype around another industry that actually _needs_ them or are they going to
try to defend the fort like the newspapers are doing now?

The Internet might just be the biggest innovative idea since the printing
press. It could be a long time until another change of this magnitude will
come along. Venture Capital will always have a place in a growing society, but
the opportunities are declining and the number of VC firms will decline as
well.

Here are the tips for VC: Make your operations more scalable, increase
diversity, fund in smaller amounts and expect less control and equity in
exchange.

EDIT: I want to add that I know this is true because VC firms have approached
us several times wanting to invest. Other companies in our market were funded
in the millions by VCs and they are already gone. They couldn't build the kind
of revenue or customer base the VCs expect, but a smaller startup like we are
can easily sustain itself.

VC investment is having a negative impact on the potential success of a
business because expectations are wildly out of bounds. It takes longer to
make money now and the competition for the business idea is so great that
investment of capital is not a differentiator like it used to be.

A VC funded startup may have more capital than we have, but we have _way_ more
_time_ than they have.

~~~
vaksel
this applies to internet companies, but any other business needs VCs. Sure you
may code your startup in a few years on your own, but how are you going to
open a factory without any outside investment?

~~~
ibsulon
Who isn't outsourcing to China anyway? :/

~~~
eru
People who are outsourcing to Vietnam or the US?

------
pg
Maybe the NVCA statistics are somewhat bogus, but there is a pretty compelling
way to answer the question empirically: how many tech companies have made it
as far as an IPO without taking money from VC funds?

Maybe the world is changing. Maybe now that it's cheaper to start startups,
some will start to make it all the way to IPOs without VC funding. Obviously I
would love it if a company we funded could make it to an IPO without any
further dilution. But that seems like insanely wishful thinking.

~~~
prakash
_how many tech companies have made it as far as an IPO without taking money
from VC funds?_

Any particular reason you are looking at an IPO as a milestone? Somehow I see
the YC companies more like SAS.

~~~
pg
It's unequivocal. You could also use a revenue threshold.

~~~
prakash
How about some combination of Revenue + Profitability?

Revenue alone doesn't help, I think Facebook crossed $300 MM but was not
profitable at that point in time.

Current IPO's target revenue in the range of $50 MM (I think), pre-bubble
IPO's required 4 straight quarters of revenue growth (something like that),
this is a moving dynamic.

~~~
akeefer
For what it's worth, my understanding is that the target these days
(especially thanks to the costs of Sarbanes-Oxley compliance) is closer to
$100 MM in revenue to even think about an IPO.

------
gruseom
Some of this critique is surely valid. But people are way too binary about
this (vcs-suck vs. no-they-don't). You can see that in the first paragraph,
where he argues that VC money wasn't essential to either Microsoft's or
Google's success. I don't believe that's true in Google's case. I'm pretty
sure that without VC money they wouldn't have been able to hire or scale in
the way they did, and without those things they wouldn't be Google.

~~~
sachinag
Oh, totally: the VCs were smart enough to see that Google was different enough
that _both_ KPCB and Sequoia went in 50/50 on the first $25MM round. And
Google had a totally failed monetization strategy (their intranet search
appliances, of which they sold a single one, to RedHat) before Sergey and
Larry capitulated to allow advertising on SERPs. Google needed the VC money to
survive until AdWords finally delivered a coherent monetization strategy.

It's a little sad that someone with so much good analysis of the NVCA's
overreaching had to throw in a jab so easily refutable.

~~~
gruseom
I agree, it's superfluous and undermines his case.

This is interesting:

 _their intranet search appliances, of which they sold a single one, to
RedHat_

I knew their appliance business wasn't that big, but is that really true? How
do you know it?

~~~
tedunangst
It's false. I worked for a company that owned one and was not named RedHat.

------
kansando
VCs are clearly exaggerating their contribution but it is easy to forget that
they are the only long-term investors in the current financial system. Who
else will commit to eight years of involvement with an unknown entity? Do they
need to restructure - yes, but their disappearance will not be good for
startups.

------
frisco
There's this confusion that VCs exist primarily to help innovative startups
get off the ground. This just isn't true; they really exist to generate
returns for their investors. The complaint that entrepreneurs are so
underserved by VCs misses the point: a VC only needs to make a couple
investments a year to meet their goals for their LPs. VCs aren't, and have
never been, the gatekeepers to success -- and that's not their intention.

Yes, there's a long tail of crappy VCs that don't make money and are generally
wastes of space -- but that's more an argument for less venture capital in the
valley, not more, at any price point, whether it's $200k or $2 million.

------
vaksel
81% of all programmer jobs? Man these VC guys must be smoking crack

~~~
ujjwalg
so, not only they make all the money, they also want to be credited for all
the innovation and leadership...

------
prat
Venture capital is just the fuel that is required to keep an innovative
enterprise running. Can oil industry take the credit for bringing industrial
revolution? No.

Education, innovation and hardwork of entrepreneurs is what keeps the VCs
alive. VCs depend on entrepreneurs not vice versa.

------
fryduck
What VCs do: Swamp ideas with money and kill off the better ideas, while
continuing to lecture the rest of us about how our PPTs should be, what dress
we need to wear, and how to be respectful of their time.

------
known
I believe Angel Investors (not VCs) contributed a lot for innovation.

<http://paulgraham.com/angelinvesting.html>

~~~
sachinag
Angel investors are now, and always have been, the engines for innovation.
Bankers - the old angels - funded Henry Ford. Back in the day, you could get a
loan from a bank for a new venture. You can't any more; this, more than
anything, is why new innovation is so concentrated in geographic areas.

In the old days, New York banks would give money to an engineer in Detroit.
Now, if you want angel money, you need to be physically near the angels. You
can raise VC - follower - money from outside your area if you 1) have traction
or 2) are a known quantity with a past exit. But a new team in a new market
with a new idea? Get thee to the Valley or Route 128, cause that's where the
angels are.

EDIT: I should say _networks_ of angels for first money in. SV and Mass have
enough angels to syndicate a deal. You're restricted to sugar daddies doing
$200K by themselves outside those areas (and maybe NYC). First Round led Mint,
but they syndicated it in the Valley. Same deal with iSocket, where Tim Draper
of DFJ led, but the deal was syndicated to angels.

And, of course, if you're Shai Agassi, you can raise a ton of money for Better
Place, even though you have no experience in battery tech or distribution,
because you're Shai Agassi.

~~~
tomjen2
The banks properly can't legally loan money to something so dangerous as a new
business. FDIC could never afford to cover _that_.

~~~
sachinag
The FDIC insures deposits of depositors, not loans made by banks. Loans are
where banks (traditionally) make their loans, and the banks themselves bear
the risk (traditionally) of those loans.

(I hate having to add the "traditionally" thanks to the insane securitization
practices of the last decade. _shakes fist_ )

~~~
Eliezer
Sounds like what we need is _venture capital securitization!_

(I accept no responsibility if this HN comment causes the downfall of America
in 20 years.)

------
prakash
I am guessing the study didn't include YCombinator!

~~~
abalashov
YCombinator is not a VC organisation.

------
lucifer
The very fact of the continued existence of VCs for software technology
businesses is a sad testament to the inability of the geekdom to capitalize on
their knowledge. Perhaps we are unconsciously worried that we will suffer the
fate of the Templars, but at least that last group of disruptive geeks managed
to squeeze a few centuries on top of the Pyramid from their collective
knowledge base.

