
Don’t Launch A Company, Launch A Fund (Or The Series A Will Die) - llambda
http://techcrunch.com/2011/11/04/dont-launch-a-company-launch-a-fund-or-the-series-a-will-die/
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asanwal
This post is quite off the mark as there are some massive leaps of faith/logic
in this post which I'll try to address. For context, my firm (CB Insights)
tracks this data so I'm not flying blind here (at least not completely)

Quote: The solution to this structural problem in the startup economy is
simple: we need more venture funds. Unfortunately, thousands of funds around
the world have been killed off since 2007.

This is really not accurate or realistic. Many venture funds have died for a
reason - their returns were terrible. In short, they deserved to die because
they didn't perform. The Limited Partners in those funds decided not to invest
more in those funds, and as a result those funds are no more. This is a good
thing as its the way markets and resource allocation are supposed to work
(albeit the market is imperfect but that's a rant for another day). If anyone
can name a fund with an above benchmark IRR that was "killed", I will stand
corrected.

The one negative of these crappy returning funds is is that some of those LPs
may have soured on the VC asset class overall and so might be gunshy to invest
in another VC fund. That's perhaps happened but nevertheless, the idea that
funds were "killed off" is inaccurate. They were given some rope and hung
themselves with poor returns.

Quote: First, you have a large number of high-quality companies that need
capital, while the competition to provide capital is decreasing. Second, you
have a pool of frustrated limited partners looking for new managers.

Capital will find its way to great opportunities. And that capital may not
always come from VCs. We track hedge funds investing in private companies
through sidepocket funds, family offices investing their money in these
companies, angels, corporates, etc. If there is a good opportunity, someone
will invest especially now when it seems everyone wants to invest in the next
FB, Twitter, Groupon, Zynga, etc.

The problem is that "high quality" as a descriptor means nothing. Great
companies whose metrics are killer, whose growth is up and to the right and
who are in the right space (mobile photo sharing app anyone?) will get their
Series A. It's the folks who are kinda up and kinda down that have trouble.
Are these high quality companies? Who knows? They might be good companies one
day but maybe the odds of them generating venture level returns is now not
realistic. And so they're orphaned and they'll die. That sounds terrible but
there is a VC conversion funnel and has been forever. Not everyone gets
follow-on funding. It's the rules.

Just 1 in 100 angel deals may get funded by venture capitalists today, yet
there are probably at least 10 strong startups in a 100, if not more.

As commenter staunch says, "Citation Needed". There is no support for this
beyond a gut feel.

Finally, here is the reality on Seed VC deals. If done by a large VC, they are
"call options". If the company kills it with that money, the VC has the first
look at them and can invest in the Series A. If they don't grow like heck,
it's just a seed investment so not lots of capital at risk.

Totally unrelated but since this response was longer than expected, I'm gonna
sneak this in -- we're hiring so check us out - www.cbinsights.com

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smilliken
I assume the author's numbers come from TheFunded or AngelList, which I'd
expect to be a highly biased sample. You would expect more seed deals to go
through these sites, since they will typically cast a wider net. Later deals
will be more private, unpublicized, and with companies that are already
connected to institutional funds. It would be much more interesting to see
numbers from SEC filings in the tech sector.

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rayhano
Seriously? How arbitrary is this article. You cannot post ambiguous numbers to
a crowd of data-junkies.

Maybe the system is broken and needs fixing? Maybe the endless series of
funding model doesn't work? Or maybe the financial markets in general are
broken and crowd sourcing via pension schemes self-selecting may be an option
once regulators stop forcing money into the public equity and debt markets,
which are nothing more than an elaborate closed shop.

------
ysilver
Stunning:

"Just 1 in 100 angel deals may get funded by venture capitalists today, yet
there are probably at least 10 strong startups in a 100, if not more."

~~~
staunch
[citation needed]

