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Dear VCs: Kill the ‘warm’ introduction (dearvcs.svbtle.com)
71 points by mck- on Nov 27, 2014 | hide | past | web | favorite | 59 comments



Author has no concept of what it is like to take submissions to anything. As someone who is a member of an investment fund that gets way less attention than a top-tier VC, I'll tell you what it is like to have open submissions:

Almost everything that comes through that channel is complete garbage. It has negative utility to read through that stuff because it makes you tired enough that you might actually miss something good if you see it anyway, and it predisposes you toward negativity regarding submissions (which is psychologically unhealthy both for your quality of life and your relationships with potential investees.)

Our hit rate from open submissions was 0.25%, that is, it took 400 submissions to get one company in which we would invest. And that company is one that likely would have come to us through a more-closed submissions process.

One of the most valuable things you can have as a business owner (startup or no) is an understanding of context. Know what the situation is like for the people you are dealing with. Know why they do things the way they do. This author has not built that experience/skill. He is only seeing things from his viewpoint as someone who wants money. Guess what, this makes him isomorphic to every other random startup founder in which a VC is not going to invest.

Use common sense: VCs are financially motivated to find good companies to invest in! If they think something will give them an edge, they are going to try it. The fact that they don't take open submissions should tell you something about the dynamics of the system. You should listen and understand what that something is, because that understanding is valuable.


Great. Here is a hypothetical for you: we are a bootstrapped company with traction and earnings, but we're located in Armpit, KS and the only people we are networked with are our suppliers and our customers.

We want to raise from a well connected firm like yourselves to launch our next phase of growth. How, exactly, do we do that without already being part of your referral network?

In anticipation of your answer, "you'll find a way" is a pure blank-out. You've already closed your circuit. How do you expect the hypothetical "us" to break in?


Here's one possible way:

1. Reach out to people who got funded by the VCs you want.

2. Ask them for a 10 minute phone call or if you can invite them for coffee. Do this with enough people and some WILL take the time.

3. Be awesome when talking to the founders (so they like you and believe you've got the stuff.

4. Ask for an intro.

5. Repeat 1 - 4 until you get an intro.

Details: https://medium.com/@Steli/how-to-get-warm-introductions-to-v...


Just playing devil's advocate here. So you suggest people waste: - a lot of their own time researching say 25 random other companies, reach out to their founders (who are in a completely different field of business etc) - fly out to San Francisco from Armpit, KS. Waste 5 of those 25 founders time for coffee who actually agreed to meet with you even though you have nothing in common with them - then tell them that you're also not interested in them really. All you want is a backhanded intro to their investors, which they hope they will give you

Only so that the investor will get 2-3 emails from founders who really know nothing about you other than what they found out in a 10 minute phone call or a rushed 30 min Starbucks on 2nd and Folsom.

Shouldn't an associate (who actually gets paid for this job) do this, rather than waste founders who are busy building their own companies?

Don't you think that system is broken?


"Just playing devil's advocate here." Not sure what you're getting out of that, but I'm happy to play along :-)

"you suggest people waste: - a lot of their own time" I wouldn't call it "wasting time" if it gets you the result you want.

"even though you have nothing in common with them" Being startup founders is already having a lot in common.

"All you want is a backhanded intro" I wouldn't do any of this in a backhanded way, founders will smell it. Be transparent and upfront.

"Only so that the investor will get 2-3 emails" The question was how to get warm introductions... these are warm introductions :)

"from founders who really know nothing about you other than what they found out in a 10 minute phone call" ... or from follow up interactions you've had with them after that initial 10 minute phone call...

"Don't you think that system is broken?" Nope :) I think it's an imperfect system - but then everything in the real world is.


Here's a system that worked for us.

1. Identify VC companies who invest in our space through web research. 2. Search for people who work at the companies on LinkedIn. It shows your contacts who know those people, and also contacts who have contacts who know those people. 3. From the contacts who know people, identify those who you think would be willing to make an introduction. Talk to them, see if they will. 4. From the third-level people, check how you're connected and see if the intermediate contact is someone who can make an intro that you can then use to get the VC intro.

Repeated across every member of our team, we found a bunch of useful contacts and got a bunch of meetings. To be fair -- step 4 didn't turn up many useful ones, most came from step 3. And to add to that, no-one invested. But it wasn't for lack of intros or meetings.


>Author has no concept of what it is like to take submissions to anything.

1. You're quite confident that you know me after reading one anonymous blog post. First, QQQ posts our real email and phone number on our website. I personally read/listen to every submission (1000+ in 2014) through this channel, and someone on our team (usually me) replies to every (non-troll) comment. We have also read and reviewed 100+ resumes attached to cold emails, along with 10+ cold investor email pitches. All three 'cold' channels have yielded amazing returns, including one of our best hires, a couple of our best investors, and many of our most loyal customers. As I've said before, the solution to warm introductions is not unlimited, irrelevant cold emails. But VCs should read and respond to all cold submissions that are clear, concise, and relevant.

>Use common sense: VCs are financially motivated to find good companies to invest in!

2. Of course, VCs are financially motivated to find great companies. However, expecting that this fact will lead to optimal decision-making on their part assumes a perfectly efficient market.

I'm arguing that the heuristics used by many investors are flawed. Early-stage funding, including at accelerators like YC, skews towards twentysomething founders. That's despite the fact that the average founder of a 'unicorn' startup is well over 30. Men get funded at higher rates than women. Tall men get funded at higher rates than short men. No one is arguing that any of these heuristics are correlated with increased returns. But they exist.

>You should listen and understand what that something is, because that understanding is valuable.

3. This is not about me. QQQ is doing great. We could raise a Series A now, but I want to push for 4-6 months of additional growth before doing so. Also, this is my second startup as a founder, and I learned from my first that it was important to move QQQ to Silicon Valley and build a large network here. When I need to meet a VC these days, I always get 1+ warm introductions into the ideal partner.

Many of the stories I tell on my blog are from my early startup days. Since then, I have learned how to "play the game." But I never forgot how much we struggled at the beginning, and want to share my experiences so that future founders will be able to spend more time building products that people love and less time learning to conform with artificial societal norms.


"Open submissions" doesn't, or at least have to, mean that you literally take any submission from anyone. It means things like having a larger group go a longer way in the submissions process and trying to stay away from arbitrary qualifications.


It bothers me when people try to tell businesses how to improve their operations, purely for personal benefit. The point of VC firms is not to fund your business, its for VCs to generate a return on investment. VCs surely know that by not reading all of the applications, they are missing potential winners. But they also know that getting strong introductions is a much much much more efficient way of finding potential winners.

It is not the system's job to work for you, it is your job to play within the system.


The point he's making is that they don't "know" that warm intros are more efficient they only believe it. There was a time when the most efficient way to meet a significant other was a warm intro. Now okcupid and plenty of fish can legitimately claim to have facilitated thousand of marriages.

I am not persuaded that slave labour associates reading cold emails is more efficient, but there are undoubtedly more creative and lucrative ways to handle the process.


You have a good point in the "advice" for personal benefit angle, but don't mistake the goals of a VC firm for their point (i.e. their raison d'etre). The goal of a VC firm may be to generate a profit, but the reason they exist is to implement part of the the resource-allocation function of capitalism. If they are failing to do a good job at this, even if they turn a profit doing so, then they are an unsuccessful firm (at least, in a broader sense).


That's sort of the point, isn't it? VCs have generated horrible returns. Compare that to Y-Combinator which doesn't require a warm introduction.


Realistically are YCs annualized returns any better than a top-tier VCs?


Or change the system.. Thanks Naval!


Sounds like a ripe opportunity for "disruption."


1. This isn't feasible. A partner at CRI once told me they get 5,000 deals a year. It's simply impossible to sift through even more than that.

2. If you're spending your nights shipping code, then you can probably get users/customers. If you can get users/customers, getting warm intros is pretty easy. So much so, that VCs will come after you (see the WhatsApp/Sequoia story)

3. I've struggled to get funding so I can empathize with the author (among his other various random rants) but this isn't the right way to react to it.

4. VCs often say (at least in SV) their biggest mistakes are the "investments they didn't make". I know very few who said "shucks, wish I woulda have gotten a warm intro from them".

The reality is pretty simple - show growth and you'll get VC intros. If you spend your time complaining how the system is unfit for you, then building a venture-based tech company is probably not for you.


YC doesn't get more than 5,000 twice a year?


YC's cheque size is $20,000 at max. Most venture firms that have > $100M under management won't write less than $1M cheque. Why? Because that's how their business works. So for institutional investors, it's a huge risk to back someone random whom they don't know. That's why YC is successful.

Nowadays, VCs are rarely the first money in bank. So YC and other accelerators act as a screening step for most institutional investors. And VCs can be successful by writing larger cheques at a later stage. So win-win for VCs as well as accelerators.


Just for the record, YC's check had increased to $120k since April


Your story would become compelling if you share your raw revenue growth graph and tell us what market you are in. Without these, your complaints sound like hollow whining. I mean this in the most constructive way possible. You could even do this without losing your anonymity.

Lacking that information, we have no data to judge the reasonableness of your complaint. All we have is the perspective of two experts, who both said "Too early" (translation, "Zero interest. But do come back if your business does magically turn amazing").


"It is practically impossible for a talented, but unknown founder to get a meeting with a top VC."

Let's break that into four buckets:

1. practically impossible 2. talented but unknown founder 3. get a meeting 4. top VC

Ok, so what's the problem? By definition, top vc's are going to be the most sought-after, and the ones who have the pick of the investment litter. So it's going to be hard. Real hard. It's going to be, you got it, practically impossible -- but not completely impossible.

If you're such a talented founder, then one of your talents is knowing how to figure out how to get through. If you don't have that talent then maybe you're not as talented as you think? You can sometimes make up for it through sheer persistence -- I don't mean by relentlessly calling the office of and sending Cuban cigars to Gordon Gekko. I mean subtle persistence. Find ways. That are clever. That show you're talented. Securing venture capital is a hack like any other. Make it a clever hack. In my experience a "warm intro" helps but is not necessary. Deep research helps more. Almost all of it is out there on Google.

But I also wonder, why do you need a "top VC" in the first place? There are bunch of smaller VCs who are superb. If your product/service is so great (read: traction, rave reviews), it will get on the radar of investors and media.

Earn your VC, and it won't be practically impossible.


Build something interesting and they will come to you.

I get 10-15 pitches a day. Most are unworkable. I reply to about one a week.


Joshua, what is your take on strong (but not famous) teams in big markets with great looking version one but before meaningful traction? Under what circumstances do you take these meetings?


I might. Depends on the area etc.

Cold pitches almost never have working prototypes.


Interesting, are the founders behind the cold pitches generally non technical then? Most good engineers I know start to build first and then end up applying to YC etc.. after they have something worthwhile.


That's encouraging :-)

We are working on mobile education. I see you investing in Codecademy and AltSchool.

If education+mobile is in your interests, we can get an intro to you. We have ~15 mutual connections.


Man, you're selling an investment to a VC. If a stock broker cold calls you to offer you an awesome deal, you hang up. Venture capitalists are just like you in that sense; they have a practically infinite number of investment options and a limited amount of time. They owe you absolutely nothing.


I think you give VCs too much credit for being good at being bad. In my experience it's more that many VCs are just mediocre at their job, much like any other field. I think the great ones don't really fall into some of these traps, but their associates and junior partners do.

As an example, I recently had a VC continuously email me for months which I ignored (mainly because I knew we weren't a fit and didn't want to waste either side's time), only to set up a meeting and have them blow me off. I found it pretty funny.

The reality is there are a lot of companies on the radar for these firms, and it's a lot of work to individually vet each one. They are only human, and I would just try not to take it personally and keep on kicking ass.

This is why it takes even great startups months to fundraise. All we hear about in the news are the rare super-hot startups which skew our perception of the fundraising game. The reality is fundraising sucks for most startups and you just described why (not that they can't improve though).


It appears the author doesn't realize that VCs are normal businesses trying to turn a profit. If there was a profitable opportunity to find "99.99% of talented, unknown founders" by accepting cold emails, then some VCs would start doing it.

I would guess the reason they don't is because the authors assumption is wrong. If you're a talented, driven founder with a growing startup then it's not really that hard to get a meeting with a top tier VC.

The problem with accepting cold emails is the sheer volume. Unless there is a standard filtering process, partners will waste too much time with crappy startups.

A solution to this would be to create a standardized format (kind of like the YC application) which founders could submit to multiple VCs. Fortunately, AngelList is already busy solving this problem.


If the author wants people to be impressed there needs to be something to be impressed about. Build an actual product with actual value and actual adoption by the market (even just a smallish test pool) and people will talk to you. If it's just an idea, well those are a dime a dozen.

VCs want to invest in real products. Does passing over a bazillion pitches about concepts mean they might pass up the next 'big one'? Sure, and the VCs know this. Their job is not to find the next big one as much as it is to make a solid positive return for investors and the best way to do that is focus primarily on real products showing something to be impressed with.

The effort wasted on writing this ranty post could have been put towards doing something to impress the VCs and have them calling you. Just saying.


This feels like the definition of wishful thinking. If I, a nobody, tend to dismiss cold enquiries then why on earth would someone in high demand not?


VCs are not like your local bank with all the time and willingness to hear all the potential business plans and pitches that can be thrown at them. Also their system isn't just spawned out of some kind of elitist mindset to keep you out of the in-crowd. Just keep working at it.


In 1996 I worked at a small Internet Service Provider. We were known for being one of the cheapest (if not the cheapest) ISP's in New York City.

Back then if you wanted a machine on the network, you'd get a 10MB uplink to a T-3 (which was better speed than a lot of the other low-tiers). A port fee was $500 a month to be able to transfer 1 gig a month, up to $3000 to transfer 100 gigs a month. Then you'd have to lease a machine as well.

Nowadays, I can get a 125MB uplink on Linode, with 2000 gigs allowed a month - for $10 a month. No lease for a machine - the VPS comes with it for free - and is much faster, has more storage, memory etc. than anything I could have gotten for a reasonable price back then.

It costs next to nothing to put a product out nowadays. Google Play and the App Store. 100 million people want to download your app from Google Play? No worries - it's hosted on their infrastructure.

Aside from that things like Github are around. There are open source libraries that do everything, and with foreign function interface you can use libraries from almost any language. A lot of your coding is done for you. A lot of what I do is hooking two libraries up together, put a UI on it, and then maybe a little bit of my own code. Voila, a product.

I have no idea why anyone who can code would feel dependent on investors.

Get in a hurry to where you, or you and your co-founder(s), are "ramen profitable", and then devote yourself 100% to building up revenue and getting product/market fit.

In high school, I used to have to sneak into the Columbia University engineering library to read the 1978 Bell System Technical Journal articles about how Unix worked. Now I can go down to my local bookstore and there is a shelf of books on it. I don't even have to leave my home, I can get the information on my PC. Not even that - all the information I want to know about Unix is on my phone at any time I want - which runs Unix.

It's like people are looking for someone to tell them "no". Every day that passes by, it gets easier and easier to build a product that hundreds of thousands of people want. You don't need a lot of capital, it's practically free. You just need to know a little programming and get to it. Of course, the more programming you learn, the easier it will be.


QQQ was featured on national TV. A junior partner at Firm #1, who happened to watch this feature, reached out to set up an ‘introductory’ meeting. Junior Partner #1 ended this introductory meeting by stating that QQQ was “interesting, but too early” for Firm #1. I was strongly encouraged to “keep Firm #1 in mind for (our) upcoming Series A.”

Having already been rejected by Firm #1 previously, perhaps you should have employed some strategy of your own at this point - display ambivalence about Junior Partner's overtures and make Firm #1 chase you a bit instead of you chasing them. It's a truism of human psychology that people feel more intense desire for what they can't have. Another approach might have been to make it clear that QQQ was a time-limited opportunity and if Firm #1 was not inclined to invest, then the door would be closed to them, forever. Nothing personal or spiteful about it - just the filter that you use to put a cap on your time investment in any given lead.

As written, and notwithstanding some good points, this comes across as 'I have ____ and ____ desirable qualities, so why can't I find love?' And like love, if it's obviously the #1 thing on your mind then that means you must be coming up short. That's a problem because it's difficult for potential prospects to get a sense of who you really are behind the neediness. So if you want investment capital, talk about your organic growth strategy or your vision for employee-owned cooperative, like firms X and Y that found success that way. If the VC wants to talk money than you talk product, if the VC wants to talk growth you tell them you're very excited about the upside potential and then change the subject. Leave first. If you're at dinner (which you should be) let the other person order dessert, then get coffee and the check for yourself. Either pick up the tab or let the VC insist, but beat a path out of there.


I'm not a VC.

1. Not all startups/business can be venture backed. Venture backed startups are expected to have 10x returns within 5-8 years of financing and swing for fences.

2. If you kill warm introductions then how are they going to do screening? There is so much noise that it's humanely impossible for institutional investors find right kind of signal (i.e. venture backed businesses)

3. Financing is hard in every situation. Be it mortgage for your house or financing your startup.

4. If you build something successful and fits into the definition of venture backed business, they will come.

5. Accelerators YC/Techstars/Angelpad successfully hacked this warm introductions problem by inviting everyone to apply. These accelerators will make warm introductions for you.


I'm a VC, although by no means a "Top VC". (Well, not yet!) I fully agree with the spirit of the post, which is that getting a warm intro shouldn't be required to talk to a VC. What I will say is that most cold emails are not very good. When they are, many VCs, including myself, will reply and meet with the founder and treat it like any other startup pitch. Just last week, I talked with 3 founders who contacted me with an intro.

Requiring a warm-intro is simply an easy way to filter our a bunch of noise. FWIW, I would say that ~50% of warm-intro pitches that I see are good, and maybe ~5% of cold pitches are of a similar quality. About 1/3 of the pitches that I get come in cold.


Is there any automated process by which people can apply for your time? Are there tools that serve the VC space to make filtering easier and to broaden your net?


There's stuff like DataFox and Mattermark to help with filtering. Also, bigger firms often have associates who do a lot of filtering work.

There's no automated process to apply for my time. Emails work fine. :)


The author makes some really good points. It is incredibly hard to meet a well-connected VC if you, yourself are not well-connected. It's the classic double bind.

However, the article seemed to imply that somehow the "goal" was raising money from a VC, instead of making a great product. There were tons of companies started before the VC industry even existed. Businesses can and should be self-sustaining - creating profit that can fund operations. Just because most tech companies nowadays are money losing for years, doesn't mean this has to be the case. And if the company is profitable, it can exist without a warm introduction.


The replies to the letter are silly. NOBODY has done a conclusive study showing that "warm" introductions result in a better deal success ratio. Ageism is the same thing. Until just 2 weeks ago, nobody had done a study to refute the rampant and overt ageism- of course, now we all know that companies founded by folks in their 40's and 50's have a substantially greater chance of succeeding. So not only is the ageism wrong, it is not remotely "best practices"- something VC's owe their investors. Neither is the "warm" introduction.


Regarding the lack of email contact info on VC sites, you can usually find ways around this. For example, the a16z contact page[0] has generic email addresses that probably just point to black holes. But a little bit of creative Googling will tell you that Marc Andreessen's email address is pmarca@a16z.com. I couldn't find Ben Horowitz's or Chris Dixon's, but based on their Twitter handles, I would guess they're bhorowitz@a16z.com and cdixon@a16z.com, respectively.

0: http://a16z.com/contact/


I wonder how many deals that are already series A size opportunities are out there which have so far avoided the typical tech startup route of picking up seed funding/ advisors which will avoid any introduction issue?

It certainly is possible, such as bootstrapping to early profitability or taking some money from those outside of regular crowds. The question would be I guess is this group big enough that it would make sense for VCs to put people on to sift through the volume of pitches to find those companies?


It's pretty simple you need one of two things: Growth or Connections. I you don't want to play the connections game then metrics talk.

Both don't hurt.

As a note: this place (the valley) is small.. you run into people you know randomly and often. You're not going to run into these people or meet people who can help you or that you can help (it goes both ways pay it forward) if you're sitting in your home in Wisconsin or Florida or Oklahoma. Boots on the ground make it a reality.


I think there is a pervasive culture that investment is a game that is almost completely separate from actually executing. Like the killer pitch deck wins the money. Or the best elevator pitch. Or most persistent founder.

There are a lot of stories that validate this, so I can see why. However, these kind of narratives are terribly distracting for a company. It's trite stuff, but stick to the fundamentals.


From https://twitter.com/sama/status/530880914708897793

> whenever i hear VCs say "we will only meet people with a referral" i think "more opportunity for YC!".


VCs are your customer. You are trying to sell them your stock. Do retailers make their customers do all the work? Or do they serve up buying opportunities on a silver platter?

If you don't put effort into selling, don't act surprised when you don't sell.


Ycombinator does a great job of abstracting investor emotional shtuff. At the same time, I think 'signals' are bad.

For example, just because a founder is non-technical and ivy league, is no reason to fund them or meet with them. Seen it happen too many times.


Are you based in the US? Yes? Congratulations, you have access to a pool of investors practically unrivalled by any other country (or, at least, Australia). At least you have the opportunity to get warm introductions to them.


Is it harder in Australia?


Sorry for the late reply, but if you see this, yes. The VC/Angel culture just isn't here, and the money that is available is handled very conservatively.


While he's right, I imagine VCs get such an unbelievable volume of cold e-mail that sorting through it is really time consuming to the point of impossibility.


Because they use a generic email address.

Why not create a smart form, YC style, that take some time to fill and provide the most important data about a startup for them in an easy to read format?

A simple "submit your AngelList page" might go a long way.


Full Disclosure: I work for FundersClub

We had this problem for a long time. We had a generic cold inbound form and got such an abundance of email with no good way of filtering it that we just gave up on it. However we realized that with a bit of focus we could turn this into a good way to get some great deals we would have otherwise missed.

We now again have an founder application form (https://fundersclub.com/founders/apply/). It asks some generic questions followed by more specific metrics based questions depending on what type of company you are (Consumer, B2B etc.). We can then filter based on these to surface what we believe to be good opportunities to the top. Would love any feedback on the metrics we ask for - we try to keep them as data focused as possible, as once you start asking more qualitative questions you go right back to being overwhelmed.


I'm just curious - why don't you delegate the cold pile to junior staff and make them do brief (39 min) writeups of incoming proposals? Film production firms (my field) are like VCs in that they receive many awful proposals and only a few of the good ones will actually work out, but they employ people to read incoming scripts and work up short summaries to indicate which ones might be worth their personal attention.


I just applied. Thank you!


"Social proof" is important to VCs. I don't blame them for not sifting through cold emails. If you're worth investing in, other people should already be talking about you.


But who are those other people? Customers or people in the "startup scene?"

Personally I think VCs ought to have a form with a couple fields:

(1) Identify yourself and your company, link to web site, etc.

(2) Describe product

(3) Traction numbers -- raw number of active users of your product

(4) Traction numbers -- revenue, or $0 if you are pre-revenue.

(5) Describe your strategy for increasing #3 and #4.

It'd be pretty easy to screen that for interesting standouts to investigate more deeply. I'd look into anything with double-digit MoM growth.


The silicon valley culture where every VC demands an introduction sucks. I concur.


My short response would be:

How to Jerk the Chain of a Seed/Early Stage Venture Partner.

Consider US information technology (IT) venture capital (VC): It is easy to understand that the author of the original post (OP) is frustrated, etc., but my guess is that with reasonably high probability can get a response from a seed/early stage VC partner if (1) have a product/service developed, about ready to get users/customers and revenue, and that a VC partner can "play with" and (2) send the VC partner some e-mail with a short description of the project together with an easy way, say, just a URL, the VC partner can use to "play with" the product/service.

Then the VC partner may evaluate the potential of the project by pretending that they are a user/customer, that is, evaluate how well many users/customers will like the product/service. If the partner likes what they see, then more communications are reasonably likely.

For a little more, since most VC firms do publish their phone numbers on their Web sites, can call and, give name, say are an entrepreneur, and ask for "office of" a VC partner are interested in. Then may get a person, often a really sweet, young woman, and explain a little of the work and ask how can send e-mail. Often can send e-mail to the woman. Also, often, if call the VC firm after closing hours can leave a message on the phone of the VC partner.

Should, of course, check the interests of the VC partner to see if those interests do cover the project. And likely should pick a VC partner without very many current investments or board seats.

For a little more, once the results of a project have obtained some publicity and traction, VC partners may notice and call the entrepreneur.

The key in all this is just (1) above, that is, have the project that far along.

But, more generally, for such contacting a VC partner, my view is that an entrepreneur with a project about to get users/customers should try hard not to accept equity funding and, instead, just continue to own 100% of the business. I explained more in

https://news.ycombinator.com/item?id=8640126

Whatever VCs are doing, tough to expect them to change if they are getting good returns on investment (RoI), but as in

http://www.avc.com/a_vc/2013/02/venture-capital-returns.html...

actually on average VC RoI is poor.

My view is that US IT VC is missing out big time on much bigger RoI. The main reason is that VCs just will not fund the work before there is a product/service ready to "play with". Much of the reason here is that VCs can't/won't evaluate plans for such work, and likely the main reason here is that they do not believe that such evaluations could be at all accurate in predicting financial success.

So, essentially all the work in IT the VCs see is what could be done by 1-3 guys in a garage before equity funding, and this situation is for high RoI just devastating. Moreover, about all the VCs can do when evaluating such projects is to look just superficially, at only the cover and not really the book, and the superficial look hurts evaluation accuracy and, thus, average RoI.

Part of the extreme tragedy of this situation is that quite broadly in our applications of the fields of science, technology, engineering, and mathematics (STEM), we know quite well, thank you, how to plan projects, present the plans just on paper, and evaluate the projects, just from the paper, with high accuracy, much higher than that of IT VC. Or, we can do such evaluations for the largest engine, ship, or airplane ever built, the tallest building or dam ever built, the longest bridge, tunnel, canal, or pipeline ever built, etc. Heck, the ancient Egyptians planned the pyramids, and we don't see a lot of evidence of a lot of partially completed, failed pyramid projects.

Here's an outline of something IT VCs could do that huge evidence from history clearly shows would yield much higher Roi; the outline is in steps (a)-(d):

(a) Problem.

Pick a good problem, one where the first good or a much better solution will be a must have, not just a nice to have for many users/customers, so that in total, from number of users/customers and revenue per each, can build a business worth $1+ billion.

Here is an example of such a problem: Find a safe, effective, cheap one pill cure for any cancer.

For this must have, there should be very little doubt; if there is much doubt, then pick another problem. In particular, we do not want to struggle over product-market fit.

(b) Solution.

For the needed solution, do some STEM research. We're talking real research here, of quality that would qualify as a Ph.D. dissertation in a good research university, a paper in a good journal, maybe a grant from NSF, DARPA, etc. Yes, there is training for such research, the Ph.D. degree. Right, mostly here we're talking a good research university STEM field Ph.D. prerequisite.

With the research, want to create some proprietary intellectual property, secret sauce, STEM technology difficult to duplicate or equal, that is the crucial, core of the solution and the business and, for competitors, a severe barrier to entry. Protect the work as a trade secret (with corresponding software securely locked up inside a server farm) or patents.

For this solution, there should be very little doubt that it is the first good or a much better solution to the problem. If can't find such a solution, then return to (a) and pick another problem.

It should be possible to give a quite accurate evaluation of the solution and, thus, the project from the research for the solution presented just on paper.

(c) Software.

Since we're considering IT, with Moore's law, etc., to provide the product/service to users/customers, write the software for servers and user devices. Given the solution, the software should be routine.

(d) Launch.

Now we are sure we have the first good or a much better solution for a problem where such a solution is a must have.

Get publicity, users/customers, revenue, earnings, and a company worth $1+ billion.

For (a)-(c) here, there are some great examples from medicine and US national security.

For the second, there was the SR-71: The problem was to do surveillance of the USSR. The intended solution was an airplane that could fly at 80,000+ feet, at 3.0+ Mach, for 2000+ miles without refueling. Kelly Johnson of the Lockheed Skunk Works showed up with an armload of papers showing the plan for the solution. The project was approved, and for years the SR-71s flew as designed.

Another example was Keyhole, basically a Hubble but before Hubble and aimed at the surface of the earth. Another example was GPS.

Technology? Nearly beyond belief. Value? World changing. Batting average? Very high, much higher than VC.

Gee, if the US DoD had wanted to sell the results of Hubble or GPS, wonder if they could have gotten any revenue? Are we talking must have here? How 'bout that?

Of course, the work in (b) and (c) needs accurate evaluation, but the US is just awash in people that can do that in the best research universities, via editors of appropriate peer-reviewed journals, via problem sponsors in NSF and DARPA, etc.

After (a) and (b), it really is possible to know with quite high accuracy VC firms should look to fund projects just after success with these two steps.

That's how to do (a)-(c) of projects. To be sure the launch in (d) works, do the work as outlined in (a)-(c).




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